When buying a business, even just its physical assets, employment law may not be top of mind, but it should be. Even if you think you’re only buying equipment, premises or goodwill, you may be walking into a legally binding relationship with the seller’s employees and their enterprise agreement (EA), which can impose ongoing obligations you didn’t bargain for.
What’s the issue?
The 'transfer of business' provisions contained in sections 311–314 of the Fair Work Act 2009 (Cth) (the Act) are designed to protect employees when a business changes hands. They aim to preserve workplace entitlements and rights by transferring existing industrial instruments, such as enterprise agreements or awards, to the new employer in certain circumstances.
The provisions are triggered when all the following occur (per section 311 of the Act):
- Termination and Re-engagement: An employee’s employment with the old employer is terminated, and within 3 months, the employee becomes employed by the new employer.
- Connection Between Employers: There is a connection between the old and new employer, through one of the following:
- The new employer owns or uses assets that were previously used by the old employer (e.g. premises, equipment, vehicles).
- The employers are related entities (as defined in the Corporations Act 2001 (Cth)).
- The work is outsourced, in-sourced, or contracted out and brought back in-house.
This second scenario is aimed at ‘restructures’ of an existing business, without a genuine sale to a third party.
If these criteria are met, then the following can occur:
- Any ‘industrial instrument’ that applied to the employee (such as an enterprise agreement, award, or individual flexibility arrangement) may continue to apply to their employment with the new employer. These are called ‘transferable instruments’ under section 312.
- The transferable instrument continues to apply until replaced, terminated, or varied via application to the Fair Work Commission (FWC).
Case study: when a property purchase becomes a workplace problem
Imagine this scenario:
You buy a commercial property from a seller who used it to run a manufacturing business. Included in the deal are assets like forklifts, machinery, and delivery vans. The seller had an enterprise agreement in place that set above-award pay rates and entitlements for their workforce. You set up a new business at the site through a separate company. To get started quickly, you hire a few of the seller’s former workers to do similar roles. You assume the EA doesn’t apply, after all, you didn’t acquire the business itself, just the premises and plant. However, under the Act, this arrangement may be treated as a transfer of business, meaning you’re now bound by the seller’s EA even though you never agreed to it.
You will now have to apply to the FWC to vary or terminate the EA, a process that involves time, cost, and legal risk.
Until such time you could:
- Be locked into pay rates, rostering rules and conditions set by the previous EA;
- Lose flexibility in setting terms for new hires;
- Face industrial disputes if you inadvertently breach the inherited agreement; and/or
- Be subject to claims for things such as underpayments if you do not act in accordance with the inherited agreement.
What can you do?
Before completing any business or asset purchase, especially one involving potential employee transition:
- Conduct due diligence: Ask about any EAs or industrial instruments in place, even if you're not buying the legal entity. Obtain copies of all employment documentation.
- Get advice early: Seek legal advice during contract negotiations and seek specific advice on pre-existing employment arrangements.
- Structure employment offers carefully, ensuring timing, role definitions, and pre-existing arrangements have been reviewed first.
- If there is an EA, apply to vary or terminate the EA: In some cases, the FWC can grant relief if it's unfair or impractical for the new employer to comply. You may even want to make the termination of the EBA a condition precedent to settlement.
