Transfer of Business
The Fair Work Act 2009 contains strict rules about employee entitlements when there is a “transfer of business”. We have produced a free downloadable guide to all matters relating to transfers of business here, but provide some basic guidance below.
A transfer of business can occur in many situations, but the most common examples are when a business or part of a business is bought or sold, when work is outsourced to a different business or when employees are transferred to different entities within a corporate group.
Under the Fair Work Act, the new employer has an obligation to recognise certain entitlements of transferring employees (e.g. accrued personal/carer’s leave), regardless of whether the business wishes to or not.
With some other entitlements, (such as accrued annual leave or redundancy entitlements) the new employer may have a choice whether or not to recognise the entitlement, but this will be impacted by whether or not the transfer is between “associated entities”. Strict processes have to be followed in order to validly notify employees that entitlements are not transferring.
It is generally at the choice of the new business owner whether or not they will offer employment to any existing staff, although often they are required to do so as part of the contract for the sale of the business.
When Does a Transfer of Business Occur?
#1 Transfer of Assets from the Old Employer to the New Employer
There is a connection between the old employer and the new employer if, in accordance with an arrangement between:
- The old employer or an associated entity of the old employer; and
- The new employer or an associated entity of the new employer.
The new employer, or the associated entity of the new employer, owns or has the beneficial use of some or all of the assets (whether tangible or intangible) that:
- The old employer, or the associated entity of the old employer, owned or had the beneficial use of; and
- Relate to, or are used in connection with, the transferring work.
The most common example is whether the old employer transfers/sells stock, premises, equipment or IP to the new employer.
#2 Old Employer Outsources Work to the New Employer
There is a connection between the old employer and the new employer if the transferring work is performed by one or more transferring employees, as employees of the new employer, because the old employer (or an associated entity of the old employer) has outsourced the transferring work to the new employer or an associated entity of the new employer.
This would cover, for example, the old employer outsourcing IT support to the new employer and one or more employees of the old employer transferring across to the new employer to perform this work.
#3 New Employer Ceases to Outsource Work to the Old Employer
There is a connection between the old employer and the new employer if:
- The transferring work had been performed by one or more transferring employees as employees of the old employer, because the new employer (or an associated entity of the new employer) had previously outsourced the transferring work to the old employer (or an associated entity of the old employer); and
- The transferring work begins to be performed by those transferring employees as employees of the new employer, because the new employer (or the associated entity of the new employer) has ceased to outsource the work to the old employer (or the associated entity of the old employer).
#4 New Employer is an Associated Entity of the Old Employer
There is a connection between the old employer and the new employer if the new employer is an associated entity of the old employer when the transferring employee becomes employed by the new employer. “Associated entities” under the Fair Work Act has the same meaning as under the Corporations Act 2001, which states that ‘entities’ are ‘associated entities’ in a range of circumstances, including but not limited to:
- Where one entity ‘controls’ the other (for example, where one entity can make decisions about the other’s financial and operating policies);
- Where a third entity ‘controls’ and has a material interest in the operation resources or affairs of both entities;
- Where both entities are ‘related bodies corporate’ (for example, holding companies or subsidiaries of one another).
What Happens When a Transfer of Business Occurs?
So what is the fuss about? What actually happens when all of the above conditions are satisfied, and a ‘transfer of business’ has occurred between 2 parties?
As a general rule, the Fair Work Act 2009 requires that, when there is a transfer of business from one employer (the “old employer”) to another (the “new employer”), the new employer must recognise the period of service that transferring employees had completed with the old employer, as service with the new employer.
There are certain exceptions to this general principle. In circumstances where a new employer is not an associated entity of the old employer, the new employer may decide not to recognise a transferring employee’s previously accumulated service for the purposes of annual leave and/or redundancy pay pursuant to the National Employment Standards (NES). In such a situation, the old employer must pay the transferring employee the amount that would have been payable to the transferring employee had the employee taken that period of annual leave and/or the transferring employee’s entitlement to redundancy pay.
Right to Unfair Dismissal
As the new employer is required to recognise a transferring employee’s period of service with the old employer, this service will generally count towards the service required to complete the “minimum employment period” required under the Fair Work Act for protection from unfair dismissal. This minimum employment period is either 6 months or 12 months, depending on the size of the employer’s business.
However, if the new employer informs the employee in writing before the new employment starts that a period of service with the old employer will not be recognised for these purposes, the new employer will not be required to recognise the employee’s service with the old employer as contributing to the minimum employment period. However, this exception will only apply when the new and old employers are not associated entities.
A new employer must recognise the personal/carer’s leave entitlements a permanent transferring employee has accrued with the old employer. Any accrued entitlements will transfer to the new employer when the transferring employee starts employment. This does not apply to compassionate leave, which does not accrue but is payable on an incident-by-incident basis.
Long Service Leave
While long service leave entitlements can vary from state to state, as a general rule the new employer will also be required to recognise a transferring employee’s period of service with the old employer for the purposes of calculating long service leave.
In recognising continuous service with the old employer, the new employer will also be recognising the annual leave the transferring employee has accrued in their previous employment. However, the new employer will not be required to recognise the annual leave accrued by a transferring employee with the old employer if the new employer chooses not to do so and the old employer and new employer are not associated entities. The new employer must inform the transferring employee in writing before the transfer that their annual leave is not being recognised. The old employer will then need to pay this out to the employee on transfer.
Continuous service with the old employer must be recognised by the new employer for the purposes of the transferring employee’s entitlement to parental leave. An employee is entitled to parental leave after 12 months continuous service. This means, for example, that if an employee had completed 11 months continuous service with the old employer before the transfer, they will be eligible for parental leave as early as 1 month after commencing employment with the new employer.
A new employer may also choose whether or not to recognise transferring employees’ period of service with the old employer for the purposes of calculating f future redundancy pay, where the old employer and new employer are not associated entities. If the new employer does choose to recognise this, the transferring employees will not be entitled to redundancy pay from the old employer.
However, a new employer that is not an associated entity of the old employer may choose not to recognise employees’ service with the old employer for the purposes of calculating an entitlement to redundancy pay. As with a choice not to recognise service for the purposes of annual leave or unfair dismissal, this choice must be communicated in writing to the employee before the employee commences employment with the new employer. The old employer will then be required to pay out any accrued redundancy entitlements to the transferring employee.
The Fair Work Act also operates so that certain “transferable instruments” will follow a transferring employee to their new workplace, as explained below.
The instrument covering the transferring employee may transfer with them to the new employer
Provided they are covered by a “transferable instrument” (eg an enterprise agreement) the transferring employees will bring the industrial instrument covering their employment with the old employer. This instrument will then apply to their employment with the new employer in relation to the transferring work (being work that is the same, or substantially the same, as the work the transferring employees performed for the old employer). This transferring instrument will apply to the new employer and the transferring employee even if the new employer has their own enterprise agreement, or is named in a modern award, at the time of the transfer.
The transferable instrument may also apply to new, non-transferring employees performing the same work
If a transferable instrument transfers with a transferring employee to the new employer, it may also apply to new, non-transferring employees hired after the transfer, if they are performing the same work as the transferring employee(s). However, this will only occur if there is no other modern award or enterprise agreement which could apply to the new employer and the new employee.
Which Instruments Can Transfer?
The main type of instrument that will transfer is an enterprise agreement. A modern award is not a transferable instrument.
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The information provided in these blog articles is general in nature and is not intended to substitute for professional advice. If you are unsure about how this information applies to your specific situation we recommend you contact Employment Innovations for advice.
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