Sick Leave & Annual Leave on the Sale of a Business

An often confusing element for sellers and buyers of a business is how employee entitlements should be dealt with, especially in relation to personal/carer’s leave (i.e. sick leave) and annual leave.

Under the Fair Work Act 2009 (Cth) (Act) where there is a “transfer of a business” the new employer must recognise an employee’s service with the old employer when working out most of their entitlements, including sick leave. However, under the Act the new employer does not have to recognise an employee’s accrued redundancy and annual entitlements.

The Act sets out that a “transfer of business” will take place if the following requirements are satisfied:

  1.  the employment of the ‘transferring employee’ of the old employer has terminated;
  2.  within three (3) months after the termination, the transferring employee becomes employed by the new employer; and
  3.  the work the transferring employee performs for the new employer (Transferring Work) is the same or substantially the same as the work they performed for the old employer;
  4.  also at least one of the following connections exists between the two employers:
    1. an arrangement that the new employer owns or has use of some or all of the old employer’s assets that relate to the transferring work;
    2.  the work from the old employer is outsourced to the new employer;
    3. work previously outsourced is insourced; or
    4. they are associated entities within the meaning of section 50AAA of the Corporations Act 2001 (there are a number of ways entities can be associated – broadly speaking, it involves one entity having a controlling interest in the other).

In most cases the business sale transaction you’re involved in will meet the above requirements.

So what does this mean for you as a vendor in the sale of business? When it comes to the employees that will be transferring over to the purchaser, ideally you will not want to pay the purchaser or make any adjustment on the purchase price to take into account the accrued sick leave of those transferring employees. This is particularly so given the vendor will terminate the employment relationship with those transferring employees, and is not obligated under the Act to pay out accrued sick leave.

On the other side, if you are the purchaser then given you have to recognise the sick leave in accordance of the Act, the total accrued sick leave of the transferring employees could be substantial, especially if the employees have been with the business for a long time.

As a purchaser, you will want to seek an adjustment on the purchase price, or payment from the vendor for this. The revised Law Society of NSW Contract for Sale of Business 2015 envisages a 70% adjustment in favour of the purchaser for the accrued sick leave of transferring employees. Some would think this is quite high in circumstances where sick leave is not payable on the termination of an employee and is in reality an adjustment in full taking into consideration the payment of a company of sick pay is a business expense with representing a 30% tax deduction so overall a 70% payment. Ultimately this is a matter of negotiation between the parties, and is largely a matter of what is commercially viable in those negotiations.

For annual leave, given it is not mandatory for the purchaser to recognise the accrued annual leave of the transferring employees, that amount could be a significant burden for the vendor and effectively eat in to the purchase price received on the sale of the business. Therefore, for the vendor, dealing with annual leave at the outset of the sale negotiation will be important, and vendors should be pushing the purchaser to recognise transferring employees’ accrued entitlements, and then negotiating with the vendor a reasonable adjustment on the purchase price for those annual leave amounts. The Law Society of NSW Contract for Sale of Business also sets out a 70% adjustment in favour of the purchaser for annual leave of transferring employees.

Given there could be a “winner” in relation to sick leave, and a “loser” in relation to annual leave, parties in the transaction should be looking to take a fair-minded and balanced approach to dealing with annual leave and sick leave.

If you require advice in relation to any corporate or commercial legal matters, please do not hesitate to contact Anthony Satti, Commercial Solicitor of our firm at 8987 0000 or ASatti@aitkenlawyers.com.au.