Taking on the employees when you buy a business under the REIQ standard conditions of sale for a business
Clause 18 of the REIQ contract conditions sets out the deal for taking on existing employees when you buy a business.
Now the employees obviously aren’t like the furniture, equipment, vehicles or stock! They aren’t slaves and the seller can’t transfer them to you as if they were business assets. And the contracts under which they work can’t be literally ‘assigned’ or transferred either in the way that (say) the benefit of a lease of premises or equipment hire might be transferred, because they are what the law regards as a special category: contracts of personal service. It will be up to individual employees to decide whether they want to stay on and work for you.
But as buyer there are things you can do to protect your interests. For example, there might be key employees whom you will find it absolutely necessary to take on if you are going to proceed at a given price. You might want to consider making completion of the contract conditional on those employees entering into employment agreements with you as the new owner. The standard conditions don’t provide for this, so you will need advice about a special condition.
The standard clause—clause 18—provides that the seller has to set out in a list, forming part of a contract, the name of each employee and their length of service.
Before settlement, you, as buyer, inform the seller which employees you want to take on. These employees must be made an offer of employment with you—which will be conditional on settlement of your purchase of the business, of course. The terms of employment have to be at least as favourable overall as those provided by the seller and must provide for continuity of service in terms of accrual of benefits, like entitlement to leave. This means you’ll have to deal with each employee as if you had employed him or her from the date the seller in fact employed them. The idea is that the seller has a legitimate interest in this because the seller will remain obliged to employees who don’t want to go over to you as the new owner. Neither you or the seller or the employees want any employee falling into some sort of gap where it’s unclear whether he or she looks to you or the old employer to satisfy accrued entitlements; and, there will be an adjustment to the contract price according to whether or not you’re taking on one or more employees.
Any employee of the seller re-employed by you as buyer is considered to be a transferring employee and you as buyer will be responsible for all accrued entitlements from the date the employee commenced employment with the seller—or any previous owner of the business.
And because of this the standard conditions say that the seller must reimburse you as buyer at settlement 70% of such accrued entitlements. This is simply done by way of an adjustment to the balance price payable at settlement. The contract explains in Appendix A that it is only 70% since the buyer will get a tax deduction when the employee entitlements are paid. Whilst, the net effect of any tax deduction will vary from buyer to buyer, the 70% apportionment is generally fair. However, if your circumstances warrant a variation, you should obtain legal advice.
If you notify the seller that you will employ an employee but don’t offer them employment in accordance with standard condition 18.3, you will be responsible for any redundancy payments due to that employee arising from the seller’s termination of their employment on or within 12 months after settlement. If an offer is properly made but rejected by the employee, or if you did not notify a desire for that employee to come over to you as buyer, the seller is responsible for their redundancy payments.
The accrual and obligation to pay long service leave is the most complex of all leave entitlements. If you have many employees with 5 years’ service or more, your obligation to reimburse the buyer under this clause may be significant, even though the employees may never reach the threshold to receive this entitlement. Depending on the number of employees you have in this category, you may wish to vary the contract to suit your circumstances and should therefore seek further advice from BlueKey Lawyers.
Author: Kevin Johnson – Legal Director BlueKey Lawyers