Employee Entitlements & Selling a Business

Dealing with Employee Entitlements on Sale of a Business in Queensland

When a business is sold, the issue of paying out or transferring accrued employee entitlements of those employees transferring with the business can be problematic. This is particularly so in larger businesses and those with employees in more than one state.

Problems arise from the myriad of laws that must be considered and their variances from state to state and from one type of employer to another. For example:

  1. there are so many leave entitlements to consider including sick leave, annual leave and long service leave; and
  2. each of these leave entitlements may be governed by a variety of sources including state and federal legislation, awards, industrial instruments and where the employee has an individual contract, by the terms of that contract;
  3. sometimes, an employee’s continuity of service upon the sale of a business is preserved by legislation and sometimes it is not (i.e. when preserved, the buyer must honour accrued leave and the employee cannot be paid out by the seller).

Also, there have been as many solutions to the problems as there have been problems. Which solution do you choose? Let’s now try to determine the best solution for dealing with transferring employees in the sale of businesses in Queensland.

Where to start?

The starting point for any assessment of entitlements is this: when a business is sold, the employment of transferred employees will terminate under common law principles and a new contract of employment will be formed with the new employer[i]. Therefore, unless an employee’s continuity of employment is preserved by law, the result of the common law termination is that all employee entitlements must be paid out.

So how do you know whether an employee’s continuity of employment is preserved by law? This depends on the following issues:

  1. which entitlement is being considered?
  2. in which state is the employee employed?
  3. is the sale of the business a “transfer of business” pursuant to the Fair Work Act (Cth) 2010 (FW Act)?[ii]

Therefore, the parties would need to determine the position as to preservation of the particular entitlements for the particular employees, which will is most cases require a legal opinion. Once done, those accrued entitlements that are not preserved may be paid out by the seller. For those that are preserved, they will transfer across to the buyer, who will require the seller to deduct from the business sale price their equivalent value.

For parties wishing to buy or sell a business in a cost effective and timely manner, this could be problematic. Whilst it is not avoidable sometimes, due to the significant amount of accrued employee entitlements and the risk in getting it wrong, in the sale of most small to medium businesses, there is a simpler solution. This arises in contract law.

The simple solution

The effect of the common law position allows the buyer and seller of a business to decide whether to pay out accrued entitlements and transfer the preserved ones[iii], as explained above, or to simply transfer all of them across; whether preserved or not. In Queensland, employees cannot claim the entitlement from more than one employer in respect of the same period and the buyer and seller of a business can feel confident that they will not have to pay the same entitlement twice.

Therefore, if the business sale contract specifically provides for a “continuity of service” for all accrued entitlements, a determination of preservation is not required thus simplifying the process and reducing the cost for the parties. Also, if completion is occurring in the lead up to Christmas and the business is closing for one or more weeks in addition to the public holidays, transferring annual leave entitlements may provide a significant advantage to the buyer’s cash-flow.

How is this done?

In order for the buyer and seller to come to such an agreement, careful consideration needs to be given to:

  1. which entitlement is an “accrued” entitlement?
  2. what amount should be deducted from the purchase price to reasonably compensate the buyer for the transfer of accrued entitlements? This is called an apportionment or an adjustment to the purchase price.

In considering this further, let’s deal with the three most applicable leave entitlements in the sale of a business:

  1. sick leave;
  2. annual leave;
  3. long service leave.

Sick Leave

Sick leave is provided to cater for sickness. Whilst the FW Act makes no mention of payment of untaken leave on termination of an employee’s employment, it allows for this leave to accumulate for an unlimited period. Some specific awards or industrial agreements may provide for a payment to the employee of unused sick leave. Therefore, does sick leave accrue? Is it an amount that should be apportioned?

It is arguable either way. The parties’ competing interests are:

  1. transferring employees may have accumulated substantial sick leave. If the seller reimbursed the buyer for all of this leave and subsequently the employee’s employment is terminated without utilising such leave, the buyer has had a windfall;
  2. similarly, if no apportionment is made and the employee takes an amount of sick leave that draws on the amount accrued prior to completion of the business sale, the buyer will be out-of-pocket.

Therefore, when it comes to sick leave, the fairest option would be to apportion some, but not all of the sick leave.

Pursuant to standard condition 18.8 of the REIQ Business Sale Contract, the seller must allow to the buyer at completion an amount equal to 70% of accrued sick leave.

Item 7 of Appendix A of the REIQ Business Sale Contract explains the reasoning for this 70% figure. It states: “since the buyer will get a tax deduction when the employee entitlements are paid, the seller would limit this allowance to the buyer to 70% of the employee entitlements, assuming the buyer is a company. The corporate tax rate has been 30% since 1 July 2001.”

Whilst not all buyers will have to pay a 30% tax rate, either because they are not a company or are making no or little profit, and this reasoning in Appendix A does not consider the tax deduction to the Seller on making the allowance, the amount of the apportionment is, in my view, fair and should be adopted. The apportionment should certainly be no less than 70% considering the average number of sick leave days taken per full time equivalent employee is 7.38 days[iv]. As the entitlement to sick leave (now included as personal leave under the FW Act) is 10 days per annum, this is 73%.

Annual Leave

An employee’s entitlement to annual leave accrues progressively during a year of service according to their ordinary hours of work and accumulates from year to year. On termination of employment an employer must pay an employee for any untaken annual leave which has accrued.

Generally, an employee is entitled to 4 weeks annual leave for each 12 months of service.

Pursuant to standard condition 18.8 of the REIQ Business Sale Contract, the seller must allow to the buyer at completion an amount equal to 70% of accrued annual leave. The justification for this is contained in Item 7 of Appendix A (see above).

As the employee will receive 100% or their entitlement to annual leave sooner or later, a 70% adjustment should be, in my view, the minimum. Whilst using the same allowance as sick leave may simplify things, I am of the view that a buyer should be reimbursed for 100% of annual leave as it must be paid sooner or later.

Long Service Leave

Long service leave is the most complex of these three entitlements.

Despite the centralisation of industrial relations powers under the FW Act, long service leave continues to be regulated by state and territory legislation. In Queensland the applicable legislative provisions are found in the Industrial Relations Act 1999.

In Queensland, the qualifying period is 10 years of continuous service. The entitlement is two (2) months leave. Employees must then complete a subsequent period of 5 years to accrue a further one (1) month of entitlement.

Therefore, long service leave does not actually accrue until the completion of the 10th year of continuous service by an employee.

Therefore, whilst this may support an argument by a seller of a business that no apportionment of long service leave should be made for transferring employees with less than 10 years service, this is certainly not the norm. This is because:

  1. long service leave entitlements can be substantial, particularly over a number of employees;
  2. there are circumstances where an employee may be entitled to a pro-rated amount of long service leave for less than 10 years service i.e. illness or death.

Therefore, there is usually as apportionment for long service leave when selling a business. Whilst businesses with transient employees won’t often have an issue with adjusting long service leave on sale, long established businesses will.

In these types of business, difficulties often arise in apportioning an amount for transferring employees between 5 to 10 years service.

Some lawyers use 5 or 7 years service as the period after which the parties must make some provision to adjust long service leave. Since no legal entitlement has arisen at either of those stages, the provision must be written into the contract in specific terms. To do so, the following questions must be considered[1][v]:

  1. on the basis that an amount is to be allowed by the seller, how much is it? Is it the full amount that would be payable for the first 5 or 7 years or x years of entitlement to long service leave or some proportion?
  2. given that something is to be allowed by the seller, what is to be done with it? Is it to be invested? Is it to be paid to the buyer absolutely? Is it to be held on trust by someone?
  3. if the proposal is that the amount allowed by the seller should be held in a bank account of some kind, who should be the signatories? The buyer and seller? The solicitors for both? Some third party e.g. an accountant?
  4. what is to happen to amounts allowed by the seller if the employees to whom they relate cease their employment with the buyer before completing 10 years of service? Can the buyer keep the allowance or the interest?
  5. what obligations does the buyer have to inform the seller of the position in relation to these employees? Must the buyer advise the seller if the employee leaves his employment or dies? If yes, how often? To whom must information be sent?

As you can see from this brief analysis, the question is by no means clear or settled. Some parties prefer the joint account arrangement. Others prefer to make a once only payment of a liquidated sum which the buyer was entitled to keep if the employee did not take long service leave.

If the parties’ preference is the latter, then the relevant provisions of the REIQ Business Sale Contract may be sufficient. Standard condition 18.8 allows for an adjustment of 70% of “the accrued entitlement to long service leave of those transferring employees with 5 years service”. Further, standard condition 18.7 provides that long service leave is taken to have been accruing “from day-to-day on a proportionate basis from the commencement of the employment”.

If the parties wish to have differing apportionment percentages, thresholds for years of service or a joint account arrangement, the REIQ Business Sale Contract must be varied to accommodate this.

In Queensland, as an entitlement to long service leave commences after 7 years of service in cases of death or disability that, in my view, should be necessary threshold (i.e. 7 years).


Unless there is a lot at stake with the types or amounts of accrued entitlements for transferring employees upon a sale of a business, the buyer and seller can simply agree to transfer all entitlements to the buyer on the basis that an amount should be deducted from the purchase price to reasonably compensate the buyer for this.

The provisions of the REIQ Business Sale Contract will accommodate the sale of many businesses, though some it will not. The most important thing is that the minds of the seller and buyer are turned to the issue before any contract is signed, so that proper provisions may be included by the lawyers in drafting the contract.

[i] CCH: Australian Master Human Resources Guide: [42-050] at 9

[ii] For the purposes of this article, I have not addressed the provisions of the Fair Work Act dealing with a “transfer of business” as they only apply to the transfer of businesses between related parties (a small proportion of business sold in Queensland.

[iii] CCH: Australian Master Human Resources Guide; [42-050] at 9

[iv] Senate Economic Legislation Committee – Budget Estimate 2005 – 2006
Visit http://www.aph.gov.au/senate/Committee/economics_ctte/estimates/bud_0506/industry/answers/77a_d.pdf

[v] CCH: Australian Buying and Selling Businesses: [10-690] at 2

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