Enterprise Legal Explains: Dealing with Employees in Business Purchases

When buying or selling a business in Queensland, the question of what happens to the employees is one of the most critical considerations. Employment relationships, entitlements, and obligations don’t simply disappear when a business changes hands. Instead, they are governed by a combination of the contract terms (usually the Standard Conditions of the REIQ Contract for Sale of Business in Queensland) and the Fair Work Act 2009 (Cth), both of which deal with how employees should be dealt with during a business sale.

Understanding these provisions is essential for both buyers and sellers to ensure compliance and avoid disputes. Failure to understand the position can also result in drastic financial consequences. Here’s what you need to know.

Employees in the REIQ Contract for Sale of Business

The REIQ Contract for Sale of Business includes standard conditions that deal specifically with the treatment of employees. Even if you are not using this Contract, most business contracts will contain similar provisions. These provisions allow both parties to agree on how existing employees will be handled during the sale process. Key aspects include:

1. Transfer of Employees: Under the REIQ contract, it is common for the buyer to decide whether they will take on the existing employees of the business. The contract will typically include provisions that specify whether the buyer will offer employment to all or some of the employees on similar terms and conditions to their current employment. If the buyer chooses to retain employees, this is generally known as a transfer of employment.
2. Employee Entitlements: The REIQ contract also addresses how accrued employee entitlements, such as leave, redundancy pay, and other liabilities, will be handled. The parties must agree on how these entitlements will be dealt with. There are usually two options:

• Adjustment at Settlement: The seller may transfer a portion of the purchase price to cover the employee entitlements, meaning the buyer effectively takes on the liability.
• Seller Retains Responsibility: Alternatively, the seller may retain responsibility for paying out employee entitlements, with those liabilities settled prior to the sale completion.
  Both approaches need to be clearly negotiated and set out in the contract to avoid misunderstandings at settlement.

3. Warranties about Employees: The seller is required to provide warranties about the status of employees, including any outstanding entitlements, disputes, or other issues related to employee management. These warranties ensure transparency and help the buyer make informed decisions regarding the workforce they are acquiring.

Fair Work Act 2009 (Cth) and Employee Protections

The Fair Work Act 2009 (Cth) plays a critical role in protecting employee rights when a business is sold. Whether or not employees are transferred to the new owner, certain legal obligations must be met under the Act. Key considerations include:

1. Transfer of Business: Under the Fair Work Act, a transfer of business occurs when the business or part of it is transferred from one employer to another. A transfer of business impacts the employee's entitlements and employment conditions, but specific protections are in place to ensure continuity where possible.
2. National Employment Standards (NES): Employees who are transferred to the new owner are entitled to maintain the core protections provided under the National Employment Standards (NES). This includes entitlements such as:

• Annual leave: Accrued leave transfers with the employee, meaning the buyer assumes responsibility for these entitlements unless otherwise agreed.
• Personal leave: Personal and carer’s leave also transfer with the employee, ensuring continuity of entitlements.
• Notice and redundancy pay: If the employee is terminated due to the sale, they may be entitled to notice or redundancy pay under the NES, unless an exclusion applies.

3. Modern Awards and Enterprise Agreements: The new owner must also honour any Modern Awards or Enterprise Agreements that apply to the transferred employees. The employment conditions, such as pay rates, leave entitlements, and other employment benefits, cannot be unilaterally altered by the new employer unless renegotiated under the terms of the Fair Work Act.
4. Employee Termination: If a buyer chooses not to offer employment to existing employees, the seller is responsible for terminating those employees in compliance with the Fair Work Act. This includes ensuring that any termination is fair and that appropriate notice and redundancy payments are made. Failure to comply with these obligations can result in claims of unfair dismissal or breach of general protections under the Fair Work Act.
5. Transfer of Service: If an employee is transferred to the new employer, the Fair Work Act considers whether the employee’s service with the seller counts as service with the buyer. This can affect entitlements such as long service leave. In some cases, the buyer may take on the employees as if their period of service with the previous owner had not been broken, meaning they retain long service leave entitlements and other service-related benefits. But you will need an experienced lawyer to help you to achieve this!

Practical Considerations for Buyers and Sellers

To ensure a smooth transition during the sale of a business, it’s essential that both the buyer and seller follow these steps regarding employees:

• Assess Employee Transfer Early: Buyers should evaluate whether keeping the existing workforce aligns with their business goals. If you plan to retain employees, ensure you understand their roles, skills, and employment terms. Sellers, on the other hand, should clearly identify key staff members and highlight the advantages of retaining them for the buyer.
• Review Employment Contracts and Entitlements: Both buyers and sellers should thoroughly review existing employment contracts, including wages, leave balances, and accrued entitlements like long service leave. This review will clarify liabilities and help ensure accurate adjustments are made at settlement.
• Negotiate Liability for Entitlements: Decide early who will bear responsibility for accrued employee entitlements. Will the seller pay them out, or will the buyer take them on as part of the purchase price? Make sure this is clearly reflected in the contract to avoid disputes later on.
• Conduct a Due Diligence Audit on Employee Obligations: Buyers should conduct due diligence not just on financials but also on the employment obligations of the business. This includes examining any outstanding employee claims, workplace disputes, or risks of non-compliance with Fair Work obligations. Sellers should be prepared to disclose any potential risks.
• Compliance with Fair Work Act Requirements: Ensure that any decision regarding employees complies with the Fair Work Act, particularly around notice periods, redundancy payments, and unfair dismissal protections. Sellers need to ensure that terminations (if applicable) are handled correctly, while buyers must ensure continuity of conditions under applicable Awards or Enterprise Agreements.

How can Enterprise Legal help?

The sale of a business in Queensland involves more than just a transfer of assets, it also involves the transfer or termination of employee relationships. Both the REIQ Contract for Sale of Business and the Fair Work Act provide crucial frameworks for ensuring that employee rights are respected, and obligations are met.

At Enterprise Legal, we can assist you in navigating the complex legal requirements surrounding employees during a business sale. Whether you're buying or selling, our expert Business Law team can help ensure that the process is smooth and compliant with all relevant laws.