Sale of Business: Employee Treatment and Entitlement Adjustments

Introduction

Understanding employee entitlements and Fair Work Australia guidelines/legislation is crucial when selling a business. These rules dictate how to manage long service leave, annual leave, and other employee entitlements. The handling of these entitlements varies based on the buyer’s recognition of employee service. Leave liabilities are also commonly adjusted to 70% of their value due to the company tax rate.

Recognition of Service vs Non-Recognition of Service

When negotiating a business sale, there are two main approaches regarding employee entitlements:

1. Recognition of Service: The buyer accepts the employee’s previous years of service, transferring leave entitlements such as long service leave and annual leave. In this case, the seller compensates the buyer for the accrued entitlements through an adjustment in the sale price.

2. Non-Recognition of Service: The buyer chooses not to recognise the employee’s prior service, in which case the seller must pay out the leave entitlements (including redundancy, if applicable) before the sale is finalised.

Adjustments for Long Service Leave

Under the NSW Law Society Contract, long service leave can either be adjusted at 70% for each employee that is entitled or is adjusted using a table that calculates the value of accrued LSL based on years of service, starting at 5 years and a 20% adjustment.

If the buyer recognises the service, the seller must adjust the sale price to reflect up to 70% of the accrued LSL value. This is because the buyer can claim 30% of the liability as a tax deduction, reducing their future financial burden.

For example, if an employee has accrued $10,000 in LSL, the seller would adjust the sale price by $7,000, leaving the buyer to claim the remaining $3,000 as a tax deduction.

Other Entitlements and Fair Work Australia Obligations

Under Fair Work Australia guidelines, certain employee entitlements must always be recognised by the buyer:

• Personal and carer’s leave: These entitlements transfer with the employee.
• Parental leave and requests for flexible working arrangements: The new employer must honour these, regardless of whether prior service is recognised.
• However, some entitlements do not automatically transfer:
• Redundancy, annual leave, long service leave, unfair dismissal, and notice of termination: These are negotiable between buyer and seller. Depending on the agreement, these entitlements may be paid out by the seller or transferred to the buyer.

Annual and Personal/Carers Leave

Generally, if service is recognised annual leave is typically adjusted at 70%, reflecting the tax deduction available to the buyer. For personal/carer’s leave, the adjustment is often negotiated. From the buyer’s perspective, they may want more than 70% of accrued personal leave adjusted to protect themselves in case an employee takes extensive leave shortly after the sale. Conversely, the seller aims to reduce this liability, as personal leave isn’t paid out if an employee resigns shortly after the sale. Negotiating helps balance the risks between both parties.

Negotiation Points for Sellers

Sellers need to focus on:

• Deciding whether to recognise or not recognise service: This affects the payout of leave entitlements.
• Adjusting for tax implications: Applying the 70% adjustment helps balance the financial obligations fairly.
• Clear documentation: Provide accurate records of employee entitlements to ensure smooth negotiations.

Conclusion

Managing employee entitlements during a business sale is crucial for both buyers and sellers. Deciding whether to recognise service impacts long service leave and other leave entitlements, and the NSW Law Society Contract provides a framework for these adjustments. Sellers should ensure that leave liabilities are properly accounted for, with 70% of the value adjusted due to tax benefits.

If you’re planning to sell your business, don’t leave employee entitlements or legal risks to chance. Get clear, strategic advice so you can move forward with confidence. Contact our team today to ensure your sale is handled properly from start to finish..