Australia: Selling a business and the transfer of employee entitlements

The sale of a business involves the transfer of particular assets of the business from the Vendor to the Purchaser. This may include, amongst others, goodwill, plant and equipment, stock, intellectual property, licences, registrations, contracts and leases. In addition to this, there may also be employees working in the business who are offered employment by the Purchaser, and will continue to work in the business following its sale and purchase. Accordingly, it is important to take note of the obligations imposed on employers under the Fair Work Act 2009 (Cth)1 ("FW Act") in relation to the transfer of employees as a result of a transfer of a business.

Transfer of business under the Fair Work Act

The transfer of business provisions under the FW Act refer to the transfer of a business from one employer to another and impose obligations on both the new employer and the old employer.

Pursuant to section 311(1) of the FW Act, there is a transfer of business between the old employer and the new employer if the following requirements are satisfied:

  1. 'the employee's employment with the old employer has been terminated;
  2. within 3 months after the termination, the employee is employed by the new employer;
  3. the employee continues to perform the same or substantially the same work; and
  4. there is a connection between the old employer and the new employer'.2

A connection between the employers will exist, for the purposes of section 311(1), if:

  • there has been a transfer of assets from the old employer to the new employer;
  • the old employer outsources work to the new employer;
  • the new employer ceases to outsource work to old employer; or
  • the new employer is an associated entity.3

Transfer of entitlements

Under the FW Act, in certain circumstances where a transfer of business occurs, an employee's service with the old employer is required to be recognised by the new employer.

Section 22(5) provides that the new employer will have to recognise an employee's prior service with the old employer if there is a transfer of employment.4

A transfer of employment will arise in two situations, namely where:

  1. the transfer is between associated entities; or
  2. the transfer is between non-associated entities.5

An associated entity is defined in section 50AAA of the Corporations Act 2001 (Cth) and includes "related bodies corporate" or instances "where one entity controls another (the associate)".6

The employee's prior service will automatically count as service with the new employer if one of the two situations in section 22(7) exist and the period between termination of employment with the old employer and commencement with the new employer is not more than 3 months.7

Exceptions to this rule arise however in respect of annual leave and redundancy pay.

If the transfer of employment is between non-associated entities and the new employer decides not to recognise the employee's service with the old employer, the old employer will be liable to pay out the employee's untaken accumulated annual leave.8

Similarly, where the employers are non-associated entities, the same exception will apply in relation to redundancy pay if the new employee elects not to recognise the employee's service with the older employer.9 This will result in an obligation on the old employer to pay redundancy to the employee upon termination.

We highlight however that the employee will not be entitled to redundancy pay if they reject the new employer's job offer and:

  • the new employer recognises their service with the old employer; and
  • the terms and conditions are similar to their position with the old employer; and
  • if the employee had accepted the job, there would have been a transfer of employment.10

In relation to long service leave, the Long Service Leave Act 1992(Vic) provides that the transfer of employment does not break the continuous employment of the employee if:

  • "the ownership of a business employing someone changes but the employment of the employee continues";11 and/or
  • "an employee performs duties in connection with any assets used in the carrying on of a business of his or her employer and those assets are transferred to another employer who continues the employment of the employee."12

A new employer will not however have to recognise an employee's service with the old employer when calculating an entitlement to long service leave if:

  • the employee is not entitled to long service leave under a registered agreement at 31 December 2009; or
  • an agreement was made on or after 1 January 2010 that replaces it; and
  • the new agreement says that service under an older agreement does not count towards long service.13

This is not however a common scenario.

Generally the Vendor and Purchaser will negotiate any adjustments to be made to the Purchase Price, in consideration of the value of the employee entitlements that are to be transferred to the Purchaser as the new employer.

The transferring employee entitlements in relation to annual leave, personal leave and long service leave that have been accrued and not yet taken by the employee may be apportioned and the Purchase Price adjusted against the Vendor, subject to negotiation between the parties.

Transfer of instruments

Where a transfer of business is established under the FW Act, a named employer award (including a modern award or modern enterprise agreement), enterprise agreement or a workplace determination applicable to the transferring employee may also become binding on the new employer ("transferrable instrument").14

The transferrable instrument will only transfer to a new employer if it covered the old employer and the transferring employee prior to the employment with the old employer terminating. 15

The transferring instrument that relates to the transferring work, will:

  • 'cover the new employer and the transferring employee from the time the employee becomes employed by the new employer; and
  • while the transferring instrument covers the new employer and the transferring employee, no other enterprise agreement or named employer award will cover the transferring employee in relation to that work'.16

Unfair dismissal

Under the FW Act, an employee is protected from unfair dismissal where they have completed the 'minimum employment period' with their employer at the time of their dismissal and one or more of the following applies:

  • a modern award covers that employee;
  • an enterprise agreement applies to the employee in relation to their employment; or
  • the sum of the employee's annual rate of earnings is less than the high income threshold.17

Pursuant to section 383, the 'minimum employment period' is:

  • 1 year service where the employer is a small business who employs fewer than 15 employees at any given time;18 or
  • 6 months service for larger employers19.

Where there has been a transfer of business between associated or non-associated entities, a transferring employee's period of employment is to be recognised by the new employer for the purposes of unfair dismissal laws.20

However, in some cases, the new employer will not have to recognise an employee's service with the old employer. This will occur when the:

  • 'employee is a transferring employee;
  • the businesses are not associated entities; and
  • the new employer informs the employee in writing before the new employment commences that the service with the old employer will not be recognised'.21

As numerous legal issues arise in relation to a transfer of business, it is therefore important that a thorough due diligence is conducted by any potential buyer prior to purchase and that due consideration be given to the process applicable to the transfer of employees and their entitlements.

Footnotes

1Section numbers in the body of the article refer to the Fair Work Act 2009 (Cth) unless otherwise specified.

2 Fair Work Act 2009 (Cth) s 311(1).

3 Ibid 311(3) to (6).

4 Ibid s 22(5).

5Ibid s 22(7).

6Corporations Act 2001 (Cth) s 50AAA.

7 Fair Work Act 2009 (Cth) s 22(7).

8 Ibid s 91(1).

9 Ibid s 122(1).

10Ibid s 122(3).

11 Long Service Leave Act 1992 (Vic) s 60(3).

12 Ibid s 60(6).

13 Fair Work Ombudsman, Employee entitlements on a transfer of business (2010), Australian Government < https://www.fairwork.gov.au/employee-entitlements/when-businesses-change-owners/employee-entitlements-on-a-transfer-of-business>.

14 Fair Work Act 2009 (Cth) s 312(1).

15Ibid s 313(1).

16 Ibid.

17Ibid s 382.

18 Ibid s 383(a); 23(1).

19 Ibid 383(b).

20 Ibid s 22(5); 384(1).

21 Ibid s 384(2)(b).

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