Expert warns SMEs to look closely at employee contracts before making a takeover

Entrepreneurs looking to expand by acquiring another business have been warned to pay close attention to employee contracts and obligations at the target company, or risk facing big payouts to employees who may be terminated after the deal is complete.

Under the Labor Government’s Fair Work regime, when a business changes hands employee contracts and obligations transfer to the new owner.

Shana Schreier-Joffe, partner at Harmers Workplace Lawyers, says entrepreneurs who buy a company need to check contracts carefully, paying particular attention to state and federal award arrangements which may exist under new modern awards, and particularly pay-out obligations.

If an employer plans to make redundancies when the workforce of the acquired company is merged with the workforce of the existing companies, this could particularly trigger big payouts.

“You absolutely need to do your homework,” Schreier-Joffe says.

“The employee’s employment contract may stipulate specific provisions that could affect the new company.”

“Employers may not realise that some employees have certain stipulations within their contracts, such as 12 month notice periods, which must be honoured. It’s not unheard of for executives to have significant payouts in their contracts.”

Schreier-Joffe says that in some cases, employment obligations are so big that they can affect the purchase price.

“Your liabilities can be quite significant and in most cases those liabilities will be set out as a liability and offset against the purchase price.”

Schreier-Joffe says employees also need to be wary of how they will fare if made redundant under new owners.

With merger and acquisition activity now on the rise, she has seen a rise in the number of executives and managers looking to pursue claims to redundancy payments, only to find no such rights exist.

“There is clearly a misunderstanding there that the word “redundant” means a massive payment,” she says.

While the new National Employment Standards to state that every employee is entitled to a redundancy payout, the employee must have served for at least one year, starting from January 1, 2010.

This means long-serving executives who do not have a redundancy payment clause in their contract and who are redundant before the end of 2010 could end up with nothing.