When purchasers put forward offers to buy a practice, they will sometimes make a request like the following with their offer:
“At completion of the sale, I'd like the Vendor to terminate all of the staff contracts and pay out all of their employee entitlements, so that I may hire them ‘clean’.”
Is it legally possible to structure a deal like this?
To answer this question, we need to break down what is being requested here into smaller questions.
- What happens to employees upon the sale of a business?
A business sale usually doesn’t involve a buyer buying the ABN of the seller.
Usually (to reduce potential liability), a buyer will actually start a new ABN and buy the assets of the old business.
If the purchaser wants to keep the employees in the business post sale, the vendor actually needs to terminate their employment with the previous ABN, and then the purchaser needs to offer them employment in the new ABN.
For this reason, when a business owner is thinking of selling their business, they need to keep in mind that there may be legislated ‘termination’ notice periods that need to be given to the employees.
Generally speaking, for the vendor to avoid paying out redundancy payments to the terminating employees, the purchaser must offer employment to the employees on terms that must be "substantially similar to and overall no less favourable" than the terms of employment with the vendor.
2. How are leave entitlements "usually" dealt with upon the sale of a business?
The standard position under most industry business sale contracts is that the purchaser takes on and recognises the accrued entitlements of those employees which it hires from the date of completion of the business sale. So, if a transferring employee has accrued 30 hours of annual leave with the Vendor, the Purchaser must recognise that leave entitlement when the employee starts working for the Purchaser.
In exchange for recognising this leave, the seller needs to provide some financial compensation to the seller. The way this adjustment is generally dealt with is slightly different for each category of leave entitlement (annual leave, personal/carer's leave, long-service leave, etc.).
In exchange for recognising annual leave and long-service leave entitlements, the business sale contract usually provides that the vendor reduces the price paid for the business by an amount to compendate for the value of the leave entitlements transferred.
The financial adjustment that occurs for recognising personal/ carer’s leave has much more variance in the industry norm and negotiation depending upon the state that you are in, the size of the liability and the perceived stability of the employee.
If the employees are not offered employment by the purchaser or do not accept the purchaser's offer of employment, the vendor will need to pay out their annual and long service leave entitlements (but not personal carer’s leave).
3. What happens if the purchaser wants to hire the employees "clean", with no entitlements (as per the premise for the article)?
This is possible for some of the employee entitlements and not for others.
It is an option and possibility for the annual leave and long service leave to be paid out and the employee to be hired “clean”, with respect to these entitlements.
However, it is not an option for personal/carer's leave, parental leave and long service leave below the pro-rata payment threshold (usually 5- or 7-years’ service depending on the state). These entitlements cannot be paid out and the purchaser will have to recognise the employees' previous service with the vendor, if the purchaser wants to keep them on.
Harry Nicolaidis is a partner at K&L Gates Brisbane. For legal advice about your practice sale/purchase, Harry Nicolaidis can be contacted at harry.nicolaidis@klgates.com.
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