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When selling or purchasing a business, one of the key considerations is the business’ employees and whether the new employer will retain them. As a seller, you want to do right by the people who have worked for you. As a purchaser, maintaining staff can help with the task of taking over an existing business. This is because of their knowledge, experience and familiarity with the business. Regardless of whether you are selling or purchasing a business, you must understand what happens to employees in a sale of business. If you fail to do so, you may be in breach of New Zealand employment laws.

Asset Sale or Share Sale?

First of all, it is critical to differentiate between a business sale (or ‘asset sale’) and a share sale. In a share sale, it is merely the shares in the company that operates the business that are for sale, not the business itself. The employment of staff is therefore unaffected, as their employer has not changed.

John and his wife, Lauren, each own 50% of the shares in the company Parallel Designs Ltd. The company employs six people. John and Lauren sell all of their shares in the company to Nikau, who takes over the business. As only the shares have been sold, the six employees’ employment is unaffected. They continue to be employed by Parallel Designs Pty Ltd.

Asset Sales – Business ‘Restructuring’

New Zealand employment law refers to a business sale or transfer as a ‘restructuring’. When a business restructuring occurs, the employees of the business are made redundant. They have their employment terminated on the settlement date (the day the business changes hands to the purchaser). If the purchaser wants to retain them, the staff then enter into new employment agreements from the time of settlement. 

When selling your business, the purchaser may decide to retain your current staff. Although your staff are being made redundant, their redundancy may be considered a ‘technical redundancy.’ Therefore, you do not have to pay them the usual redundancy entitlements. It is best practice to ensure that your employment agreements with employees include ‘technical redundancy’ provisions. This provision will allow for a technical redundancy and help avoid having to pay redundancy entitlements to transferring employees.

Whether the purchaser is going to retain existing employees, the process involved depends on two key factors: 

  • the ‘employee protection provisions’ of the employees’ employment agreements; and
  • whether the employees are ‘vulnerable employees’ as defined in the Employment Relations Act 2000.

Employee Protection Provisions

New Zealand law requires that every employment agreement contains ‘employee protection provisions.’ This provision sets out the employee’s rights in the event of a restructuring. If you are selling your business, you should carefully review these provisions in your employees’ employment agreements to understand the process you will need to follow. Generally, the process will involve:

  1. documenting your proposal (such as explaining the reasons for the sale and how it may affect them);
  2. inviting your employees to a meeting to discuss the sale and how it affects them;
  3. holding the meeting;
  4. getting their feedback (employees can provide written or oral feedback); and
  5. genuinely considering that feedback.

After following the above steps and assuming you still wish to proceed with the sale, you must then confirm the details of the sale to your employees in writing. Your letter should set out: 

  • their notice period (as per their employment agreement); 
  • the end date of their employment; 
  • whether they will be receiving any compensation; and 
  • an offer to meet with them to discuss if they have any questions.

Throughout this entire process, you should be regularly communicating with the purchasers to confirm whether they will be offering employment to any of your employees upon taking over the business. The purchaser may request information from you as part of their due diligence, such as your employees’ employment agreements.

Make sure you get your employees’ consent before providing this kind of personal information to the buyer. 

Vulnerable Employees

There are special rules for ‘vulnerable employees.’ New Zealand employment law defines ‘vulnerable employees’ as employees providing cleaning, food catering, caretaking and laundry services in certain industries such as education, health and aged care. Unlike regular employees in a business sale, vulnerable employees are entitled to continue their employment with the purchaser of the business (if they want to). This employment must be on the same terms and conditions of their employment under the seller.

These rules for vulnerable employees only apply if you are purchasing a business with 20 or more employees. If you are buying a business that employs less than 20 people, you are exempt from having to offer the same employment terms to transferring vulnerable employees. For this reason, you must know how many employees the seller’s business employs – the seller must provide you with a warranty as to this number.

Paying Out Employee Entitlements

When selling your business, the purchaser may communicate with you that they will not be retaining your staff. In that case, you will need to pay out your employees’ wages/salaries, PAYE, holiday and any other leave entitlements up until settlement. If the new owner is retaining your staff, then you can either: 

  • pay out their entitlements, which are then reset upon the purchaser taking over the business; or
  • pay the purchaser (or simply adjust the purchase price) to account for the employees’ accrued entitlements, which then continue uninterrupted post-settlement.

Key Takeaways

The management of employees is just one of many important legal considerations when selling or purchasing a business. The process involved in transferring employees or making them redundant can depend on a range of factors, including the:

  • type of work they do;
  • terms of their employment agreement; and
  • size of the business.

It is vital that you engage a suitably qualified commercial lawyer with knowledge of New Zealand employment law to ensure you are honouring their entitlements. If you require assistance in buying or selling a business, contact LegalVision’s New Zealand business lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What happens to employees after a sale of business?

When a business restructuring occurs, the employees of the business are made redundant. They have their employment terminated on the settlement date. Then, if the purchaser wants to retain them, the staff then enter into new employment agreements from the time of settlement. 

Do I need to pay redundancy entitlements to employees if the purchaser of my business decides not to retain them?

If the purchaser of your business decides not to retain your current staff, you need not pay redundancy entitlements as it is considered a ‘technical redundancy’. Therefore, you do not have to pay them the usual redundancy entitlements.

In what circumstances must the purchaser of a business retain the current employees?

Unlike regular employees in a business sale, vulnerable employees are entitled to continue their employment with the purchaser of the business (if they want to). ‘Vulnerable employees’ include those providing cleaning, food catering, caretaking and laundry services in certain industries such as education, health and aged care.

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