Buy a Business: Employee Considerations
You’ve found the business. Done your investigations and are ready to buy the business and take over. What about the staff? The employees? What happens to them?
Having been a business broker for 20 years and with over $100m of sold businesses , Ive seen buyers do it correctly, and others making mistakes that cost them money. This will give you a broad outline on how to manage the transition of staff in a business sale.
What are a business buyers obligations to the employees of the business when you buy a business? I was asked by a recent buyer of a business if they could employ only the people they wanted and, on their own terms and conditions? How should purchasers responsibly manage employee transitions when they buy a business, and can they employ only the people they want?
Ignoring employee obligations in business acquisitions is a recipe for legal disaster. When we consider a business sale, it's important to remember it's not just a transaction between a buyer and a seller. Employees of the business are key stakeholders, and their rights are protected here in New Zealand under the Employment Relations Act. The Act outlines specific requirements that must be followed when a business is sold, transferred or contracts out work. This is known as 'restructuring'.
Ever wondered what happens to employees when a business changes hands? All employees in New Zealand must have a written Employment Agreement between themselves and the business that employs them, and that will contain an 'employee protection provision'. This is designed to ensure a fair process when a business is restructured, sold or transferred, and it sets out the process that an employer must follow in these situations.
What are the legal responsibilities towards employees during a business acquisition? When looking at the legislation, there are no legal obligations to inform employees of the impending sale. In saying that certain groups of employees do receive additional protection during a sale/restructuring, particularly those who work in sectors that are often sold, transferred, or contracted out, such as cleaning, catering, laundry, caretaking, or security services. These are termed vulnerable employees. This is not a full list and you should check the legislation to be sure. Workers in this vulnerable category have the right to transfer to the new employer on their existing terms and conditions of employment. In other words, a Purchaser is forced to employ employees that fall under this group. The purchaser also must treat employment for these employees as continuous, ensuring entitlements such as annual leave, sick leave etc pass over to the new owner and continue unaffected.
There is, of course a BUT. In dealing with this and some other aspects of a business sale, the answers to legal questions are seldom a straightforward 'yes' or 'no'.
Which poses the question, what steps should a purchaser take to ensure compliance with employment laws when buying a business? Outside of the vulnerable categories above, there may be cases where there’s no legal obligation for the purchaser to offer the employment on the same or similar terms or even offer any employment at all, but the seller might ask them to do this anyway. This might be because the seller’s employment agreements will often state that the vendor doesn’t have to pay notice & redundancy compensation to their employees if they sell the business; and the purchaser offers the employees employment on “the same” or “substantially the same” or “substantially similar” terms.
With that in mind, the seller may try to insert an obligation into the sales and purchase agreement for the purchaser to offer employment on, say, “substantially similar” terms. Looking at it from the purchaser’s viewpoint, they should check employment agreements and see if they’re prepared to offer employment to all employees, or if they want to cherry pick which employees; and once they’ve worked that out, ask themselves if they want to offer employment on the same or substantially similar term?
Why do some business acquisitions face legal challenges related to employee rights while others do not? When buying a business and faced with a legal question, there will be two things at play that will determine the ultimate answer:
the relevant legislation that governs the situation (which in the above example is the Employment Relations Act); and
the terms of any contract/agreement between the parties (which in this case would be something like an employment agreement and/or the sale and purchase agreement).
It is important to note that sometimes these can give conflicting answers, even between the lawyers for each party. Usually legislation will provide certain rules, some of which must be followed, but some that can be contracted out. This interplay between legislation and actual contracts is a common feature across business law. To use a simple example, the Companies Act requires two directors to sign on behalf of a company (where there is more than one director) in order for a contract to be binding, however, some companies can have a formal document that changes this rule.
Once the purchaser of the business has decided which employees they will employ and remember that they are entitled to choose who to employ and who not to employ, the sale of a business will often handle the employees in these two ways.
The first will be as mentioned above. If the employees fall into the vulnerable category, then their employment is treated as continuous and all entitlements, holiday pay, sick leave, long service, redundancy payments etc are transferred to the new business owner. This is normally done with an adjustment of the purchase price. Effectively the price of the business is adjusted downward by the value of these entitlements so that they are available to the employees once the business is transferred.
The second option is that the seller of the business will pay all entitlements like holiday pay, bonuses etc to the employees when the business is sold, and the buyer of the business will offer them employment on a new set of terms and conditions. The employees have the right to accept, negotiate these terms or leave the business and the seller has the right to pick and choose who they will want to employ.
The complexities that arise from this reinforce why advice from a good HR consultant or employment lawyer is a vital part of any business sales transaction. Accordingly, the answer to the question posed at the beginning of this article is that it depends. This is a case where Im not only recommending professional advice from HR or employment lawyers, but Im saying it is essential to get this advice to ensure you are following the correct procedures in dealing with all employees.
Peter Nola is an Auckland based business broker, author and YouTuber with 20 years’ experience and over $100m of businesses sold, helping New Zealand business owners to buy and sell businesses.
Helping buy a business and sell a business without expensive mistakes
