Employment Law Considerations for Buying or Selling a Business

The people in a business often make the business, so if you are planning to buy or sell a business, it is important that you understand your employment law obligations in relation to employees.

Asset Sale v Share Sale

As a starting point, it is important to know the difference between the sale of the business and assets of the business to the purchaser (asset sale) and the transfer of the company’s shares for consideration paid by the purchaser (share sale).

An asset sale can be the whole or a part of the business but employment agreements, and employees, cannot be sold in an asset sale.  Existing employees of the vendor are not automatically employed or transferred to the purchaser.  Instead, the sale of the business, even as a going concern, results in a termination of the employees’ employment.  This is within the definition of a “restructure” under the Employment Relations Act 2000 (Act).  A termination of employment in these circumstances is one of the types of redundancy termination.

Unless agreed with the vendor, or the employee is in the specified category of employees under the Act (commonly known as ‘vulnerable’ employees) and has elected to transfer, the purchaser has no obligation to offer employment to any of the vendor’s employees in an asset sale.  If the purchaser does offer employment to one or more of the vendor’s employees it can be on any terms and conditions of employment (again, unless agreed otherwise or a vulnerable employee is transferring).  The vendor’s employees will have no obligation to accept the offer of employment from the purchaser. But if the offer is accepted, it is new employment with a new employer.   

In contrast, in a share sale, employees continue to be employed by the company whose shares are being bought or sold and the employment relationship does not change.  It is not a restructure and does not result in the termination of employment.  The purchaser takes on the whole history of employment including the employment agreements, leave balances, employee liabilities and any employment relationship problems.  

Vendor Obligations and Employee Protection Provisions

In the context of an asset sale, vendors need to be mindful of employees that are necessary to the business as a going concern (due to the potential GST implications).  Vendors also need to understand and comply with the statutory and contractual obligations regarding restructuring and redundancy in any asset sale.  

Employee Protection Provision

Every employment agreement is required by law to include an employee protection provision (unless the employee is a vulnerable employee).  The parties need to make sure that the sale and purchase agreement complies with the obligation in the employee protection provision.

The purpose of an employee protection provision is to provide protection for the employment of employees affected by a restructuring.  In this context, a restructure is defined in the Act as contracting out or selling or transferring the employer’s business (or part of it) to another person.

An employee protection provision must include: 

  • a process that the vendor must follow in negotiating with a potential purchaser about the restructuring, to the extent that it relates to potentially affected employees; and
  • the matters relating to the affected employees’ employment that the vendor will negotiate with the purchaser, including whether the affected employees will transfer to the purchaser on the same terms and conditions of employment; and
  • the process to be followed at the time of the restructuring to determine what entitlements, if any, are available for employees who do not transfer to the purchaser. 

An employee protection provision (as required by law) does not usually provide a high level of protection to employees, unless there are enhanced obligations and requirements in the employee protection provision.  It focuses on process.  However, while a provision may not be onerous on the vendor, the impact of not having an employee protection provision in an employee’s employment agreement, or having one and not complying with it, can be significant.  The whole restructure, and therefore the sale and purchase, can be delayed.  Further, if the employee protection provision is not complied with, damages for breach of contract can be awarded to each employee.  It is even possible that an injunction could be sought preventing the sale until the employee protection provision is complied with. 

Redundancy Process and Consultation

In the context of an asset sale, the full redundancy process needs to be followed by the vendor before any employee’s employment is terminated and before the sale and purchase takes effect. 

There is no statutory definition of redundancy.  Subject to any contractual definition, redundancy is often defined in New Zealand as a situation where the employment is terminated by the employer because the position filled by an employee is surplus to the needs of an employer.  If it is an asset sale of the entire business all employee positions, and therefore all employees, will be potentially affected as the vendor will no longer own the business for the employees to work in. 

A redundancy must be implemented in a procedurally fair manner, which involves a consultation process with any potentially affected employees before any decisions are made, like the decision to sell the business or part of it.  The underlying principles in New Zealand employment law are good faith and natural justice. The statutory test is whether the employer’s actions, and how the employer acted, were what a fair and reasonable employer could have done in all the circumstances at the time.  There is also a statutory good faith obligation to provide all information that is relevant to the continuation of the employment of the affected employees. 

Practically speaking, the vendor’s obligations include:

  • Developing a proposal, and the reasons for the proposal;
  • Providing information relevant to the proposal (not just the limited information relied on by the vendor, or that supports the proposal) and that information must be accurate and must not mislead;
  • Giving employees an opportunity to respond to the proposal and information, and an opportunity to be represented; and
  • The vendor must be able to show that it has considered feedback from the employees, which usually means providing responses and reasons why it has rejected alternatives.

Only then can the vendor reach a decision that it can proceed with its proposed redundancy, and the sale of the business.  A failure in this process is likely to render any termination of an employee’s employment unjustified.

Notice and Redundancy Compensation

If an employee’s employment is terminated due to redundancy, the vendor must give notice in accordance with the employee’s employment agreement.  An employee’s notice period must be worked out or paid in lieu (if there is a contractual ability and right to do so) – unless there is a technical redundancy clause in an employee’s employment agreement which is activated.  Therefore the time between employees being given notice of the termination of employment due to redundancy, and the settlement or completion date of the sale and purchase, should ideally be at least the length of the employees’ notice periods.

There is no statutory entitlement to redundancy compensation in New Zealand, but it is sometimes a contractual right that has been included in an employment agreement.  Again, a technical redundancy clause in an employment agreement may be relevant here.

Vulnerable Employees 

Vendors and purchasers also need to be aware that under the Act there is a specified category of employees, commonly referred to as vulnerable employees.  They are afforded a higher level of statutory protection in a restructure. The government’s rationale is that they are employees employed in occupations or sectors which are frequently restructured, and the employees have little bargaining power.

The specified categories of employees are set out in schedule 1A of the Employment Relations Act 2000, and are employees who provide specified services in the specified sectors, facilities, or places of work.  Services can include: cleaning services, food catering services, caretaking, laundry services or orderly service. Sectors can include: education sector, health sector, age-related residential care sector, public service or local government sector and services in relation to any airport facility or for the aviation sector.  There is then the catch all of cleaning services or food catering services in relation to any workplace. 

The protection conferred to vulnerable employees includes the right to elect to transfer to the purchaser on the same terms and conditions of employment. If the employee does elect to transfer, employment is treated as continuous, including for the purpose of service-related entitlements whether legislative or otherwise. 

Concluding Comments

The above employment law considerations in the sale and purchase of a business are commonly misunderstood, overlooked or considered too late in the sale and purchase process.  The obligations are not onerous, but if neglected, can cause significant ramifications for the employees, the parties and the business.  The transaction needs to allow time for consultation and notice.  The sale and purchase agreement must comply with the vendor’s employment obligations otherwise the vendor will be in breach.  It is far more difficult for a vendor to comply with its obligations if the sale and purchase agreement has already been entered into.

If you have any questions about buying and selling a business or any other aspect of employment law, please get in touch with our Employment Law Team or your usual contact at Hesketh Henry.


Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

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Media contact - Kerry Browne
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