When purchasing a business, it is important to carry out due diligence in relation to employees, as some may be crucial to the ongoing success of the business. Employees are not automatically transferred to the purchaser at settlement. It is up to the purchaser to offer and the employee to accept employment offers.
For purchasers, employee due diligence should include a review of the following:
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- Existing Employment Agreements;
- Compensation structures;
- Restraints of trade or non-competes;
- Employee records and history;
- Contract for Sale of Business; and
- Employee Schedule (In many transactions this is a key document as it sets out relevant details of each employee such as their position, award, wage/salary, employment status, and accrued entitlements.)
The purchaser will need to decide which employees they want to retain and offer them employment on terms no less favourable than their current terms and confirm whether they will recognise existing employee entitlements. It is generally a term of the Contract for Sale of Business that vendors must encourage employees to accept offers of employment, but this is ultimately a decision for each employee. For those that accept, a new Employment Agreement should be signed to confirm the terms of employment.
Purchasers should also carefully consider existing employee entitlements – for example, recognition of personal leave is required, but an election may be made whether annual leave will be recognised. Some employees prefer to have their annual leave entitlements paid out, whereas others wish to retain them.
Strategies which can be employed by purchasers to better protect their interests might include:
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- Making completion of the purchase conditional upon key employees entering into new Employment Agreements with the purchaser.
- Requiring an adjustment from the vendor for accrued but untaken personal leave. This allowance is usually an amount equal to 70% of the value of accrued personal leave for transferring employees.
- Negotiating for access to employees and employment records as early in the transaction as possible to allow sufficient time to interview and properly consider whether to retain each employee.
- Maintaining clear communication with the vendor and employees to reduce the risk of uncertainty and anxiety among employees which could trigger resignations.
- Develop a strong business plan with a focus on the transition in the business from the vendor to the purchaser.
If you plan to buy a business, employees are often an integral part of the success of the business and retention should be a key consideration in the transaction.
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