Transfer of employment to an associated entity - is an employee's service continuous?

Updated 23 March 2022

A transfer of employment to an associated entity happens if an employee is going to start work for for a business that has a connection to the former business, they are an associated entity. We'll get into the meaning of this later. 

An employee's service won't always be continuous in a transfer of business and this is important, because this will impact employee and employer rights for entitlements and even for unfair dismissal claims.

For example, if an employee's employment is classed as continuous after transfer of business, the employee can apply for unfair dismissal shortly after their employment transfers to the new entity and don't have to wait out the minimum employment period in section 383 of the Fair Work Act 2009 (Cth). 

When does former service for an employer count?

In a transfer of employment situation, an employee’s service for their old employer will count towards their service period with the new employer per s. 22(7) Fair Work Act 2009 (Cth) if:

• the entities are associated; and
• if the employee becomes employed by the new associated entity within 3 months.

Notice to an employee if their prior service will count

Written notice to an employee about whether their previous period will count is very important and employers get this wrong too many times. Why? because employers may be dealing with experienced business lawyers that are not familiar with employment law as well, in particular section 384 of the Fair Work Act.

Section 384 Fair Work Act 2009 (Cth)

Section 384 states that for the service of an employee to be continuous, the new employer must not have informed the employee in writing before the new employment started that their previous period of service with the old employer would not be recognised: s. 384 Fair Work Act 2009 (Cth).

Basically, if an employee does not get written notice that a former employment period won't be recognised, the employee’s employment is continuing and the employee is simply working for an associated entity. 

So, if an employer wants an employee's employment to start fresh after a transfer of business to an associated entity, they need to give the employee a letter saying their former employment period will not count. 

Below we’ll go through the associated entity meaning to clarify. 

Associated entity

What is an associated entity for a transfer of business situation?

The associated entity meaning is found in s.50AAA of the Corporations Act 2001 (Cth).

An entity (the associate) may be an associated entity of another entity (the principal) in these cases:

• the associate and principal are related bodies corporate
• the principal controls the associate
• the associate controls the principal and the operations, resources or affairs of the principal are material to the associate
• the associate has a qualifying investment in the principal, has significant influence over the principal and the interest is material to the associate
• the principal has a qualifying investment in the associate, has significant influence over the principal and the interest is material to the principal, or
• a third entity controls both the principal and the associate and the operations, resources or affairs of the principal and the associate are both material to the third entity.

Because one feature of an associated entity is that the principal controls the associate, we’ll look at the definition of control next.

Control

Control is defined in s.50AA of the Corporations Act 2001 (Cth). 

One entity controls another when the first entity can make decisions that determine the financial and operating policies of the second entity.

Bringing it all together 

If you are an employee wondering if your employment is going to be continuous after a transfer of business, you need to check if there was a transfer to an associated business; you can run some ASIC company searches yourself or have a lawyer help you with this.

Then, you need to check if you have a letter from the new employer stating that your former employment period would not be recognised. If you have such a letter, then your employment is not continuing. Your employment has started fresh from the time you signed a new contract or started work for the new employer's entity. This may impact your ability to apply for unfair dismissal and certain entitlements, so you should get legal advice.

If you are an employer that's purchasing a business with a link to the former business (an associated entity), make sure you are clear with your lawyer about whether a former employment period will be recognised.

A lawyer helping an employer can take care of notice to employees per section 384 and help you structure the business sale per your goals.

Do you have questions or comments about a transfer of employment? Be sure to leave them below or reach out to us for help.