Transfer of business & employee contracts: how to manage employee contracts before and after buying a business

Updated: 8 December 2019

If you are thinking about buying a business with existing employees, here are some useful tips to help you. 

In a hurry? Jump ahead.

First, you should check any employee contracts.

1. Pre-purchase check of employment contracts 

Before you buy a business, you can check the key terms of any written employee contracts. 

So what should you check for in a contract ? 

Here are some ideas of what you should be checking for:

  • if an award applies, and if it does, if the employee has the correct duties assigned;
  • correct pay is paid; and 
  • other minimum employee entitlements.

Importantly, national employment standards will still apply, even if there's no written agreement or an award does not apply.

What if you discover there's an underpayment ?

First, you should make sure that the current business owner corrects any underpayments before you buy the business.

Also, you'll want to reduce the risk of being liable for underpayments. 

So, for your protection, it's a good idea to have a clause in your sale of business contract like this one:

The Vendor will be responsible for all pre and post completion date claims, suits, demands, actions or proceedings arising out of or in connection with the employees that were ever employed by the vendor or the cessation of their employment.

Next, you can negotiate a business sale to either include or exclude current employee entitlements. 

2. No liability for current employee entitlements

If you agree with the seller that you will not be responsible for existing employee entitlements, the current business owner will pay what's due up until the settlement date. 

And in this case, you should write to the employees and explain a new employment contract applies and also that the period of service with the old employer will not count. 

So what happens if you don't do this ? 

If you don’t write to an employee, then that employee can claim their employment period is continuous. They can do this because of section 384 of the Fair Work Act 2009 (Cth).

3. Liability for employee entitlements

If you reach an agreement with the seller that you will assume employee entitlements, then the seller will not pay these. 

Also, employee entitlements will continue to accrue and as the new owner, your business will be responsible for them. 

This means, you will be responsible for accrued entitlements like long service leave, annual leave and sick leave.

4. New employment contracts

As the new business owner, employment contracts will be important for you to outline employee rights and responsibilities. 

Because you may have different expectations of employees compared to the current owner, it's fair to the workers to set these out in an employment contract. 

Here's what you can include in the employment contract:

  • employer details;
  • employee position & duties;
  • employee entitlements;
  • dispute resolution steps to reduce the risk of a law suit; and
  • any other new terms. 

5. Insurance

Insurance generally is important for any business. 

Workers compensation insurance is important to protect your business. 

You may also need professional indemnity insurance, particularly if you are buying a service business.

So you should make sure you are insured right from the start

Also, if you are entering or taking over a lease, most landlords will require you to have workers compensation.

Key points

Here's a summary of the key points above:

  • check employment contracts (if any) before buying the business;
  • decide whether you or the seller will pay for existing employee entitlements;
  • draft new employee contracts for employees that will be kept on; and
  • get the insurance you need - e.g. workers comp, professional indemnity etc.






Vivian Michael
 

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to deliver the best quality business legal services to entrepreneurs launching an Australian business, wherever they are in the globe.

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