Key Things to be Aware of When Transferring Employees in a Business Purchase…

A Wellington businessman wanted to make an offer to purchase a large restaurant.  He had got to know a few of the staff from dining at the restaurant himself and had decided that he would like to replace some of those staff with his family members if his offer to purchase the business was successful.

He had a quick read over the draft Agreement for Sale and Purchase presented to him by the Vendor.  He became confused as it recorded that he was required to take over certain ‘protected’ employees (such as the kitchenhand and the cleaner).  He had never heard of ‘protected’ employees and given he wanted his family to work for him, this requirement could seriously affect his decision to purchase the business.

He was also unsure about whether he would need to start afresh with things like leave for any employees he took over.  He took the Agreement his lawyer for review.

Buying a Business with employees

When you buy a business, often one of the most important aspects of the business is the staff.  Generally purchasers want to ‘buy’ the employees as part of a business purchase to help keep continuity in the business. It is important that the Agreement for Sale and Purchase of a Business includes all necessary provisions regarding employees/staff.

Key things to be aware of when buying a business where there are employees are:

1. Generally when you buy a business, the employer of the staff will change from being the Vendor to the Purchaser. The employees’ employment with the Vendor therefore ceases on settlement date (the date ownership changes) so the Vendor needs to terminate the employment of the various staff on the settlement date;
2. The Purchaser will need to enter into new employment agreements with the employees from the settlement date;
3. Generally the Purchaser will want to choose which employees they take over and will offer employment to those employees;
4. Many employees will be covered by an “employee protection provision” in their employment agreement, and any restructuring required during the business purchase will require the Vendor to enter into negotiations with the Purchaser in accordance with the employee protection provision.
5. There may also be ‘protected’ or ‘vulnerable’ employees in the business, who are afforded additional protection under the law.  Protected employees are defined by law, and include those working in food catering or cleaning services, as well as orderly or laundry services in certain sectors.  ‘Protected’ or ‘vulnerable’ employees may elect to transfer to the new employer on existing terms or on new terms.  The existing employer must provide certain information to the employees before the employees make their decision, and a failure to comply may result in penalties.  If an employee in this “protected” or “vulnerable” category is made redundant, there are also requirements in terms of negotiating redundancy entitlements, even if not contained in the employment agreement.
6. Entitlements such as leave are to be treated as continuous where a protected employee is taken over by the Purchaser (eg: their leave balance won’t change).  Often the Vendor and the Purchaser will come to an arrangement regarding reimbursement for this to the Purchaser in the Agreement for Sale and Purchase.
7. Entitlements for all other non-protected employees may be transferred to the new employer, depending on what the Vendor and the Purchaser agree.  Generally, either:

• The Vendor pays out all leave owing at termination of the employee’s employment and the employee starts afresh with the Purchaser in terms of leave and entitlements; or
• The entitlements and leave are treated as continuous, but the Vendor reimburses the Purchaser for such entitlements and leave.

Buying shares in a Company

If you are buying shares in a company, rather than buying the assets of a business, then the above will not apply as in that case the employer (being the company) remains the same regardless of the shareholdings changing.

It is very important to take advice about all aspects of buying or selling a business, including employees, to make sure that all employees are treated correctly and that you are getting exactly what you are expecting out of the purchase.