By Edwards Law for On Your Terms
July 2023
When selling a business, the current owner’s main concern will be the commercial elements of the deal – the sale price, when the deal can be completed and disclosure of commercial information.
But business owners must also keep in mind their legal obligations to their employees. Employers have an obligation to consult with employees during a redundancy or restructure. A business sale is treated, for employment law purposes, as a technical redundancy. If a business owner doesn’t meet their legal obligations to their employees during the business sale, they may have an action brought against them in the Employment Court.
A business owner’s employment obligations will vary depending on the manner of the business sale – whether it is by the shareholder(s) selling their shares (a ‘share sale’) or by the business selling its business and assets (an ‘asset sale’).
Sale of shares – what are employers’ obligations?
For employees, if a business is sold as a share sale, this process is relatively straightforward, as the legal entity that employs the employees does not change when the shares are sold to a new owner. The employees remain employed by the same legal entity, and their employment agreements remain valid and effective.
There is no obligation for the current owner to consult with employees about the share sale. But they do need to ensure that the terms of the sale address any contingent liabilities that may arise as a result. For example, if an employee raises a personal grievance in relation about (or around the time of) the business sale e.g., believing they should be made redundant, will the current owner or the new owner be liable for any costs/awards associated with this?
Asset sale – what are employers’ obligations?
In an asset sale, the new owner is purchasing the business’ assets, and these assets will be transferred to the new owner.
In contrast with a share sale, the employing entity will change from the current owner to the new owner. This will also involve the transfer of the business’ employees to the new owner. From a legal perspective, when the business’ assets are sold to the new owner, the employees become surplus to the current owner’s requirements and are therefore redundant.
Employment agreements are not transferrable, so when a business sells its assets, employment agreements with the current owner are terminated (by reason of redundancy), and the employees need to be offered employment with the new owner in order to remain employed in the business. It will be up to the new owner to determine whether it wants to retain any existing staff, and it will be up to each individual employee to accept or decline any offer of employment.
When an employee is offered employment with the new owner on the same or substantially similar terms as their existing employment agreement (or on any terms the employee is willing to accept) this is called a ‘technical redundancy’. Most Individual employment agreements state that, in a technical redundancy, the employee will not be entitled to redundancy compensation (if any) or notice of redundancy, whether or not they accept the new owners’ offer of employment.
In an asset sale, the current owner must first consult with its employees on the proposal to sell the business to the new owner and the potential impact this has on employees. Employees must also be provided with relevant information for their consideration, as well as an opportunity to provide their feedback on the proposal before the current owner makes a final decision to sell the business.
When should the current owner consult with its employees on the proposed sale?
Ideally, consultation would commence
- after the current owner has enough detail about the terms of the proposed sale, including who the new owner will be, and whether all or some of the employees are likely to be offered employment with the new owner, and
- before the current owner has entered into any binding sale and purchase agreement (SPA) with the new owner.
This ideal scenario would ensure that employees are able to provide meaningful feedback on the proposal before the current owner makes any commitments regarding the proposed sale. However, that is often not realistic, as the proposed sale discussions may still be confidential, and the current owner may not feel comfortable consulting with employees until there has been a firm/binding commitment from the new owner to purchase the business.
Accordingly, the latest point the current owner should consult with its employees is after the SPA has been signed but before the conditions have been confirmed satisfied. Whilst the SPA is conditional, the current owner may be able to change its mind regarding the sale after obtaining and considering employees’ feedback.
Once the SPA becomes unconditional, the sale must proceed. Any consultation with employees after the SPA has become unconditional would be limited to the terms of any proposed transfer to the new employer.
The timing around when to consult with employees on the proposed sale of a business is a commercial decision that is determined by the current owner’s appetite for risk. Consulting too early in the process could mean employees don’t have enough detail regarding the proposed sale to provide meaningful feedback (or employers may even consult unnecessarily where a sale does not proceed). Similarly, consulting with employees too late in the process may result in a claim that the current owner has failed to adequately discharge its good faith obligations.
Key Points
- When selling a business, owners should ensure they meet their employment obligations. Failure to meet these employment obligations can expose business owners to [ ].
- Employees should be consulted before any decisions are made that may impact their employment.
- The timing for consultation can be complicated when selling a business, due to the (potentially) commercially sensitive nature of a business sale.
There will be other considerations for business owners when selling a business, including any employment protection provisions for vulnerable workers, and the treatment of accrued service-related entitlements such as holiday pay/leave.
If you have any questions regarding your employment obligations when selling a business, do not hesitate to reach out to the friendly team at Edwards Law – Employment Law Specialists.
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