When businesses undergo acquisitions, whether through asset sales or share sales, employees are often moved from one employer to another. Sellers and buyers of a business will need to carefully consider their legal obligations related to these employees. Buyers will need to carefully consider what liabilities they are taking on and sellers need to understand when redundancy may apply.
Both buyers and sellers must consider various legal, financial, and strategic factors. A employment transition relies on employers understanding their legal obligations and the employment landscape that applies to transferring employees.
In this article, our M&A lawyers discuss the importance of considering both the sellers and the buyers employment law obligations in the purchase and sale of a business.
Key takeaways
- Sellers need to handle any terminations, redundancies and transition arrangements in compliance with employment laws.
- Buyers should conduct thorough due diligence on employee obligations, entitlements and any potential liabilities they might inherit.
- Employment contracts may need revising or reissuing under new terms, depending on the acquisition structure.
- Maintaining accurate records and written documentation is essential to prevent and address any future employment disputes.
Employment law issues to be considered by a business seller
When selling a business, both sellers must carefully consider employment issues to avoid potential legal pitfalls.
These issues vary depending on the type of transaction—whether it’s a share sale or an asset sale.
If the business sale is a share sale
In a share sale, the buyer acquires the shares of the target company. This means the purchaser essentially takes ownership of the business, including its employees, contracts, and liabilities. Employee terms generally remain unchanged, and continuity of employment is preserved in a share sale.
Key considerations for the seller in a share sale include:
- Employee Retention: Employees generally remain employed under the same terms and conditions, with the buyer assuming responsibilities.
- Transfer of Employee Entitlements: Entitlements, including long service leave and accrued leave, transfer directly, and continuity of employment is generally preserved.
- Notice Requirements: While employees typically continue employment uninterrupted, notice may need to be given to alert them of the change in ownership.
- Awards and Agreements: Australian employees are often covered by awards or enterprise agreements, and these continue to apply post-sale unless renegotiated.
- Fair Work Act Compliance: The seller must notify employees of the sale and any potential impacts, ensuring compliance with the Fair Work Act, any award-specific or enterprise agreement obligations.
The seller should ensure these key considerations are discussed with the buyer prior to the transition. This ensures both parties know their duties to the businesses employees. It may also be beneficial to ensure that these responsibilities are outlined in the share sale agreement (or similar contract).
Learn more about Fair Work Act compliance for employers in our article.
If the business sale is an asset sale
In an asset sale, the buyer only acquires specific assets of the company. Assets can include the seller’s equipment, contracts, or intellectual property but does not always include employees.
Employees may be transferred to the new owner, but this typically requires re-hiring or issuing new contracts, and employment terms may change.
This often requires different steps for the seller in handling the existing employees, such as:
- Termination and Rehire: Employees may need to be terminated by the seller and re-employed by the buyer under new terms. The seller is responsible for paying out final entitlements if the employment ends.
- Termination and Redundancy: Employees who are not rehired by the buyer may need to be terminated by the seller. Sellers may need to offer redundancy payments, depending on the employment contracts and applicable laws.
- Transfer of Service: If the buyer intends to recognise prior service, the seller should communicate this to employees to provide peace of mind during the changes. The Seller will need to provide related information to the buyer to ensure continuity of employment for long service leave or other entitlements.
- Employee Consultation: Certain jurisdictions require consultation with employees if redundancies are likely to happen as a result of the sale, especially if it impacts a large number of employees.
Sellers should consider the above factors when selling a business under an asset sale agreement. They will need to appropriately communicate the changes to the employees, and discuss or negotiate these considerations with the buyer prior to the completion of the asset sale.
Employment law issues to be considered by the buyer of business
If the business sale is a share sale
As employees are not formally terminated in a share sale arrangement, the buyer can also inherit the existing employment obligations and liabilities. This preserves continuity for employees but also means that buyers assume pre-existing obligations, making comprehensive due diligence and strategic discussions between the parties essential.
Key considerations for buyers in a share sale include:
- Continuity of Employment: Employees will continue under their current contracts, so any pre-existing claims or entitlements will become the buyer’s responsibility.
- Employee Benefits: The buyer should assess the cost of benefits and entitlements, as they remain payable under the existing arrangements. The buyer should also consider if they have sufficient financial resources to meet any entitlements that might become due shortly after the sale.
- Employment Policies: Buyers may wish to introduce new policies and procedures. In some cases, consultation or consent from employees may be required, particularly if these policies differ from the previous employers terms.
- Compliance with Workplace Laws: Buyers should ensure that all employment obligations, awards, and agreements are met post-sale, as any lapses in this can lead to potential liabilities.
The buyer should ensure these key considerations are discussed with the seller prior to the transition. This ensures both parties know their duties to the businesses employees. It may also be beneficial to ensure that these responsibilities are outlined in the share sale agreement (or similar contract).
If the business sale is an asset sale
In an asset sale, the buyer has more flexibility in selecting which employees they wish to retain, but must still manage the transition carefully.
Key considerations for buyers in asset sales include:
- New Employment Offers: Buyers may choose to offer employment selectively, typically issuing new contracts with revised terms and conditions.
- Avoiding Breaks in Service: To avoid legal issues, the buyer should clarify if they intend to recognise prior service for entitlements, like long service leave.
- Transfer of Entitlements: For employees who are rehired, buyers should negotiate the terms for transferring entitlements or starting fresh where legally permissible.
- Notice and Consultation Requirements: In cases involving large-scale redundancies, consultation with employees or unions may be necessary to comply with the law.
Buyers should consider the above factors when purchasing a business under an asset sale agreement. They will need to ensure the seller has appropriately communicated the changes to the employees, and discuss or negotiate these considerations with the seller prior to the completion of the asset sale.
Hot tips when selling a business
Save records
Maintain detailed records of key employment-related decisions and communications. This is important for both buyers and sellers, as these documents serve as evidence of compliance and can help mitigate risks in the transition process.
Key practices include:
- Documenting variation requests: Whether the seller or buyer initiates changes, these should be documented and agreed upon by the affected employees.
- Keeping records of consultations: If consultations are held regarding redundancies, these should be documented to show compliance with legal requirements.
- Maintaining payroll and entitlement records: Ensuring accurate and up-to-date records on employee leave entitlements, payments and benefits prevents disputes.
Conduct Due Diligence
Conducting due diligence is crucial for buyers to fully understand the liabilities they may inherit with the transfer of a business. Careful consideration of employment obligations is essential to mitigate unforeseen risks associated with employee liabilities, entitlements, and compliance.
Important due diligence steps for buyers include:
1. Reviewing employment contracts
Buyers should analyse existing employment terms, including notice periods, non-competes clauses, entitlements and termination clauses to ensure they are compliant and that they can meet these obligations.
Some employment contracts may include “change of control” clauses that trigger exit packages or other benefits upon a sale of the business. The buyer should review these clauses during due diligence.
Buyers should also confirm that restraint clauses are in place and consider if they need to renegotiate these clauses with key employees.
If you’re not sure what to look out for in these reviews, reach out to us and our employment lawyers can review the employment contracts for you.
2. Understanding the extent of employee liabilities
This includes understanding accrued leave balances, long service leave owing and any other outstanding entitlements that may become due for the buyer.
Consider whether there are any employees on parental leave that the buyer will become responsible for upon their return to work as well.
3. Checking legal compliance and disputes
Buyers should verify that the seller has complied with all employment laws, awards, and agreements. Any ongoing or unresolved disputes with employees should also be identified and evaluated.
If buyers choose not to conduct appropriate due diligence, they may be caught out after the asset sale is completed or on the hook for liabilities they did not foresee before the purchase. We often see buyers who end up being ‘stuck’ after a business sale has gone through with higher than expected financial liabilities, as due diligence was not conducted on the existing employment entitlements.
Have a transition plan
Finally, once the legal aspects of the employment transfer are understood, both buyers and sellers should focus on the practical transition. This step is often forgotten in the complexities of the sale discussions, but can help ensure a smooth start to the change for all parties.
Important steps to consider for the post completion stage include:
- Onboarding processes: If new employees will be hired by the buyer, there should be a well planned onboarding process for any new employees to ensure a smooth integration with any existing employees.
- Cultural and Organisational Change: Acquiring a business often involves cultural changes, which can affect employee morale and productivity. Clear communication and transitional support can be valuable in retaining top employees during the change.
- Maintaining momentum: Buyers should establish a strategy to integrate employees effectively and maintain productivity during the transition. Sellers should facilitate a positive transition for employees to protect the business’s reputation and maintain good employee relations post-sale where possible.
Frequently asked questions
If I am buying a business, should I create new employment contracts?
When buying a business, creating new employment contracts can be advisable, particularly in an asset sale where employees are rehired by the buyer. This ensures terms and conditions align with the buyer’s operational needs and policies.
In a share sale arrangement, the existing employment contracts typically continue as is, but the buyer can introduce new terms through formal consultation and agreement with employees.
Why do employment disputes happen in M&A transactions?
Employment disputes typically stem from misunderstandings about entitlements, discrepancies in contract terms or lack of clear communication during the acquisition.
Common issues include disagreements over accrued leave, redundancy payments and notice periods, especially when employment terms shift under new ownership.
What happens to employees' entitlements during an asset sale?
In an asset sale, employees are generally considered terminated by the seller and re-hired by the buyer, which can impact their entitlements. Depending on the agreement, the seller may be responsible for paying out accrued entitlements like annual leave, redundancy, and long service leave if these aren’t transferred to the buyer. The buyer then decides whether to recognise prior service, which may affect employees’ accrued entitlements going forward.
Do enterprise agreements or modern awards still apply after a sale?
Yes, if employees are covered by a modern award or enterprise agreement, these agreements generally continue to apply after both asset and share sales, provided the business remains similar in nature.
Buyers must review applicable awards and agreements during the due diligence stage to ensure continued compliance and avoid potential legal issues related to employee rights and entitlements.
How does an asset sale impact employee redundancy entitlements?
In an asset sale arrangement, if employees are not offered continued employment with the buyer or choose not to transfer to the buyer, they may be entitled to redundancy pay from the seller.
However, sellers need to keep in mind that even if employees are re-hired by the buyer, the seller may still be required to pay redundancy if the new role is substantially different. Both parties should address redundancy responsibilities in their asset sale agreement to avoid unexpected liabilities.
Learn more about redundancy in our article.
