What happens when employees are transitioned to a new employer?
The Reserve Bank of Australia has predicted a slow growth to household disposable income over the coming quarter, which would result in consumption to remain soft1. While this is good news for us insolvency practitioners, it may trigger small-and-medium-business owners to consider what their strategic outlook should be, including an exit from their industry all together.
In those circumstances, the business owner might sell its business, which could include the transfer of its employees to the purchaser. But what does this actually mean for each stakeholder to address employee entitlements?
This article looks at the following elements:
- Whether the sale conditions constitute a 'transfer of business'.
- How employment instruments are applied.
- When annual leave, notice of termination, and redundancy entitlements are paid.
- When long service leave, sick leave, carer's leave, parental leave entitlements are paid.
- How superannuation entitlements are met.
- Whether probation periods apply and their effect in unfair dismissal cases.
- What happens to employee records.
The Fair Work Act 2009 deals with this situation under its "transfer of business provisions"2, and sets out the following to determine whether a transfer of business has occurred:
- The seller is no longer employing the transferring employees.
- The seller's former employees become employed by the purchaser within three months of being terminated by the seller.
- The work that the employee performs for the purchaser is the same or substantially the same as the work formerly performed for the seller.
- At least one of the following is relevant to the business sale:
- The purchaser owns or has use of some / all of the seller's assets in operating the business.
- The seller's work is outsourced to the purchaser.
- If the work was previously outsourced and is now in-sourced by the purchaser.
- The seller and the purchaser are associated entities within the meaning of section 50AAA of the Corporations Act 2001.
When a transfer of business meets the criteria above, despite any sale contract terms about who is responsible for the employee entitlements, the Fair Work Act rules will prevail.
Business owners and their advisors should consider the pertinent aspects that follow.
If an award, agreement (such as an EBA—enterprise bargaining agreement), workplace determination or other type of instrument applied to the employee under the seller's structure, that instrument will continue to apply to their employment under the purchaser.
Payments for annual Leave, notice of termination, redundancy
Provided that the seller and purchaser are not associated entities, the purchaser may choose not to recognise the employee's prior service. In those circumstances, the seller must pay out those liabilities for annual leave accrued and notice of termination and redundancy.
In this scenario, any future termination under the purchaser is calculated from the re-hire date with the purchaser.
The seller is not required to pay redundancy if the purchaser recognises the employees' service with the seller and the employee accepts or rejects an offer of employment with the purchaser—provided that the employment terms are substantially similar to their former employment.
Long service leave, sick leave, carer's leave, parental leave
The transferring employees' accrued leave for long service leave, sick leave, carer's leave, and parental leave is automatically transferred. That is, the purchaser cannot opt out of recognising these accruals.
Unpaid superannuation obligations outstanding at the relevant date cannot be transferred to a purchaser and remain with the seller to pay.
The purchaser can choose not to recognise prior service for the standard six-month probation period, provided that the purchaser gave written notice to the transferring employees in advance. An employee must serve this period to be eligible to make any unfair dismissal claim,
The seller must provide all employee's employment records to the purchaser current to the date of transfer.
Any employees not offered employment with the purchaser, their entitlements remain with the seller to pay.
Once the seller and purchaser have finalised the transaction, the seller may then wish to wind down the remainder of the company's affairs.
1 Reserve Bank of Australia: Statement on Monetary Policy – May 2019.
2 Fair Work Ombudsman website factsheet: When businesses change hands factsheet. July 2018.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.