Dealing with employee entitlements on a transfer of business

When a business is sold (i.e. transferred), there are rules with regard to employee entitlements which both the vendor and the purchaser need to get right.

Generally, the transfer of a business in accordance with the Fair Work Act 2009 (Cth) (FW Act), does not constitute a break in an employee’s employment and accordingly, the new employer is obliged to recognise the employee’s service with the old employer.

Transfer of business

Section 311 of the Fair Work Act provides that there is a transfer of business if:

• the employee’s employment with the old employer (the vendor) has been dismissed;
• the employee begins working for the new employer within 3 months of ending their job with the old employer;
• the employee’s work duties under the new employer is the same, or substantially the same, as the work duties performed for the old employer; and
• there is a ‘connection’ between the old employer and the new employer, meaning:
  
  - there is a transfer of assets from the old employer to the new employer;
  - the old employer outsources work to the new employer;
  - the new employer ceases to outsource work to the new employer; and/or
  - the new employer is an associated entity of the old employer, meaning they are related bodies corporate or one has some controlling interest in the other.     

Which employee entitlements are recognised by the new employer?

Employee entitlements that are generally recognised and carry over to the new employer (i.e. are not paid out by the old employer) include:

• sick and carer’s leave;
• requests for flexible working arrangements;
• parental leave; and
• long service leave.

The Long Service Leave Act (SA) does not recognise a transfer of employment as constituting a break in service. On this basis, accrued long service leave (including pro rata) cannot be paid out by the old employer and the employee will continue to accrue entitlement as if they had always been employed by the new employer.

Which employee entitlements are not required to be recognised by the new employer?

Employee entitlements that are not required to be recognised by the new employer include:

Redundancy

The new employer, provided it is not an associated entity of the old employer, can choose to not recognise an employee’s service with the old employer for redundancy pay purposes.  In this case, the old employer will be required to pay redundancy pay to the employee upon termination. 

However, an employee will not be entitled to redundancy pay if they reject the new employer’s job offer and:

• its terms and conditions are similar to those of the old job;
• it recognises the employee’s service with the old employer for redundancy pay;
• there would have been a transfer of employment if the employee had taken the job.

Annual leave

With respect to annual leave, the old employer and the new employer can either agree:

That annual leave accumulated with the old employer will carry across to the new employer; or If the new employer does not wish to recognise an employee’s service with the old employer, then the old employer is obliged to pay out the employee’s untaken annual leave.

Either way, this needs to be clearly documented in the sale and purchase contract with the purchase price adjusted accordingly to reflect what it is that has been agreed to by the vendor and purchaser.

Unfair dismissal

In some cases the new employer does not have to recognise an employee’s service with the old employer for the purposes of unfair dismissal.

This can happen when the:

• employee is a transferring employee;
• businesses are not associated entities, and
• the new employer lets the employee know in writing before the new employment starts that service with the old employer would not be recognised.

Notice of termination

A transfer of business ends an employee’s employment with the old employer. Therefore, the old employer has to either:

• give notice of termination,
• or provide payment instead of notice.

The above is still required even where the employee has been offered employment by the purchaser and will transfer to the new employer. If a transferring employee, who was given notice by the old employer at the time of sale, is later terminated by the new employer, then the new employer must give notice of termination.  Only service with the new employer counts for determining how much notice the employee gets.

For those employees who are not being offered employment by the new employer, if a transfer of business occurs before the notice period ends, the old employer is still obliged to pay the rest of the notice period.