Institute of Certified Bookkeepers
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January 2015 Questions of the Month

  • 127 posts
  • # 103711

My client has sold a business which has a number of employees. He has instructed me to pay out all entitlements but does not want to pay super on the unused annual leave and is not sure if the employees are being terminated…where do I go for the right information on how this situation should be treated?

Should the employees be terminated and re-engaged or can they just ‘swap over’ to the new business?

  • Member in Practice
  • Practice Certificate
  • 45 posts
  • # 103776

Here's a link to Fair Work

  • Fellow in Practice
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  • Certified Bookkeeping Practice
  • 71 posts
  • # 103979

That link doesn't seem to work for me.

My understanding is that whether leave liabilities are being taken over by the new business owner or not are specified in the contract of sale of the business. If the new business owner is assuming these liabilities, then a dollar value will need to be calculated and these will form part of the price of the purchase of the business and end of year adjustments and calculations will be made by the accountant for the selling business owner.

  • 83 posts
  • # 104451

FairWork is the first port of call for information on this situation, and depending on how tricky it is, you may also need guidance from an employment law advisor.

There are several factors to take care of.

From FairWork, a transfer of business is when all of the following happen:

  • an employee begins working for the new employer within three months of ending their job with a previous employer
  • the employee's duties are the same or nearly the same as they were for the previous employer
  • there is a 'connection' between the previous and new employers.

A “connection” between employers is when the old employer sells some or all of the business to the new employer; or the two employers are associated or related entities; or the old employer outsources the work of the employee to the new employer.

An employee that moves from the old employer to the new employer in a transfer of business is called a 'transferring employee'. A transferring employee will be covered by whatever industrial instrument is in place at the time of the sale or transfer. A registered agreement will continue to operate until it runs out of date or is replaced. In most cases for an award covering an employee, it will be the same award that is used even when the business is sold. In some cases where the employee’s job actually changes, then the award that governs that employee may change.

Do Entitlements Transfer?

In general, when there is a sale or transfer of business, the new employer must recognise the employee’s service with the previous business owner for the purpose of calculating long service leave if applicable.

However, there are some entitlements that are not necessarily required to be recognised by the new employer: redundancy, annual leave, long service leave, unfair dismissal and notice of termination. For more detail see FairWork Employee Entitlements on a Transfer of Business.

For example, if a worker has been employed for over five years, they would ordinarily be due four weeks of notice if he is given notice. If the new employer gives the worker notice within the first six months after taking over the business, because the employee has been with the news employer less than a year, the employer is only required to give one week of notice.

Note that Long Service Leave entitlement is state-based legislation, so you will need to check your state’s provisions for whether an employee’s service will be recognised within certain timeframes. For example, if an employee leaves at the time of the sale of business, but is re-engaged within two months in NSW, their prior service will be recognised. Check if in doubt.

Old Employer Obligations

  • Make sure sale of business documents clearly outline who is responsible for notifying employees if their job is not ongoing with the new employer
  • Make copies of all employee records and keep for 7 years; provide originals of all employee records to the new employer
  • Provide notice of any individual agreements or employment contracts in place with employees to the new employer
  • Pay out employees’ entitlements if necessary according to FairWork and the sale of business documents - check if in doubt.

New Employer Obligations

  • Give every employee a copy of the FairWork Information Statement (including National Employment Standards), even if they received one from the old employer
  • Provide a new Tax File Number Declaration form
  • Provide the legal name of the employer
  • Provide all employees a super choice form and notify any employees using the default super fund of the old employer that they have the option to stay with the previous default fund or they can swap to the new employer’s default fund
  • Individual workplace flexibility arrangements in place with the old employer must be honoured by the new employer
  • Inform employees about the award or agreement that will govern them

The Contract of Sale Documents

It is very common that sale documents are drawn up that in fact do not include any provisions for employee entitlements, (along with other things such as gift vouchers and stock). If this is the case, you must go back to the business owner and clarify the situation. They may well need to get legal advice and/or get additional documents drawn up for the sale of the business to include employee entitlements and so on. If there are employees who would be paid pro-rata long service leave on termination, check that this has also been included in the sale.

Generally speaking, the new owner would have their own entity name and ABN; it less common that the sale of a business includes the entity name and ABN. Therefore, while the employees are not necessarily terminated from employment, they may have their entitlements paid out at the date of transfer of business ownership, OR the entitlements may be “bought” by the new business owner, so that the liabilities are transferred to the new owner.

The employee would then receive two payment summaries for the financial year, even if their service continued from the old employer to the new one.

In conclusion, what is essential is that you check the sale documents for any information about employee arrangements. In the terms of the sale, it should be made clear as to whose responsibility it is to provide notice of termination if the employees are not required in the new business. It is important to be clear about how the sale of the business will affect the employment agreement, nature of the job, entitlements and period of service for all employees in the business.

The FairWork Act 2009 does not oblige employers to notify their employees of a transfer of business; however, it would be fair to tell them as soon as any confidentiality agreements regarding the sale of the business are no longer operating.


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