What happens to employee entitlements and leave when selling your business?
O*NO! So, you’ve decided to sell your agency, but you’ve forgotten to manage your leave balances. It may not seem like a big deal, but high leave balances can seriously impact your finances, your agency, and even the sale of it. You may also need to consider employee entitlements if you decide to purchase a business and keep the employees on.
As employees across Australia have been unable to travel and reluctant to spend money due to financial uncertainty, there has been an upward trend of employees across the nation not taking leave. We’ve already covered how the accumulation of employment leave entitlements can affect agency valuations, borrowing capacity, and the wellbeing of employees in our previous blog here. Read this blog to find out how leave balances, and in some cases unfair dismissals, can impact the sale of your agency and how you can avoid this.
Employee Entitlements that you need to consider
If you haven’t already read our previous blog, here is a quick refresher on the different types of leave your employees may be entitled to.
Annual leave, also known as holiday pay leave, are days/time employees can take off whilst still being paid. So, we know the basic rules – your staff are generally entitled to 4 weeks annual leave per year (pro-rated for part-time employees) unless you have been more generous in your employment contracts. All employees, except those that are casuals, are entitled to annual leave.
After working for a long period for the same employer an employee may be entitled to long service leave. These entitlements are decided by long service laws in each state and territory.
Another issue you may to need keep in mind is unfair dismissals. Unfair dismissals refer to employees who have been let go from the agency in a manner that is unjust, harsh, or unreasonable, this includes if the dismissal was unlawful or a breach of general protections. Employees who feel they have unfairly been dismissed can apply to the Fair Work Commission to have their case reviewed. However, employees can only do this if they were dismissed after at least 6 months of employment. This period is increased to a minimum of 12 months for employees employed by a small business. You will see below why this is relevant to a sale of business.
Implications of high leave balances when selling your agency
There are implications generally in having high staff leave balances on your balance sheet. For example, upon a change in the ownership or sale of your agency to an unrelated or non-associated entity. The accrued leave entitlements are a financial liability to your organisation as a seller where you would be required to adjust for those employee entitlements at settlement in favour of the purchaser. In other words, your agency would be required to undertake the expensive exercise of ‘paying out’ (known as adjusting in a sale situation) your staff’s leave entitlements for those staff staying with the business under the new ownership.
If you decide to sell your agency, a purchaser would be required to recognise and assume responsibility for all of your staff’s leave entitlements.
What happens to these employee entitlements when you sell your agency?
If a purchaser agrees to take on the employees of the business/company they are buying, there are certain Fair Work requirements they must meet – specifically honouring employee entitlements. This may include leave entitlements and work arrangements. As a seller, you must notify the purchaser of any obligations you have towards your employees. However, you are under no obligation to notify your employees of a transfer of business, but it is always a good idea to do so for business continuity reasons especially if your sale has a retention or earn out component.
Generally, when employees transfer with the purchase of the business, their service to the previous employer will count towards the service to the new employer/purchaser. However, if the old employer has already settled the employees leave balances before the transfer, then the employees old service will not be counted towards the entitlements owed by the new employer. For example, if you have already managed your employees annual leave balance over time, then they have not accrued any annual leave balances that must be transferred with the sale.
However, there are some exceptions to the above. The following will provide a break down on how certain entitlements should be dealt with if, as a purchaser, you decide to keep on the company’s existing employees.
Annual Leave
The purchaser has the option to decide whether or not they recognise annual leave entitlements of a transferring employee if they are not an associated entity of the old employer/seller. In this case, the old employer/seller has the responsibility of paying the employee their untaken accrued entitlements, and this must generally be done before the settlement of the business sale.
When you sell your business, the following two things can occur with annual leave:
annual leave that accumulated with the seller will be carried across to the purchaser as the new employer; or
where the seller and purchaser as employers are not associated entities, the purchaser can decide not to recognise an employee's service with the seller. In this case, the seller has to pay out the employee's untaken accumulated annual leave.
Long Service Leave
As employment periods continue if employees are transferred with the sale of business, so do their periods for long service entitlement. This means that, even if the purchaser gives the old employees new offers of employment in the same business, their employment period does not reset back to the start. Therefore, when calculating the long service leave of an employee, the duration of employment must include the time up to and after the purchase of the business.
However, there are exceptions to this under which the purchaser does not have to recognise the employees service with the seller when calculating long service leave. This includes employees who were 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.
Probationary Periods, Unfair Dismissals & Redundancies
In some cases, the purchaser can opt to not recognise an employee’s prior service so they can reset the employee’s probationary period. However, this can only be done if the purchaser has notified the employees of this, in writing and before the new employment starts. Notably, this also means that the unfair dismissal period will also reset as the purchaser will not recognise the service the employee has provided the old employer. Also, this can only occur if the purchaser is not an associated entity of the seller.
Again, this results in your agency paying out potentially costly long service leave entitlements upon the sale of your business.
If the purchaser is not an associated entity of the seller, then they have the right to refuse the transfer of employees from the old business. In this case, the employees will remain with the seller. However, after the sale of the business these employees will become redundant. If this occurs, then it is your duty as the employer and seller to terminate the employment of these employees as per their contracts.
There are a few matters to consider if the purchaser refuses to take on your old employees. As you are the one terminating the employees, you have the obligation to pay out all outstanding entitlements they have accrued, specifically annual and long service leave. Beyond this, if your business is not classified as a ‘small business’ you may also have to pay redundancy pay. Also, if the employees were not given the required termination notice, then they are entitled to termination notice pay. Failure to consider these factors may lead to the employees filing unfair dismissal claims against you, which could potentially affect you financially, and damage your reputation.
How can you effectively manage your employee entitlements?
Remember, the best approach is to manage your employee entitlements and leave balances over time, rather than considering all of it at the sale of your agency. This may result in you having to pay out entitlements in large sums at the same time. This can a be financial stress on your business. Reduce this risk by keeping track of your employees leave balances and having conversations about it with them.
Principals may enforce leave, shut down the business in holiday periods and where reasonable insist staff take annual leave over the holiday periods. You can also direct staff to take annual leave if they have accrued an excessive amount. Under the Real Estate Industry Award, if an employee has accrued more than eight weeks of annual leave then it is considered an excessive amount. In this case you need to talk to that employee about how and when that leave balance will be reduced. If you can’t reach an agreement then you can direct your employee to take leave, provided you follow the procedure set out in the Award.
An alternative way of getting leave balances down is to start a conversation around what you and your staff are looking forward to over the year and start to plan when every one of your team, including yourself, will take time off to either spend time with their families or do the things that they enjoy. Principals should feel free to “encourage” their staff to take leave over the shutdown periods to help them rest, recover and recalibrate after a rough year.
Also, when selling your business, it is always good practice to discuss any such issues with the purchaser before the sale is final. This includes confirming whether or not the purchaser intends to transfer your old employees, and if so, whether they will be recognising their employment entitlements. It is best to have these matters settled contractually to avoid any confusion. This will also allow both the seller and purchaser to adjust the price of the business according to the added employment obligations they must carry out.
Key Takeaways:
The purchaser in some circumstances has the right to not recognise employee entitlements and/or their service to the old employer – in this case it is the seller’s obligation to pay out the employee entitlements;
The purchaser can refuse to take on the old employees of the business – in this case the seller must terminate them, provide them with the required notice and pay out their outstanding entitlements;
The seller and purchaser may negotiate to adjust the sale price according to the employee entitlements they are obligated to undertake.
It is best to manage leave balances over time - staff who have an accumulation of excessive annual leave, (ie. more than 8 weeks’ worth if they are under the Real Estate Industry Award) can be directed to take time off; and
Remember to have conversations about leave balances with your employees, encouraging them to take time off, both for your balance sheet and their wellbeing;
Next Steps
Not sure about your legal requirements when it comes to your employees’ entitlements or have other questions about selling your business? Why not book a free 10 minute call with us today to discuss your options.
Boring legal stuff: This article is general information only and cannot be regarded as legal, financial, or accounting advice as it does not take into account your personal circumstances. For tailored advice, please contact us. PS - congratulations if you have read this far, you must love legal disclaimers or are a sucker for punishment.