Many employers – particularly those running small and medium sized businesses – remain largely unaware of the importance of the Fair Work Act 2009’s ‘Transfer of Business’ provisions in the event that they buy or sell a business.
This article provides a brief overview of the key things every business owner (or prospective owner) needs to know about the transfer of business provisions imposed by current law.
Defining ‘Transfer of Business’
A transfer of business will occur when:
- A worker’s employment with an old employer ends and they become employed by a new employer within three months, and
- the work being done by the employee for the new employer remains the same as – or is very similar to – the work that they performed for the old employer, and
- at least one of the following so-called ‘connections’ exists between the old and new employers:
o the new employer now owns or can use the old employer’s relevant assets, or
o the old employer has outsourced the work the employee does to the new employer, or
o work that was previously outsourced is once again ‘insourced’, or
o the old and new employers are ‘associated entities’, as defined in section 50AAA of the Corporations Act 2001.
For example, let’s say you own a corner shop and decide to sell it to someone who expresses an interest. If the new employer (i.e.the buyer) chooses to keep the shop and retain the existing staff once the sale has been completed, there will be a ‘transfer of business’ for Fair Work purposes. Similarly, there will also be a ‘transfer of business’ if the old and new employers are associated entities and the new employer chooses to close the shop and redeploy the workers to other locations.
Who Do Transfers of Business Matter?
The Fair Work Act 2009 imposes some very strict rules whenever there is a ‘transfer of business’. If these rules are over-looked or misunderstood, the new employer may find their labour costs are significantly higher than expected or face potential claims for back-payments and associated penalties.
There are two key things to know about transfers of business under the current laws:
- Certain ‘instruments’ will also transfer, and
- Certain employee entitlements (read: employer liabilities) will carry across from the old employer to the new employer.
Let’s consider each of these in turn.
Transferable Instruments
The Fair Work Act 2009 refers to ‘instruments’, meaning legally enforceable sources of employment-related entitlements. The most common types of ‘instrument’ within this current context include Modern Awards, Enterprise Agreements (EAs), Individual Flexibility Arrangements (IFAs), and Guarantees of Annual Earnings given to employees earning more than the High Income Threshold (currently $133,000 p/a).
All of these particular instruments are ‘transferable instruments’, meaning that they will transfer from the old employer to the new employer where there is a transfer of business. For example, let’s again assume that you’re selling your corner store. A year before the sale, you negotiated a new Enterprise Agreement (EA) with your employees and this is due to remain in force for another three years. If you sell the business and the new employer retains your employees, this EA will also ‘transfer’ and the new employer will become bound to provide the same terms and conditions of employment it imposes once the sale has been completed.
In effect, this means that the new employer cannot just decide to move everyone back to the minimum rates payable under the otherwise applicable Modern Award, or pick and choose which parts of the EA they would like to keep. The EA will continue to apply as though the business had not changed hands, thereby protecting the employees it covers. This is important to know, because if the new employer has mistakenly based all of their wage projections on the Modern Award instead of the EA, they could be in for a very rude (and expensive!) shock when they process payroll.
Transferable Entitlements
Certain employee entitlements will also automatically carry across – or must be ‘recognised’ by the new employer – when there is a transfer of business. Importantly, some entitlements always transfer across while others must only be transferred if the old and new employers are ‘associated entities’.
The following employment entitlements must always be carried across to – or be recognised by – the new employer:
- Accrued personal/carer’s leave, and
- Periods of continuous service with the old employer for determining eligibility for flexible working arrangements and parental leave
The following entitlements need only be carried across to, or recognised by, the new employer if they and the old employer are ‘associated entities’:
- Accrued annual leave
- Periods of continuous service with the old employer for determining redundancy payments,
- Periods of continuous service with the old employer for determining unfair dismissal-related entitlements
When the old and new employers are not ‘associated’, the new employer can choose whether these three specific employment entitlements will or will not be carried across / recognised. If they choose the latter, the old employer will become liable to payout all accrued annual leave and, potentially, all accrued long service leave.
Additionally, each employee may become entitled to a redundancy payment based on their period of service up to that point, and must also receive written confirmation that their period of ‘continuous service’ is effectively being reset to zero. This means the employee won’t be eligible for protection from ‘unfair dismissal’ until they have completed the applicable ‘minimum employment period’ with the new employer. This period is six months if the employer has 15 or more employees, and 12 months in all other cases.
Summary
As you can see, the rules are both strict and complex, and much depends on whether the two employers are ‘associated’ with one another. The rules relating to possible redundancy payments and accrued long service leave can be particularly problematic.
Workforce Guardian always recommends employers obtain expert advice before they proceed with the purchase or sale of a business. This advice should confirm whether any pay-outs will be required and whether the sale price needs to be adjusted to take into account transferring entitlements.
© David Bates is the Managing Director of Workforce Guardian, Australia’s leading HR and employment relations service for employers. For further contact information head to their listing.
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