Employment Law: What happens to the employees on the sale of a business?

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Slee Blackwell’s Roger Cheves looks at how the TUPE Regulations apply

One of the most pivotal questions when a small to medium sized business is sold is what will happen to the employees when the business changes ownership.

It is often the case that many small businesses will operate with relatively small margins. As such, the issue of the number of employees, their rights and their remuneration becomes key when a potential buyer weighs up whether the purchase of the business is a viable option.

Indeed, one of the most frequent questions a commercial lawyer will face when discussing a potential business transfer with a buyer or seller is what will happen to the employees?

Luckily, the question is relatively straightforward to answer, but on 31 January 2014 the law in this area changed. Business owners need to be aware of those changes.

Of course, when a business is sold by way of a share sale control of the company passes to a new shareholder, but its legal status remains the same and the employees’ contractual relationship is unaltered.

However, when a business is transferred by way of an asset purchase and the buyer plans to operate the business in largely the same manner as before – as is the case with the vast majority of small business sales – it will almost certainly involve the application of the Transfer of Undertakings (Protection and Employment) Regulations (TUPE).

Broadly, TUPE provides that when a business is sold to a new owner:

  • The employees’ jobs usually transfer over to the new company;
  • Their employment terms and conditions transfer; and
  • Continuity of employment is maintained.

Therefore, if you are buying a business and plan to operate it in largely the same manner as the previous owner, it is highly likely that the employees of the business will transfer over as a matter of course. If this is the case, both the buyer and seller must comply with certain statutory requirements.

But, what if the buyer does not want to take on all of the employees?

In an attempt to avoid any problems the easiest (and most common) solution is to use “settlement/compromise agreements”. These are essentially redundancy packages that employers can offer to employees making them fully aware of their statutory rights under TUPE. The employees can take these agreements to an independent legal advisor and seek advice on the rights that they are giving up in return for the redundancy package. Provided that all parties agree, the transaction can proceed without the terminated employees transferring. This process is however time consuming and costly.

Beyond the use of compromise agreements, the basic position is that any dismissal that occurs due to the transfer of the business will be automatically unfair and depending upon timing and the process itself liability may fall to either the buyer or the seller. The buyer will usually seek in the contract to identify the employees they do want to take on and have their solicitor draft water-tight clauses to ensure liability for any other employees that the seller will need to dismiss remains with the seller.

Dismissals may not be deemed automatically unfair if the reason for termination was “economic, technical or organisational”. Of course, the reason must be legitimate and not simply that the incoming employer perhaps cannot afford to fund the current employment contracts.

It must be said that by virtue of the 2014 changes to the law there is a broader scope for lawfully dismissing employees in the midst of an acquisition but potential breaches of employment law and subsequent (eye-wateringly expensive) litigation means that legal advice on the issue is imperative and should be sought as soon as possible.

What do I need to do to ensure that the business transfer is conducted lawfully?

Upon agreeing the terms of the asset sale:

The seller should consider:

  • Whether to inform employees (or any representatives of employees) of a potential sale; and
  • The risk of exposure to unfair dismissal claims of dismissing staff because of the sale and possible effects on morale

The buyer should:

  • Assess the ongoing profitability and operation of the business in light of the fact that the employees are likely to transfer.
  • Prior to completion of the transfer of the business:

The seller must:

  • Inform/consult the employees about the transfer and any measures that may be taken;
  • Identify who will transfer; and
  • Provide information on the employees (known as ELI or Employee Liability Information) to the buyer.

The buyer must:

  • Inform/consult about the transfer and any measures
  • Identify who will transfer; and
  • Request ELI from the outgoing employer.

On the transfer of the business

Both the seller and the buyer must retain a process of consultation with the remaining employees.

After the transfer of the business

Both the seller and the buyer must retain a process of consultation concerning any redundancies.

If you are buying or selling a business and require advice on employment law issues then give us a call on 01272 372128

Please note that this article is intended to give general information about legal topics and is not intended to apply to specific circumstances. Its contents should not, therefore, be regarded as constituting legal advice and should not be relied on as such. In relation to any particular problem that you may have you are advised to seek specific legal advice. Slee Blackwell’s blog