Employee Entitlements on transfer of business – an art form or a science?

Stephen Booth, Peter Stewart

Any business sale or purchase is likely to involve the transfer of employees from one entity to another. Careful consideration therefore needs to be given as to: 

Tight and clear drafting up front will go a long way towards ensuring that there is no dispute as to the nature and extent of adjustments to the purchase price at completion.

Annual Leave

It is common for parties to agree that unused annual leave entitlements that have been disclosed to the buyer in relation to a transferring employee will transfer to the buyer at completion. Some buyers require annual leave entitlements to be paid out by the seller immediately prior to completion so that a transferring employee starts employment with the buyer without any accrued leave. Others are happy to take on those entitlements provided there is an appropriate adjustment to the purchase price.

Where annual leave entitlements do transfer, the parties will need to agree on the extent of any adjustment to the purchase price to reflect the value of those entitlements.  

Increasingly, buyers are seeking to adjust for 100% of the value of accrued entitlements that they are to take on. On the other hand, sellers generally seek to have the purchase price adjusted by only 70% of the value on the basis that the real cost to the buyer is the after tax cost of paying those entitlements.  

Some buyers also seek to ‘gross up’ the value of employee entitlements to include annual leave loading and even other on-costs in accordance with AASB 119. A failure to be aware of the scope of some adjustments sought by buyers can give rise to a discussion with your client at completion that might well have been avoided.

Long Service Leave

The standard form NSW Law Society Contract for sale of business contains a table setting out the extent to which long service leave should be valued based on the period of service of the relevant employee, commencing at 20% (where an employee has between five and six years of service) and rising to 70% for an employee with at least 10 years of service.  Adoption of the underlying ‘formula’ in this table isn’t mandatory and in fact, some buyers are keen to have the seller pay out any accrued long service leave prior to completion.

Length of Service

Buyers need to be aware that for the purpose of calculating ‘length of service’ with an organisation (critical in determining any long service leave entitlement), the period of service of a transferring employee with the seller carries over to the buyer. The Fair Work Act 2009 allows a buyer of a business to decline to accept continuity of service for the purposes of annual leave and redundancy, but not for personal leave. Similarly, the NSW Long Service Leave Act doesn’t allow any discretion in accepting continuity of service for long service leave.

Thus, accrued long service leave entitlements of an employee with four years of service with the seller will be unlikely to be included in any adjustment against the purchase price paid by the buyer. This is despite the fact that the employee will be entitled to long service leave in certain circumstances after only one additional year of service with the buyer when their length of service reaches five years.

Personal Leave

It is usually accepted that accrued personal leave has no payout value. The buyer simply takes on the accrued personal leave entitlement of the transferring employee with no consequential adjustment to the purchase price. The argument often used by sellers is that by having significant personal leave entitlements, employees are demonstrating that they aren’t prone to taking personal leave. Some standard form contracts do seek to adjust the purchase price for accrued personal leave by including personal leave within the definition of Employee Entitlements. Such provisions should be scrutinised closely to ensure that the parties understand and accept or modify the stated position.

Redundancy

Generally, an employee is entitled to redundancy pay where their position is made redundant (whether through a transfer of business or otherwise) on a sliding scale once their length of service reaches one year. Where the buyer is not an associated entity of the seller, the buyer can choose not to recognise a transferring employee’s service with the seller for the purposes of redundancy entitlements. In such circumstance, the seller will need to pay redundancy to the transferring employee on termination. Redundancy pay will also be payable by the seller to non-transferring employees if they aren’t able to be offered ongoing employment with the seller. Redundancy pay isn’t payable to a non-transferring employee in cases where they have rejected the buyer’s offer of employment and that offer was on terms substantially similar to their existing terms and conditions, and recognised the employee’s service for redundancy pay.

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