Employees accrue entitlements progressively throughout their employment. Entitlements such as annual leave, personal/sick leave and long service leave. Most employers are aware that annual leave needs to be paid out when someone ceases employment with them. But usually, there is no requirement to pay out sick leave or long service leave. (Note – In relation to long service leave, this is relevant for employees with under 7 or 10 years of service – depending on the State they work in).
However, if an employee ceases with one employer, and commences with another employer in the context of buying or selling a business, or in other terms, a transfer of business – the situation is different and there are important consequences to be aware of.
The most common situation when a transfer of business arises is when an employer sells their business to a third party, and the third party offers employment to the existing employees. However, there can be other circumstances where this applies. This includes where assets of business [but not a business itself] are transferred, certain outsourcing arrangements, and where entities are associated.
the key consequences for the previous employer, new employer and employee are usually as follows.
- Annual leave will either be paid out to the employees by the previous employer or the new employer will instead assume the liability. The terms of the business sale agreement will usually dictate which is to apply.
- Sick leave and long service leave is required by law to be recognised by the new employer. It is critical that the new employer obtains compensation from the previous employer for taking on this burden. Usually, this is done as an adjustment to the purchase price for the business. Depending on how many employees there are and their length of service – this adjustment can be extensive [consider for example an employee for 10 years of sick leave accumulated – even for a minimum wage employee this could be $15k!].
- Importantly, it is not possible to wipe the slate clean [contrary to popular belief sometimes] even when the new employer offers a brand new contract to the employees.
Don’t get caught out. There are ways to deal with these issues to ensure there is a fair allocation of responsibility between the previous employer and new employer. Get in touch with the businessDEPOT Legal team and ask us how.