Employee Redundancy & Business Sales

Redundancy occurs when an employer no longer wishes the job an employee has been doing to be done by anyone, due usually to technological changes, a change in economic conditions or most importantly in the context of this article, the sale of a business . Where a termination of employment does occur by reason of a sale of a business, such a termination will usually constitute a dismissal by way of redundancy.

What happens on redundancy?

Upon redundancy, the employee is entitled to redundancy pay calculated in accordance with the Fair Work Act . The amount payable is on a sliding scale: from 4 weeks pay for an employee with 1 to 2 years service, to 16 weeks pay for an employee with 9 to 10 years service.

What happens on the sale of a business: an exception?

There is no obligation on an employer to pay redundancy where an employee transfers to a new employer with “continuity of service” . Therefore, upon the sale of a business, an employee transferring to the buyer will not be entitled to redundancy pay if there is continuity of service.

Continuity of service means that the new employer will recognise the accrued entitlements of the employee for the period of time served with the previous employer. This is normally what occurs in the sale of businesses in Queensland.

In addition to the exception above, an employee forfeits any entitlement to redundancy pay if they refuse an offer by a buyer of the business who is prepared to recognise their service with the seller and offer them employment on substantially similar terms and no less favourable than those received with the seller .

Therefore, a seller of a business will have limited exposure to redundancy pay if the buyer offers the same (or better) terms of employment to all employees of the seller, even if some employees decline to accept. However, if a buyer does not offer such employment to an employee, the seller will be liable for redundancy pay to that employee whose employment they will terminate.

Redundancy and the business sale contract

The buyer and seller of a business may use the business sale contract to:

1. establish a framework around the obligations of a buyer to offer employment to employees of the business; and
2. transfer the liability of redundancy pay from the seller to the buyer.

As to the framework, in Queensland, the REIQ Business Sale Contract provides that the Buyer, after notifying the seller which employees it proposes to employ, must offer them employment (clause 18.3):

1. on terms no less favourable than the terms of the employee’s employment with the seller;
2. that provides for continuity for all purposes of employment.

As to the obligation to pay, the REIQ Business Sale Contract provides that the buyer is responsible for any redundancy payment that the seller must make to any employee to whom the buyer does not comply with the contract, after indicating they will take them over, and whose service the seller terminates within 12 months after completion of the sale.

Conclusion

Sellers and buyers of a business need to be aware of their potential liability for redundancy either at law or as varied by the business sale contract. Besides the exemption for transfer of employment, there are other circumstances in which a seller may not have to pay redundancy pay. Therefore legal advice should be sought on potential liability and whether the business sale contract adequately addresses the position of the parties.