The relationship between a business owner and its employees is governed by a contract. These contracts may be partly or entirely:

• written;

• oral; or

• implied.

It is important for a purchaser to check the records of the business relating to the employees, including the original employment contracts, and any subsequent variations. This process should also include requiring records showing:

• details of the employee;

• duties;

• salary and benefits;

• accrued entitlements;

• any applicable industrial instruments, such as awards, determinations or agreements; and

• any contracts of employment, including any variations.

Transferring employees

A contract of employment is a contract of personal service, which means that it cannot be assigned, novated or "transferred" from a vendor to a purchaser. The employee is always free to decide for whom they want to work.

Sale of shares

A business acquisition will either take place by way of a purchase of shares or a purchase of assets.

Technically, transferring shares in the employer company does not require the employee’s consent because there is no change to the legal identity of the employer. However, from a practical point of view, an employee can choose to terminate their contract of employment at any time. Accordingly, the employee must be persuaded to work under the control of the new business owner.

In a sale of assets, the purchaser will need to offer employment to any of the vendor’s employees it wishes to retain. Any employees who are not required by the purchaser (or who decline an offer of employment) will remain employed by the vendor, who will need to decide about their ongoing employment. If the vendor has no remaining work for the employees to perform, usually it will be necessary to terminate their employment on the ground of redundancy.

Contractors

Both workers and business owners often claim that the workers are contractors, not employees.

Employees believe it may give them tax benefits while employers believe that it avoids employment-related laws, such as the Fair Work Act 2009 (Cth).

On a purchase of business, the purchaser must be sure that those described as contractors are not disguised employees. If they are, then all of the laws relating to employees will apply. These include benefits such as long service leave, accrued while working for the vendor, passing through to burden the purchaser.

Key employees

If there are any staff whose services are vital to the business, the purchaser should ensure that the contract for purchase of business is conditional upon securing their services. Also, particular attention should be paid to the restraint provisions in their contracts and the enforceability of those restraints, should they leave the business.

See Employee contracts.

Fair Work Act

The Fair Work Act 2009 (Cth) (FWA) became law on 1 January 2010. It phased out Australian Workplace Agreements and old awards, and has introduced a series of "modern awards". It also applies the National Employment Standards to all employees. These provide ten minimum standards of conditions for employees.

Industrial instruments binding a purchaser

When buying a business, the purchaser may become bound by a variety of awards, agreements and determinations including:

Employer-specific instruments

Section 313 of the FWA provides that the purchaser of a business is bound by “transferrable instruments”, defined in s 312 of the Act. Similarly, s 768M of the FWA provides that the purchaser of a State employer will be bound by a "copied State award" or a "copied State agreement", defined in s 768AF of the FWA. These are agreements, determinations and awards, specific to the vendor.

Industry-wide awards and determinations

Awards apply according to the type of industry the business is in, and according to the type of work the employees perform. For example, if you buy a business which fits fire sprinklers, the Plumbing and Fire Sprinklers Award 2010, will automatically apply to each of your workers carrying out work as referred to in that award.

Individual arrangements

Individual arrangements under the FWA:

• individual flexibility arrangements; and

• guarantees of annual earnings.

What instruments apply to a particular business?

To find what instruments apply to a business you can conduct a search, but this may not give the true picture:

• it does not include all of the employer specific instruments; and

• it may be difficult to determine which awards apply to each of the vendor’s employees.

The purchaser’s solicitor should include provisions in the contract for sale of business to force the vendor to disclose any applicable award, determination or agreement. There should then be the subject of a careful examination during the due diligence process.

Employment records

Under s 535 of the FWA, and under the Pt 3-6 Div 3 of Fair Work Regulations 2009 (Cth), detailed employment records must be kept. The regulations provide that, on a sale of business, these records must be handed to the purchaser and the purchaser must keep them as if they were their own records.

See Industrial relations law.

Long service leave

Each state has long service leave (LSL) legislation. The entitlements vary but are usually between 10–13 weeks' LSL once 10–15 years' service have been completed. Pro rata entitlements are generally available once employees reach 5–10 years' service (or 7 years in Victoria, South Australia and the ACT). Some industrial instruments also provide for LSL, in similar terms to the state legislation.

On a transfer of employees as part of a sale of business, the time spent working for the vendor automatically transfers across. Accordingly, employees are entitled to LSL from the purchaser as if the purchaser had always been the owner of the business.

On settlement, there is usually an adjustment, whereby the purchase price is reduced by the liabilities for LSL taken on by the purchaser. For employees with less than 10 years of service (or 7 years in Victoria, South Australia and the ACT), there can be issues between the vendor and purchaser as to what adjustment should be made. This is because there may be no LSL entitlement if the employee leaves voluntarily before achieving a minimum period of service.

Victoria

On settlement, there is usually an adjustment, whereby the purchase price is reduced by the liabilities for LSL taken on by the purchaser. For employees with 7 years of service, there can be issues between the vendor and purchaser as to what adjustment should be made. This is because there will be no LSL entitlement if the employee leaves voluntarily before achieving 7 years of service.

Personal / carer’s leave

This covers:

• sick leave; and

• carer’s leave.

On a purchase of a business, any entitlements accrued with the vendor automatically pass to the purchaser under s 22(5) , FWA. However, the purchaser may never have to pay such liability if the employee leaves without using up their leave entitlements accrued while working for the vendor. In practice, the entitlement of transferring employees to personal/carer's leave is ignored, and not included in standard templates for contracts for sale of business.

See Long service and personal / carer's leave.

Annual Leave

If a vendor and purchaser are associated entities within the meaning of the Corporations Act 2001 (Cth), the purchaser will be obliged to recognise annual leave entitlements accrued by employees while working for the vendor. This obligation does not apply if the vendor and purchaser are non-associated entities but can be agreed as part of the sale. In practice, annual leave is almost always transferred to the purchaser, rather than paid out on settlement, as employees generally prefer holiday entitlements rather than to receive cash and go without holidays. In that event, the purchaser will almost always seek an adjustment to the purchase price to reflect the liabilities it takes over.