What happens to employees when a business is sold?

If you are considering selling your business, you have probably asked yourself what happens to employees when a business is sold. Answering this question will largely depend on several factors, including the agreements made between both parties at the time the business is sold. In most cases, employees can either transfer with the business and commence employment with the new owner, or their employment will be terminated. This Business Kitz article will inform you as to what happens to existing employees during a sale of business, including how to manage their accrued leave entitlements. 

If you are selling your business, you may wonder what happens to employees when a business is sold.

What happens to employees when a business is sold?

Business owners typically will have many questions about a business transfer. These include the responsibilities of the buyer and seller, employee leave entitlements and the rights of employees.

The Fair Work Act 2009 (Cth) defines the circumstances under which a transfer of business occurs for the purposes of dealing with employee entitlements. A business is considered transferred when an employee commences work with the new employer within three months of ending his or her employment with the previous employer, the employee’s duties are substantially the same as they were previously, and either:

  • Assets of the business are sold; or
  • The employers are associated entities.

What is the difference between an asset sale and a share sale?

A business owner has two options if they wish to sell their company: a share sale or asset sale. A share sale is where the shareholders sell their shares, allowing the new owner to have a majority of the control over the business. This means that changes to employees are limited as employees will not need to transfer and can continue in their positions. They also keep all their entitlements, including annual and long-service leave, rates of pay and conditions.

Conversely, an asset sale is where the company sells their assets to the new owner. In this situation, transferring employees becomes more complicated. During an asset sale, the purchaser has the option of purchasing the business with or without the existing employees. 

If the new owner decides to purchase the business with existing employees, the employees need to be transferred to the purchasing entity. The purchaser is not required to recognise prior service with regards to redundancy, annual leave, long service leave, unfair dismissal and notice of termination. If the buyer decides to not recognise the existing employees prior service, it becomes the seller’s duty to pay the existing employees accrued entitlements up to the completion date.

In this case, the employee’s entitlement should be paid by the seller once the old employment is terminated. If the new owner does wish to recognise prior service, the buyer and seller can make appropriate adjustments and the buyer becomes responsible for the employee’s accrued entitlement. 

What happens if the purchaser decides to terminate employment of the previous employees?

If the purchasing entity does not wish to offer employment to existing employees, the employment will terminate during the transfer of business. In this case, the seller is obligated to pay employees their entitlements. Compliance with Fair Work legislation requirements must still be met, including honouring the employee’s accrued entitlements such as annual leave, termination notice and long service leave, as well as redundancy if applicable. An employee is not entitled to redundancy payments if they rejected an offer of employment with similar terms and working conditions. 

Legal advice

Selling or buying a business can be a rewarding and exciting experience, but it can also be stressful and easy to forget about the rights of employees. Understanding employee rights during a sale of business is important as arrangements must be made to comply with Fair Work. It is the seller and buyers’ responsibility to negotiate employee entitlements before the sale of business. If the new owner chooses to not recognise some entitlements, it becomes the sellers responsibility to pay them.

If you require assistance managing your employees during a transfer of business, you should seek legal advice. Our sister company, Legal Kitz can assist with ensuring that your matter is as time and cost efficient as possible. We provide a FREE 30-minute consultation to set you in the right legal direction. Click here to book a FREE consultation with one of our highly experienced solicitors today or contact us at info@legalkitz.com.au or by calling 1300 988 954.

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