When buying or selling a business in Australia, most people focus on price, contracts, stock, and settlement. But one of the most important — and often overlooked — issues is what happens to the employees.
Do they stay with the business? Do they need to be terminated? Who pays out entitlements like annual leave, long service leave, or redundancy?
The answers to these questions can make a big difference to the costs of the deal and the smoothness of the transition.
1. The Legal Framework
Under the Fair Work Act 2009, employees are entitled to certain minimum protections when a business changes hands. What happens depends on whether the buyer offers employment, and whether the buyer agrees to recognise their prior service with the seller.
- If the buyer takes on employees and recognises prior service
→ The employees are treated as continuing in their roles. There is no termination or redundancy. Their length of service carries across for things like annual leave, long service leave, and future redundancy rights. - If the buyer does not take an employee, or does not recognise prior service
→ The employment with the seller ends. The seller must pay out entitlements, including redundancy (unless a small business exemption applies). If the buyer re-hires that employee, they start as a “new” employee.
This means the treatment of employees is not just an HR matter — it’s a commercial and legal issue that affects the deal structure.
2. Two Common Approaches
🔹 Approach 1: Seller Terminates All Staff, Buyer Re-Hires If Needed
In this approach, the seller terminates all employees at completion. The buyer then decides who to re-hire, on brand new employment contracts.
Pros for the Buyer:
- Clean slate: The buyer does not inherit historical liabilities (such as accrued long service leave or redundancy risk).
- Flexibility: The buyer can set fresh terms and conditions — hours, pay rates, job descriptions.
- Certainty: Future redundancy liabilities start from zero.
Cons for the Buyer:
- Staff retention risk: Employees may choose not to return, or may feel insecure.
- Disruption: New contracts can create uncertainty and affect morale, especially if the business relies on loyal or specialist staff.
Impact on the Seller:
- The seller must pay out all entitlements — annual leave, long service leave (if applicable), redundancy pay, and notice of termination (or payment in lieu). This can be expensive, and sellers often prefer to avoid it.
🔹 Approach 2: Buyer Takes On Employees with Service Recognition
In this approach, the buyer offers employment to some or all of the seller’s staff, and agrees to recognise their length of service. The employment is treated as continuous.
Pros for the Buyer:
- Continuity: Employees feel secure, and the business transition is smoother.
- Retention of key staff: Valuable knowledge, client relationships, and operational expertise are preserved.
- Goodwill: Staff see continuity as a sign of stability.
Cons for the Buyer:
- Inherited liabilities: The buyer takes on accrued annual leave, personal leave, and long service leave.
- Future redundancy risk: If staff are let go later, redundancy pay is based on their total service, including time with the seller.
- Less flexibility: The buyer usually has to keep terms and conditions substantially similar.
Impact on the Seller:
- The seller only pays redundancy for employees not retained.
- For those employees taken by the buyer, accrued entitlements transfer — but the buyer usually gets a purchase price adjustment to cover this liability.
3. Which Approach Is Better?
There’s no one-size-fits-all answer. It depends on the nature of the business and the priorities of the buyer.
- If cost certainty and flexibility are most important → Buyers often prefer the seller to terminate staff and start fresh. This is common in small retail or hospitality businesses, where staff turnover is already high.
- If staff continuity is critical → Buyers usually prefer to take on employees with service recognition. This is especially true in specialist or professional businesses, where retaining skilled staff and customer relationships is vital.
In practice, many deals fall somewhere in between. For example, a buyer may take key staff (with service recognition) but let the seller terminate casuals or part-timers.
4. Practical Tips for Buyers and Sellers
For Sellers
- Budget for entitlements: If staff are not going to be taken by the buyer, factor in redundancy, notice, and leave payouts before you set your sale price.
- Negotiate purchase price adjustments: If entitlements are transferring, make sure the buyer receives an adjustment so you’re not paying twice.
- Be transparent: Provide a full schedule of employees and entitlements early in the sale process.
For Buyers
- Decide on your staffing needs: Before committing, work out which employees are critical to keep, and which roles you may want to restructure.
- Check the numbers: Get a clear breakdown of accrued entitlements. These can be significant, especially long service leave.
- Think about culture and retention: Sometimes taking on staff with service recognition is worth the extra liability if it ensures business stability.
For Both Parties
- Put it in the contract: The Business Sale Agreement should clearly state:
- Which employees will be offered employment;
- Whether prior service will be recognised;
- Who pays for accrued entitlements; and
- How purchase price adjustments will be made.
- Communicate carefully: Employees are often anxious during a sale. A joint communication plan can help maintain trust and minimise disruption.
5. Examples in Practice
- Café Sale: A buyer of a small café may prefer the seller to terminate all staff, then re-hire selectively. This avoids inheriting entitlements and allows the buyer to set new rosters and pay rates.
- Engineering Firm Sale: A buyer of a specialised engineering firm will usually take on key technical staff with service recognition, because their expertise and client relationships are essential to the value of the business.
These examples show that the “best” approach depends on the business model and the buyer’s priorities.
Key Takeaway
How employees are handled in a business sale can significantly affect costs, risks, and the smoothness of the transition. Whether employees are terminated and re-hired, or transferred with service recognition, the decision should be made early, and clearly reflected in the Business Sale Agreement.
Getting this right avoids disputes, protects both parties, and ensures the business can keep running smoothly after settlement.
At Sinosmart Business Brokers, we regularly guide both buyers and sellers through these issues, making sure employee entitlements are properly accounted for in the deal structure. If you’re planning to buy or sell a business, talk to us early so we can help you avoid hidden costs and keep the process stress-free.
