For many business owners, selling a business is the culmination of years of hard work. While much of the focus is understandably on the commercial aspects of the transaction, it is equally important to consider the impact the sale may have on employees.
One of the most common misconceptions is that employees automatically transfer to the purchaser when a business is sold. This is not generally the case. Whether employees remain employed, transfer to the purchaser or become redundant depends on the structure of the sale and the steps taken by both parties.
Getting the employment aspects wrong can expose employers to personal grievance claims, damage workplace relationships and create unnecessary delays in completing the transaction.
The Structure of the Sale Matters
The first question is whether the transaction is a share sale or an asset sale.
In a share sale, the company itself continues to employ the employees. Although the ownership of the company changes, the legal employer remains the same, meaning employees usually continue their employment uninterrupted.
An asset sale is different. The purchaser acquires the business assets rather than the employing entity. This means employees do not automatically become employees of the purchaser simply because ownership of the business has changed. Instead, decisions must be made about whether the purchaser wishes to offer employment and whether employees agree to accept those offers.
Review Employment Agreements Early
Before progressing too far with a sale, employers should carefully review their employees' employment agreements.
Many agreements contain provisions dealing with the sale or restructuring of the business. These clauses may set out consultation requirements or explain what will occur if ownership changes. However, contractual provisions do not replace an employer's statutory obligations under the Employment Relations Act 2000.
Understanding these obligations early allows potential employment issues to be identified and addressed before settlement.
Good Faith Remains Paramount
The obligation to act in good faith applies throughout the sale process.
If the proposed sale could affect employees' ongoing employment, employers will need to consult with affected employees before any final decisions are made. This means providing sufficient information about the proposal, allowing employees a genuine opportunity to comment and carefully considering any feedback before reaching a decision.
Consultation is not simply advising employees that a decision has already been made. The process must be genuine, and employees must have a real opportunity to influence the outcome where appropriate.
Employers must also avoid misleading or deceiving employees throughout the process, even where commercial negotiations are still underway.
A Sale Does Not Automatically Mean Redundancy
Many employers assume that selling a business automatically creates a redundancy situation. That is not necessarily correct.
If an employee's role genuinely comes to an end because the seller no longer requires them after settlement, redundancy may be appropriate. However, a fair redundancy process must still be followed. Employers are expected to consult and consider alternatives, including whether employment with the purchaser is available or whether suitable redeployment opportunities exist within the existing business.
Only after those options have been explored and employees have been properly consulted should a final decision be made.
Some Employees Have Special Protection
Certain employees working in specified industries are covered by Part 6A of the Employment Relations Act. These are often referred to as "vulnerable employees" and commonly include employees working in cleaning, catering, laundry, caretaking and orderly services.
Where Part 6A applies, eligible employees may have the right to transfer to the purchaser on their existing terms and conditions. Both the seller and purchaser have specific statutory obligations that must be followed, including providing prescribed information within strict timeframes.
These protections exist to ensure employees in vulnerable industries are not disadvantaged simply because the work changes hands. They can apply where a business is sold, as well as where one employer loses a service contract and another employer takes over performing the same work, such as cleaning, catering or laundry services.
Don't Forget Employee Entitlements
A business sale also raises practical issues around employee entitlements. Annual leave balances, sick leave, KiwiSaver obligations, final pay and other accrued entitlements should all be considered well before settlement.
While responsibility for these costs is often negotiated between the seller and purchaser in the sale and purchase agreement, those commercial arrangements do not alter employees' statutory entitlements.
It is important that these matters are clearly documented to avoid confusion after settlement.
Balancing Confidentiality and Consultation
Business sales are often commercially sensitive, particularly during negotiations. However, confidentiality does not remove an employer's obligation to consult with employees if the sale is likely to affect their employment.
There is often a balance to be struck between protecting confidential commercial information and providing employees with enough information to meaningfully participate in the consultation process. Every situation is different, but employers should seek advice before withholding information that may be relevant to employees' decision-making.
Planning Ahead Reduces Risk
Employment issues should never be treated as an afterthought in a business sale.
Early planning allows employers to identify potential risks, engage with the purchaser about future employment arrangements and ensure employees are treated fairly throughout the process. A carefully managed process not only reduces legal risk but also helps preserve morale and maintain business continuity during what can often be an uncertain time.
If you are considering buying or selling a business, obtaining advice early can help ensure the transaction proceeds smoothly while protecting the interests of both the business and its employees. Get in touch with us if you need support. We can guide you through the process from start to finish, helping you manage employment risks while achieving a smooth transition for your business and your employees.