What to do with employee entitlements when selling your business
Negotiating the adjustment of employee entitlements in a business sale can be difficult. There are a number of entitlements you need to consider. These include:
- Annual leave
- Personal and sick leave
- long service leave
- redundancy and wages
- Superannuation
If you are buying or selling a business, you need to account for the business’s employees. Specifically, you must make the proper adjustments regarding their entitlements at settlement. This article explains how a buyer and seller can negotiate employee entitlements in a sale of business. It also sets out the process for attending to adjustments at settlement.
Essentially where a business is sold and it has employees, decisions need to be made whether to:
- Terminate and pay out all employees (then if they want to work for the new employer then they get a new contract).
- Transfer the employees across to the buyer.
It is between the buyer and the seller to negotiate terms. It is in the best interest of the buyer and the seller to have continuity of employment to ensure the successful continuation of the business so usually they agree to 100% price adjustment to carry over the annual Leave and long service leave, and therefore no adjustment for sick leave. Some negotiations result in an agreed figure of between 20 – 70% of long service leave, 70% of annual leave, and hence a negotiated figure for sick leave as well. The reason for the percentages is due to old contracts when the company tax rate was 30% and various different state laws also applied.
Please refer to the below example:
An employee who has been working in the business for six and a half years continuously and has had a good run with their health such that they have accumulated many weeks of sick leave (personal/carer’s leave).
If that employee were to transfer to the purchaser upon completion of the business acquisition they may then decide to leave their new employment within the next six months for a variety of reasons. If they did so, then they would have no entitlement to long service leave because they would not have reached the minimum threshold of seven years of service. The same employee would also have no entitlement to be paid out for unused sick leave.
On the other hand the employee may go on to have a long career with the purchaser and after only six months become entitled to 30 days long service leave (subject to the terms of the Long Service Leave Act). Fair for the employee who would have been working in the business for seven years. Not so fair for the purchaser who has only had the benefit of that employee’s service for a mere six months.
Similarly, that employee might have a change of fortune and having built up many months of sick leave entitlements with the vendor, suddenly become seriously ill within weeks of transferring to the purchaser. The employee is now entitled to be paid by the purchaser for all of their time off work sick up to the limit of their accrued sick leave entitlement. Again fair for the employee who would have been working in the business for seven years. Not so fair for the purchaser.
But on completion date these are unknown factors and the future could evolve either way.