Adjustment of employee entitlements

On settlement, the purchaser should be credited for any entitlements of the transferring employees. This includes:

Salary

This is where employees may be entitled to payment after settlement, for a period commencing before settlement.

Superannuation

Any unpaid superannuation accrued prior to settlement should be adjusted, like any other outgoing of the business.

Annual leave

The purchaser is only liable for annual leave accrued before settlement if it “recognises” the employees’ service with a vendor. This is covered by ss 22(5) and 91 of the Fair Work Act 2009 (Cth) (FWA). Otherwise, the vendor has to pay out the accrued annual leave on settlement.

Financially, this makes no difference to the vendor. If it does not pay the employees, it will have to allow the same amount to the purchaser as an adjustment on settlement.

However, it is better for the purchaser to recognise and assume liabilities for these entitlements. It means that the purchaser will receive a cash adjustment on settlement, but only has to pay the liabilities as the employees take holidays or leave their employment. The employees will also generally be happier, taking holidays in the usual way, rather than having them cashed out on settlement.

Redundancy pay

Businesses with more than 15 fulltime employees are exposed to paying employees who are made redundant, based on their years of service. Under ss 22(5) and 122 of the FWA, if the purchaser “recognises” the employees’ services with the vendor:

• • the employees who continue with the business are not considered to be redundant; and
• • the calculation of any redundancy pay the purchaser may have to pay in the future will include the period of service with the vendor.

In most cases, the contract should provide as follows:

• • The purchaser recognises the transferring employees’ service with the vendor. This avoids the vendor having to pay redundancy pay for those employees on the sale of the business.
• • There is no adjustment on settlement because the entitlement to redundancy pay may never eventuate.

Long service leave

Entitlements to long service leave (generally arising under state legislation) require careful review and apportionment. The purchaser is likely to be liable for long service leave accrued before settlement under the employees’ service with a vendor. The vendor generally cannot cash out the accrued long service leave on settlement.

See Adjustment of employee entitlements.