Employees are one of the most important and valuable assets of any business. However, when the business is transferred to a new owner, it is common that not all employees are retained or, if retained, not retained on the same terms. If a decision is made to change the number of employees or any terms of employment, it is important that it is dealt with, and documented, correctly.

When employees are transferred between employers, there are two key areas of law which must be taken into account – contract law and employment law. That is, the sale contract and the Fair Work Act must be considered, and often together.

The terms and conditions of any sale contract usually provides for whether the new employer must offer employment to all existing employees in the business or whether the new employer has discretion to choose which employees to retain. The contract may also contain conditions relating to the offers of employment made to any existing employees who the new employer intends to retain. Relevantly, it may provide for whether the offers of employment made to the employees must be on terms “no less favourable” than the terms of employment under which the employees are employed by their current employer.

The question of whether an employee’s service with their current employer must be recognised by the new employer is a question asked by most new employers. Generally, where there is a transfer of business, the employees’ service with the old employer counts as service with the new employer – but there are exceptions.

A new employer may decide not to recognise service of the transferring employees for reasons including the new employer’s desire to re-start the employees minimum employment period
(commonly referred to as a probation period) or to have the employees annual leave paid out so that their accrued entitlement is nil from the date of completion.

By restarting the minimum employment period, employers are afforded the opportunity to terminate the employee’s employment without reason in either the first six or twelve months of the employee’s employment (depending on the size of the business) without risk of a claim of unfair dismissal being made against them. Similarly, by paying out the annual leave entitlements, employers mitigate the risk that employees will take annual leave while the new employer is settling in to the business, leaving the new employer short staffed.

However, it is important new employers are aware that when there is a transfer of business and employment a new employer must recognise employee’s service when having regard to sick leave, long service leave, requests for flexible working arrangements and parental leave. Accordingly, sick leave and long service leave cannot be cashed out and provision must be made in the contract for the accrued entitlements to sick leave and long service leave of the transferring employees to be adjusted in favour of the new employer at completion.

If a decision is made not to recognise service for the purposes of the minimum employment period and accrued annual leave entitlements, there are some requirements which the new employer must first satisfy, outlined as follows:

Does the sale contract allow it?

First, the new employer should ensure the sale contract allows the new employer to decide not to recognise the employee’s prior service. If the contract requires the new employer to offer employment on terms “no less favourable” than the terms of employment under which the employees are currently employed, an offer of employment which provides that prior service will not be recognised as service with the new employer may put the new employer in breach of the contract as it is viewed as a less favourable term of employment, particularly when done to enable the employer to restart the minimum employment period.

Have you complied with the Fair Work Act?

Second, the new employer should ensure it complies with the relevant provisions of the Fair Work Act prior to the employees commencing employment with the new employer.

That is, if the new employer does not wish to recognise service and wishes to place the employees on a probation period and/or restart their annual leave entitlements from the date the employee’s commencement employment with the new employer, the new employer must give written notice to the employee of the decision not to recognise prior service before the new employment starts. It is not sufficient to advise the employees that prior service will not be recognised after they have already commenced employment or, worse still, not at all. The new employer should also not rely on the previous employer to convey messages to the employees. Written notice is required. It is also recommended that new employers obtain written confirmation of acceptance from the affected employees and retain the relevant notice and acceptance documentation on the employee files.

Employees often become confused, distressed and concerned about the future of their employment when they become aware of a transfer of business from their current employer to a new employer. It is important to communicate with the employees clearly and to ensure they are aware of what will be changing, but also of what will be staying the same.

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