Transfer of Business – What about the People?


As practicing employment lawyers it always surprises us how businesses are bought and sold, without so much as a pause to consider the employees concerned. The first lawyers to be contacted and involved are the corporate lawyers. They are well versed in merges and acquisitions, tax and finance matters and ensuring the financial and contractual obligations of the parties are considered and the fine print of the purchase and sale agreement is carefully drafted. However, no or very little consideration is given to the most important asset of any business, its people.

When the assets and liabilities of a company are bought or sold, one issue that should always be considered is what happens to the employees. If the new employer will be offering ongoing employment to employees, on what basis will this be made and what practical issues arise when integrating two workforces who may be covered by separate industrial instruments, employment agreements and terms and conditions generally. These issues are all part of the due diligence and transitional planning when a transmission of business event takes place, and it is imperative that both the outgoing and incoming employer have a proper understanding of the legal requirements under Fair Work Act 2009 (Cth) (“FW Act”).

The transfer of employees from one employer to another as a result of a commercial acquisition, outsourcing arrangement or other circumstances will trigger the provisions dealing with the transfer of business contained in Part 2-8 of the FW Act. Under the FW Act, four conditions must be satisfied to establish a transfer of business from one employer (“Old Employer”) to another employer (“New Employer”).

These conditions are:

  1. the employee’s employment with the Old Employer is terminated (“the Termination”);
  2. the employee commences employment with the New Employer within three months of the Termination;
  3. the employee continues to perform the same, or substantially the same work for the New Employer; and
  4. there is a “connection” between the Old Employer and New Employer within the meaning of the FW Act, typically such a connection is established where:
    1. the New Employer owns or has beneficial use of some or all of the assets (whether tangible or intangible) of the Old Employer;
    2. the Old Employer is outsourcing transferring work to the New Employer;
    3. the New Employer ceases to outsource the transferring work to the Older Employer; or
    4. the New Employer is an associated or related entity of the Old Employer.

It is worth noting that not all transfer scenarios will be caught by the FW Act. The sale of shares in an entity such that the employing entity remains unchanged will not constitute a transfer of business for the purposes of the FW Act. In this scenario there is no termination of employment and no need to consider the consequences that normally flow from such a termination.

Assuming that the sale of the business qualifies as a transfer of business under the Act, the legislation makes provision for the recognition of an employee’s service where the employee is transferring between associated entities, or otherwise where the employment is transferred from the Old Employer to the New Employer. The New Employer is entitled to refuse to recognise the previous service, in which case the employee will be treated in the same manner as any new employee. However, this will result in the Old Employer being required to pay the employee all their entitlements including redundancy pay. If, as is the usual circumstance, the new Employer does recognise the previous service of the transferring employee, then it is will have a direct impact on the cost of:

  • parental leave;
  • annual leave;
  • personal leave;
  • long service leave;
  • redundancy benefits; and
  • notice of termination periods.

In a transfer of business situation, given that the employees’ employment with the Old Employer will terminate as a result of the transfer, unless the employee is offered employment on terms “no less favourable on an overall basis” than that enjoyed with the Old employer, the employee may be entitled to redundancy pay, if they refuse the offer of new employment. This is especially important in ensuring that all the employment benefits enjoyed by the employee with the Old Employer are considered, and not only those that appear in the written contract of employment.

It is critical that in any acquisition or business restructure that results in a transfer of business, a thorough and comprehensive employment due diligence is conducted. Both the New Employer and the Old Employer should ensure that these matters are properly considered. For the New Employer it is crucial that the main employment liabilities are carefully considered, as these can, for long serving employees, be significant. If an employee is not required to transfer, or is not offered employment that is, on an overall basis, suitably comparable or in some way is less favourable, the employee will be entitled to redundancy pay. As this liability will usually rest with the Old Employer, as part of the negotiations for any transfer of business, the Old Employer will need to ensure that the employees are offered comparable employment, and should conduct a comparative exercise to determine whether the proposed terms and conditions of the transferring employee are no less favourable than they were with the Old Employer.

It is not uncommon for businesses to have their own enterprise agreements or other individual industrial instrument. The FW Act provides that the industrial instrument transfers with the transferring employees. This means that for the New Employer, may acquire a workforce which is governed by a completely different set of terms and conditions. This may be costly and administratively difficult. In addition, any new employees engaged by the New Employer who perform the same work as the transferring employees, will also be covered by the transferring industrial instrument. As a result, the FW Act confers broad discretionary powers upon the Fair Work Commission (“the Commission”) to make orders dealing with the application of these industrial instruments. On application to the Commission, the Commission can order, among other things:

  1. that a transferring instrument will bind the New Employer and all its employees;
  2. that the transferring instrument does not transfer and the New Employer’s existing enterprise agreement covers the transferring employees; or
  3. terminate, vary or remove any ambiguity or uncertainty of a transferring instrument, such as an enterprise agreement, to allow the transferable instrument to operate in a way that is better aligned to the working arrangements.

It is possible to apply for the above orders before any transfer of business takes effect to give employees and the New Employer greater clarity about the industrial arrangements that will apply. In granting any of these orders, the Commission must have regard to a number of factors, including consideration of the following:

  1. the view of the New Employer and employee who are affected;
  2. whether employees would be disadvantaged;
  3. if the application relates to the termination or modification of an enterprise agreement – the nominal expiry date of the agreement;
  4. whether the instrument would hinder productivity in the new workplace;
  5. whether the new employer would incur significant economic disadvantage;
  6. the degree of business synergy between the transferable instrument any other industrial instrument in operation at the New Employer; and
  7. the public interest.

Given the complexity of these matters and their very real cost to the business if not properly considered, we recommend that careful consideration be given to these issues well prior to any completion of a transfer of business.

We regularly give advice on transfer of business issues and have conducted employment due diligence processes as well as advised on a number of transitional and harmonisation strategies, in the context of business acquisitions. Apart from traditional corporate and financial due diligence checks, we recommend that employers conduct a thorough and proper due diligence audit on the vendor’s business, as the transferring liabilities and latent employment risks that may not be apparent to the untrained eye, could be potentially very significant.

Please do not hesitate to contact us for specialist advice or assistance.

This alert is not intended to constitute, and should not be treated as, legal advice.

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