M+A: Transfer of employee entitlements on sale of business

In a sale of business and business assets situation, important issues arise for both the seller and purchaser regarding the entitlements of employees who transfer to the new employer (such issues do not generally arise on a sale of shares, as there is no interruption to the employment).  This article examines those issues. 

Personal/carer’s leave – such leave automatically transfers and this cannot be contracted out of.  Also, the purchaser cannot readily get the benefit of the `anti-double dipping provision’ (which states that service with a former employer does not count as service with a new employer where that service has been used to calculate and pay an entitlement- s.22(6) of the Fair Work Act 2009), because there is a limit on how much personal/carer’s leave can be cashed out by the seller (or any other employer for that matter).  An employer can only cash out personal/carer’s leave if a modern award or enterprise agreement applies and specifically permits this, however, even in these cases, you must still leave the employee with at least 15 days leave after the cashing out, so in a sale of business context, it would be pointless to do it.

A purchaser should ordinarily be compensated by an adjustment of the purchase price for taking on this burden, although this will have to take into account that the leave is contingent in that it may never be taken if the employee does not get sick and, unlike annual leave and long service leave, it is not paid out on termination, meaning there is no certainty it will ever need to be paid.

It should be noted that personal/carer’s leave need not be paid by an old employer if employees reject a new employer’s offer of employment, so there is no exposure to the seller here and no need to obtain indemnities.

Long service leave (LSL) – This automatically transfers and is unable to be cashed out, so there is no exposure for the seller and no need to deal with this issue by way of indemnities.  The purchaser should be compensated by an appropriate adjustment of the purchase price for taking on the LSL burden.

Of course, it is important for sellers to realise that they will in any event be liable for untaken LSL in respect of employees who do not take up the new employer’s offer (hence the need to know before termination which employees have accepted the offer and to limit the time for acceptance of the purchaser’s offers to employees).  Unlike redundancy, there is no ability for the old employer to escape liability on the basis that the new employer’s offer, although refused, was on terms no less favourable than the old employment.

Annual leave – The default position in respect of transferring employees is that it transfers and the old employer is relieved of liability, but the new employer can unilaterally decide that old service does not count as service with the new employer, in which case the old employer is liable for unpaid annual leave accrued up to the date of termination.  From the seller’s perspective, the best solution is to have the purchaser agree that they will not decide to not recognise old service for annual leave purposes, with an indemnity to back up any breach by the purchaser (ie: if it decides not to recognise prior service regardless of the contractual provisions as between the seller and the purchaser).  The purchaser can be compensated by an appropriate adjustment of the purchase price for taking on the annual leave burden.

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