When selling a business, national system employers need to be aware of the impact this has on their employees’ entitlements.

If you are unsure as to whether you are a national system employer, contact the Employee Relations Advice Centre on (08) 9365 7660 or [email protected].

The sale of a business results in the termination of any employment contracts. The employer is required to legally terminate the contract of employment of each employee or face the prospect of legal action.

It is important to note that the transfer of shares between shareholders in a proprietary limited company is not deemed to be a ‘transfer of business’ for the purposes of determining employment contracts or employee entitlements.

What is a transfer of business?

Under section 311 of the Fair Work Act 2009 (Cth), a transfer of business occurs if the following requirements are satisfied:

1. the employment of an employee with the old employer has terminated; and
2. within three months of the termination, the employee becomes employed by the new employer; and
3. the work the employee performs for the new employer is the same, or substantially the same as the work performed for the old employer; and
4. there is a connection between the old employer and the new employer.

There is a connection if:

1. there is a transfer of assets from the old employer to the new employer;
2. the old employer outsources work to the new employer;
3. the new employer ceases to outsource work to the old employer; or
4. the new employer is an associated entity of the old employer.

The term ‘associated entities’ is defined under s50AAA of the Corporations Act 2001 (Cth). Members should seek advice from their accountant as to whether the transfer is between associated or non-associated entities.

Obligations of an employer upon transfer of business

Regardless of whether the transfer is between associated or non-associated entities, transferring employees from the old to the new employer must see their prior service with the old employer, in respect of the following entitlements, recognised by the new employer:

• long service leave
• unpaid parental leave
• eligibility to request flexible working arrangements
• notice of termination.

These leave entitlements are discussed in-turn below.

Long service leave

The Long Service Leave Act 1958 (WA) recognises continuous service for the purpose of calculating long service leave, where a business is transmitted from one employer to another.

Note: That not all transfer of business types outlined in the Fair Work Act 2009 (Cth) require service, for the purposes of the long service leave entitlement, with the old owner to be recognised.

Western Australian long service leave provisions will continue to apply to all employees in Western Australia, regardless of whether they are in the federal or state industrial relations system. However not all employers in Western Australia are bound by the Long Service Leave Act 1958 (WA). There may be a pre-reform award, a Notional Agreement preserving a State Award or an agreement that continue to apply for Long Service Leave provisions. For further information see the CCI Information Sheet – Long Service Leave – how does it work from 1 January 2010 for national system employers.

 Unpaid parental leave

Service with the old employer must be recognised by the new employer in respect of parental leave. More specifically, if an employee has already commenced a period of unpaid parental leave with the first employer, the employee is entitled to continue on that leave for the rest of that period. Furthermore, an employee who has already taken a step required or permitted under the Fair Work Act 2009 (Cth) with respect to an entitlement to parental leave with the first employer, will be taken to have taken the step with the second employer.

Eligibility to claim flexible working arrangements

To make a request for flexible working arrangements, the employee must have completed at least 12 months of continuous service with the employer immediately before making the request. An employee’s service with the old employer must be recognised as service with the new employer for the purposes of assessing an employee’s period of continuous service when it comes to requesting flexible working arrangements.

Notice of termination

Under the Act, an employer must give the employee at least the following notice (or compensation in lieu of notice):

Employee’s period                                      *Notice period
of continuous notice                                              in weeks

Not more than 1 year.......................................................... 1

More than 1 year but not
more than 3 years................................................................ 2

More than 3 years but not
more than 5 years................................................................ 3

More than 5 years ............................................................... 4

*The notice period is increased by one week if the employee is more than 45 years old and has completed at least two years continuous service.

Note: An employer must not terminate an employee’s employment unless the employer has given that employee written notice of the day of termination (this cannot be the day before the notice is given).

There are exemptions from providing the notice prescribed above. These include:

• employees engaged for a specified term, on a specified task or for the duration of a specified season;
• employees who are dismissed for serious misconduct;
• a casual employee;
• an employee (other than an apprentice) to whom a training arrangement applies and whose employment is for a specified period of time or is, for any reason, limited to the duration of  the training arrangement;
• a daily hire employee working in the building and construction industry (including working in connection with the erection, repair, renovation, maintenance, ornamentation or demolition of building structures);
• a daily hire employee working in the meat industry in connection with the slaughter of livestock; and
• a weekly hire employee in connection with the meat industry and whose termination is determined solely by seasonal factors.

Modern awards, agreements or employment contracts may provide for greater notice periods than those prescribed in the Act. Employees are entitled to the most beneficial notice provision.

Other entitlements

Transfer between associated entities

Where a transfer occurs between two associated entities, the period of service with the old employer will count as service with the new employer. That is, the new employer is obligated to recognise the service.

Annual leave

An employee’s accrued annual leave entitlements must be recognised by the new employer.

Redundancy pay

Redundancy pay may not be payable by an old employer where an employee rejects an offer of employment with the new employer that is the same or similar to their previous role. The old employer must apply to Fair Work Commission (FWC) using Form F45A seeking a reduction in redundancy pay. FWC will independently assess the similarity of the two roles and may reduce the redundancy pay, in some cases to nil.

Before applying to FWC, employers should check whether the specific employee is an excluded employee who is not entitled to redundancy pay (see below).

Transfer between non-associated entities

In a transfer of business between two non-associated entities, the new employer has the option of not recognising prior service in the following respects.

Annual leave

Where the new employer does not recognise service, the old employer will need to pay out all unused annual leave to the employee upon the employee’s termination.

Redundancy pay

If the new employer opts not to recognise the employee’s service with the old employer, redundancy pay may be payable by the old employer, depending on how similar the employee’s role with the new employer is. Employers should check whether the specific employee is an excluded employee who is not entitled to redundancy pay (see below). In this situation, service for the purposes of redundancy pay would start from zero with the new employer.

Unfair dismissal qualifying periods

Additionally, if the new employer writes to transferring workers advising that prior service will not be recognised, the new employer need not recognise prior service for the purposes of the qualifying period for unfair dismissal remedies.

Where the new employer has the option, the decision to recognise or not recognise service should be a point of discussion between the two businesses when negotiating the purchase price.

Transfer of business and the redundancy process

Considerations for the new employer: Selecting employees from the old business

The new employer is not obliged to take on any or all of the employees of the old employer.

When deciding whether to employ any or all of the old employer’s employees, it is important to consider factors such as the value of maintaining existing skills, knowledge and customer relationships, along with the potential problems arising from existing employee relations issues.

In selecting workers from the old business to offer employment to, the new employer must be mindful to select people based on merit rather than discriminatory grounds such as age, nationality or family responsibilities (this list is not exhaustive), or due to entitlements that a person may have under a workplace law or industrial instrument such as large long service leave or annual leave accruals or eligibility to access parental leave etc.

However, the new business can choose not to hire a transferring employee because they are entitled to a benefit under a transferable instrument such as an enterprise agreement that has been approved by Fair Work Commission (FWC), a workplace determination, a named employer award, an individual flexibility arrangement or a guarantee of annual earnings (see below).

To demonstrate that the selection of staff was based on objective criteria rather than discriminatory grounds, criteria such as qualifications, years of experience and job performance should be the key considerations in making that selection and this should be clearly documented. The documents may assist in defending any claims made against the employer for discrimination or general protections.

Considerations for the old employer: Redeployment and consultation requirements

Once a decision has been made that some or all employees will be selected for redundancy the old employer must notify employees of the decision.

Employers should check the applicable industrial instrument for requirements to consult parties about redundancy or significant changes that may affect them. The obligation to consult may come from:

• the Fair Work Act 2009
• a modern award
• workplace/enterprise agreement
• contract of employment
• workplace policies.

In circumstances where an employer is obligated to consult employees it is advisable for the employer to document these processes. The relevant industrial instrument may require information on the nature and timing of the significant change and ways the employer will minimise the impact to be provided in writing to the affected employees and, in some cases, the relevant union.

The new employer may decide not to employ some or all of the old employer’s employees. If this occurs, the old employer is obliged to consider whether redeployment to an acceptable and alternative position, either within the organisation or within an associated entity, is viable. If so, this should be discussed with, and offered to, employees who will be made redundant.

Considerations for the old employer: Redundancy pay

The National Employment Standards (NES) contains specific entitlements for severance payments that apply to employees of national system employers.

According to the NES, when an employee’s employment is terminated as a result of their job being made redundant, the employer is required to make the following redundancy payments:

Employee’s period                                    Redundancy pay
of continuous service                                 period (weeks)

Less than 1 year................................................................. Nil

At least 1 year but less than 2 years ................................ 4

At least 2 years but less than 3 years .............................. 6

At least 3 years but less than 4 years............................... 7

At least 4 years but less than 5 years............................... 8

At least 5 years but less than 6 years............................. 10

At least 6 years but less than 7 years............................. 11

At least 7 years but less than 8 years............................. 13

At least 8 years but less than 9 years............................. 14

At least 9 years but less than 10 years.......................... 16

At least 10 years................................................................. 12

Employers should always check their applicable industrial instruments, such as enterprise agreements, awards and contracts for redundancy provisions as they may be more beneficial than the NES.  Furthermore, employers should give consideration to past custom and practice, company policies and verbal communication indicating that redundancy pay will be payable.

It is important to note that small businesses employing less than 15 employees are exempt from the requirement to make redundancy payments under the NES. Furthermore, a modern award or enterprise agreement may include a term specifying other situations in which the amount of redundancy pay prescribed by the NES does not apply to the termination of an employee’s employment.

Employers may be exempt from making severance payments in certain circumstances and to certain types of employees. This includes:

• if the employee’s period of continuous service with the employer is less than
  12 months
• where an employee refuses an offer of employment with the new employer where the terms and conditions are substantially similar to, and no less favourable, to that which the old employer currently offers, and the new employer recognises the service with the old employer (i.e. had the employee accepted they would have been a transferring employee)
• employees that are engaged for a specified task, time or season
• employees that are dismissed for serious misconduct
• casual employees
• an employee (including apprentices) to whom a training arrangement applies, whose employment is for a specified time or for any reason is limited to the duration of the training arrangement
• employees to whom an industry specific redundancy scheme in a modern award applies or who is bound by an enterprise agreement which incorporates by reference to a modern award, an industry specific redundancy scheme.

Transfer of instruments from old employer to new employer

For national system employers, if a ‘transferable instrument’ covered the old employer and a transferring employee immediately before the termination of the employee’s employment with the old employer, then:

1. the instrument will cover the new employer and the transferring employee (provided that the work that the transferring employee is doing for the new employer is the same or substantially similar) and;
2. while this instrument covers the new employer and the transferring employee in relation to the transferring work, no other enterprise agreement or named employer award that covers the new employer at the transfer time covers the transferring employee in relation to that work.

Instruments that may transfer from an old employer to a new employer include:

1. an enterprise agreement
2. a workplace determination
3. a named employer award (i.e. a modern award that is expressed to cover one or more named employers)

Non-transferring employees may be covered by transferring instruments

If the new employer is covered by a transferring instrument in relation to particular work that a transferring employee is performing, it is possible that new employees (i.e. non transferring employees) may be covered by the transferring instrument. For this to occur, the following criteria would have to be satisfied:

1. a non transferring employee is employed by the new employer;
2. the new non-transferring employee performs work that is the same (or substantially the same) as the transferring employee; and
3. no other enterprise agreement or modern award covers the new employer and the new employee in relation to the work performed.

Fair Work information statement

Transferring employees will need to be provided with the Fair Work Information Statement as soon as reasonably practical after commencing employment with the new employer.

For further information on the industrial implications for employers when buying or selling a business, contact CCI’s Employee Relations Advice Centre on (08) 9365 7660 or email [email protected].