An important consideration when purchasing a business is whether to continue to employ the business’ existing staff.
There may be many benefits to the new owner of a business by continuing to employee existing employees, particularly if the existing employees have specialist knowledge of the workings of the business and customer connections or if employing new staff is likely to involve onerous hiring and/or training processes.
On the other hand, if the business continues to employ existing staff and it turns out that they are not a good fit, it could be difficult to terminate them if they have already served the minimum period of employment with the previous owner of the business. If the existing employees have served the minimum employment period with the previous owner of the business, they are protected from unfair dismissal, meaning if the new owner of the business wants to terminate existing employees, they require a valid reason for termination and to ensure the termination is not harsh, unjust or unreasonable.
According to the Fair Work Act 2009, where a business has been transferred to a new owner, the new owner is not required to recognise existing employees’ period of service with the previous owner of the business provided the following criteria are met:
- The new owner and the previous owner of the business are not related or associated entities; and
- The new owner of the business notifies the existing employees in writing that the business will not recognise their period of service with the previous owner of the business prior to the employees commencing employment with the new owner.
As outlined above, if the above conditions are met and the new owner elects not to recognise employees’ service with the previous owner this will reset the minimum employment period, allowing the new owner to terminate the employee for any reason until they have again served the minimum employment period. It should be noted that even where the above conditions are satisfied, the new owner is still required to recognise existing employees’ prior service with the previous owners with regards to sick leave, long service leave, requests for flexible working arrangements and parental leave. As sick leave and long service leave cannot be cashed out, provision should be made in the sale contract for these accrued entitlements.
If after the transfer of business the new owner continues to employ existing staff but does not intend to recognise their service with the previous owner, they should ensure that the sale contract does not contain a clause to the effect that the new owners are required to offer existing employees employment on terms “no less favourable” than the terms of the previous owner as an offer of employment whereby prior service is not recognised is likely to be in breach of any such provision.
The minimum employment period is 6 months for businesses with 15 or 12 months for businesses with fewer than 15 employees. The number of employees employed by a business is calculated on a simple headcount of all employees including casual employees who are employed on a regular and systematic basis).