We have all heard the saying that the most important asset of any business is its employees, and yet, when it comes to buying a business, employment issues are commonly overlooked with due diligence usually focussed on financial performance.
However, consideration should also be given to relevant employment issues as some of the decisions made in this regard could have a significant impact on the profit (and potential losses, both in monetary and operational terms) once the buyer assumes control of the business.
Here are our top three key employment issues that both vendors and purchasers should not ignore during the business sale process.
1. Should all employees be offered ongoing employment?
A due diligence undertaken in relation to employees will assist buyers to make an informed decision as to whether they wish to offer employment to all or some of the employees. This will also influence the terms and conditions contained in the business sale agreement. This process will also be of some interest to vendors given the possible redundancy implications for any employees that do not receive an offer of employment from the buyer.
2. Transfer of industrial instruments, employment contracts and policies
In some instances, it may not be beneficial to the buyer's overall business to have a particular industrial instrument transfer from the vendor to its business on the transfer of employees.
There are steps the purchaser may be able to take to remove the obligation to abide by the transferring instrument, although the starting proposition is always that the Fair Work Act 2009 (Cth) (Act) provides that an industrial instrument will transfer with employees where there is a transfer of business and the employees work remains substantially the same.
Buyers should also check any existing employment contracts and policies and make sure that they are comfortable with their terms, particularly any termination clauses, in circumstances where the employment contracts are novated to the buyer through the business sale process.
3. Recognising continuity of service
If there is a transfer of employees through the business sale process, then the Act generally imposes an obligation on the buyer to recognise the transferring employees' period of service for the purpose of such entitlements including annual leave, personal/carer's leave, long service leave, notice and redundancy payments and unfair dismissal.
However, an often overlooked section of the Act also provides that if the buyer decides not to recognise the employee's service with the vendor, then there will be no continuity of service with respect to annual leave, notice and redundancy pay. Additionally, the buyer may, by notice, require the employee's period of service to start again for the purposes of the unfair dismissal provisions of the Act.
This, in effect, means the transferring employees would need to serve another minimum period of employment (probation) – a handy option to allow buyers an opportunity to evaluate the employees of the business after settlement.
When considering a business sale, decisions taken with respect to employees can have a direct impact on the profitability or otherwise of the business after settlement. In particular, the impact of any transferring industrial instruments and the flow on effect to any existing businesses or employees of the buyer should be given great weight.
Also, a decision on whether or not to recognise transferring employees' period of service can have a significant impact on both the buyer and the vendor, not only in relation to adjustments to be made to the purchase price, but the possibility of allowing the buyer greater flexibility in evaluating employees post-settlement without the risk of an unfair dismissal claim.
As such, the parties should consider and treat employees just like any other asset of the business during a business sale process and ensure that the due diligence process does not overlook or underestimate their impact on the business both before and after settlement.
Mark Bunch is a Partner of Aitken Legal, a law firm specialising only in employment law for employers. www.aitkenlegal.com.au. The information in this article is intended as a guide only. Liability limited by a scheme approved under professional standards legislation.