In brief

The ramifications of not being aware of the obligations regarding and/or not correctly dealing with employee entitlements can be costly (even if only taking into account the ultimate dollar value of the entitlements).

What you need to know

  • Generally, where there is a transfer of business in accordance with the Fair Work Act 2009 (Cth) (FW Act), an employee’s service with the old employer (the vendor) counts as service with the new employer (the purchaser). However there are exceptions to this general rule.
  • Separate statutory principles apply to each of annual leave, personal leave, redundancy pay and long service leave.
  • Clear agreement as to how the employee entitlements will be dealt with in a sale of business should be reached prior to completion and clearly set out in the sale of business contract.

Dealing with employee entitlements (such as annual leave, personal leave, long service leave and redundancy pay) in a sale of business can be tricky.

Read on for a brief description of how to deal with annual leave, personal leave, long service leave and redundancy pay in a sale of business.

Is there a transfer of business?

The first thing that should be considered when determining how to deal with employee entitlements in a sale of business is whether there is a transfer of business as described in section 311 of the FW Act.

Section 311 of the FW Act provides that there is a transfer of business if:

  • the employee’s employment with the old employer (the vendor) has been dismissed;
  • within three months after the termination, the employee becomes employed by the new employer (the purchaser);
  • the work the employee performs for the new employer is the same, or substantially the same, as the work the employee performed for the old employer; and
  • there is a connection between the old employer and the new employer (i.e. there is 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 the new employer; and/or the new employer is an associated entity of the old employer).

If there is not a transfer of business as described in section 311 of the FW Act, an employee’s service with the old employer (the vendor) will not count as service with the new employer (the purchaser). Therefore, the old employer would simply deal with accrued annual leave, personal leave and redundancy pay in the same way that it would if it was an ordinary redundancy situation and the new employer would not need to recognise the employee’s service with the old employer for the purposes of accrued annual leave, personal leave and redundancy pay.

If there is a transfer of business as described in section 311 of the FW Act, accrued annual leave, personal leave and redundancy pay should be dealt with is follows.

Annual Leave

In a transfer of business, accrued annual leave entitlements can be dealt with in one of two ways:

  1. If the new employer is not an associated entity of the old employer and the new employer is not recognising service for annual leave purposes, the old employer should pay out all accrued annual leave. As a result, the accrued annual leave entitlements will not transfer with the employee to the new employer; or
  2. If paragraph number 1 above does not apply, accrued annual leave entitlements will transfer with the employee to the new employer.

Personal Leave

In a transfer of business, accrued personal leave entitlements cannot be paid out by the old employer and must therefore transfer with the employee to the new employer.

Redundancy Pay

Section 122(1) of the FW Act provides that in a transfer of business, redundancy pay entitlements can be dealt with in one of two ways:

  1. If the new employer is recognising service with the old employer for redundancy pay purposes, the employee is not entitled to be paid redundancy pay when his or her employment with the old employer terminates (generally at completion). As a result, the employee’s service with the old employer counts as service with the new employer for redundancy pay purposes; or
  2. The new employer, provided it is not an associated entity of the old employer, can choose to not recognise an employee’s service with the old employer for redundancy pay purposes and the old employer will be required to pay redundancy pay to the employee upon termination (generally at completion).[i]

Long Service Leave

In Victoria, long service leave is governed by the Long Service Leave Act 1992 (Vic) (LSL Act).

The LSL Act provides that where a business is sold and an employee remains with the business, or has less than a three month break between being dismissed by the old employer and being employed by the new employer, the new employer becomes responsible for the employee’s long service leave entitlement.

Long service leave cannot be paid out on transfer of business (section 74 of the LSL Act provides that it is an offence to give or receive payment instead of an employee actually taking the break from work). As such, in a transfer of business, service with the old employer will count as service with the new employer for the purposes of long service leave.

Conclusion

It is important for employers to be mindful of the extent of, and how to deal with, employee entitlements in a sale of business. As such, all details regarding employee entitlements should be provided during the due diligence stage so that the parties can have meaningful discussions, and reach agreement, regarding how employee entitlements will be dealt with in the sale of business.

If you have any queries about any aspects above, please do not hesitate to drop me a line.

 

[i] Note: In accordance with section 120 of the FW Act, the old employer may be able to apply to the Fair Work Commission to have the amount of redundancy pay varied on the basis that the old employer arranged other acceptable employment for the employee with the new employer.

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