Employee relations: An essential ingredient in transaction success
Rachael Smith, Founder of EzieR
Article by: Chris Sheedy OF The Hard Word
Employee entitlements and consultation are often overlooked during a deal, giving rise to numerous issues. Fortunately, says employment relations specialist Rachael Smith, getting it right is easier than you think.
Having been deeply involved in more business transactions than most, accounting firm transaction advisor Kev Ryan says one of the most vital considerations is around staff.
“Who are the key people that you really do need to hang on to, and how do you do that?” he says.
“Which staff members won’t work well in the culture of the new business, and how can you be sure they won’t blow the deal at the last minute?”
Rachael Smith, employment relations specialist and founder of EzieR, believes the solution starts and ends with communication.
“Whether it be the stress of the deal, or fear of saying the wrong thing, lots of business owners don’t communicate change effectively with their teams,” she says.
Rachael confirms that when it comes to a transfer of business between non-associated entities, the new employer has the option to recognise or not recognise the length of service and entitlements of transferring employees.
If the new employer does not recognise this, the seller will need to pay the transferring employees redundancy pay (if they are entitled to it). Small business employers do not have to pay redundancy pay.
Formal/written communication of this is required before the transfer takes place. It is the responsibility of the previous employer to terminate employment and pay out any relevant entitlements.
Notice of termination must also be given when employees are transferring to a new employer. If the former employer fails to give appropriate notice of the transfer, the transferring employees could claim payment in lieu of notice.
Even when length of service is not recognised, some entitlements always transfer across.
This includes:
transferable instruments (for example enterprise agreements);
length of service in relation to flexible working requests, parental leave entitlements and long service leave, (however, long service leave varies subject to the particular circumstances);
personal/carer’s leave, and;
worker’s compensation obligations.
Communication is key
If you haven’t communicated with employees that you’re not going to recognise certain entitlements, and they have not been made redundant from the prior business, the default position is that length of service and entitlements automatically transfer to the new business owner.
This means employees are likely to have access to unfair dismissal, their notice period (based on their length of service and/or contract terms) will need to be honoured, and their annual leave entitlements will transfer across, among other things.
The key message, Rachael says, is that to avoid unexpected issues or liabilities you should ensure all employment relations matters, both existing and future, are explored and rectified before the transaction takes place.
This can only happen in an environment of open communication, both with the seller and the employees.
What happens with employees should be discussed and agreed upon as part of a sale, ensuring each party understands their obligations, she says.
It’s important to review applicable industrial instruments (awards and enterprise agreements, for example) for specific requirements regarding entitlements, termination of employment and consultation.
Employees should be given time to ask questions and clarify concerns. The employer should consider putting together a summary of all relevant points, or an FAQ document, Rachael suggests.
Importantly, all information relating to employment and entitlements should be confirmed in writing.
Any redundancies must be made before the transfer takes place, including time for notice periods, if they are being worked as opposed to paid out. This must be handled by the selling business, the employee’s current employer.
Other risk, Kev says, comes from the fact that invariably, people in the business have relationships with clients. Therefore, staff members have at least some control over the brand’s external image.
“You need to stay ahead of this risk,” he says. “Whether it’s troublesome team members, or a key staff member who owns a lot of the relationships, or people who are simply too good to lose, they all need to be taken care of before a deal can be finalised.”
What are the best steps for employee relations success?
Rachael says there are several important steps to take to mitigate employee relations risk.
1) Communicate early, regularly and transparently.
Outline the impact the sale is going to have on people’s employment verbally, in a face-to-face environment, and in writing. Where possible and appropriate, include details about the vision for the business moving forward. Everybody will be much more comfortable with change if they feel they are receiving the information they need and aren’t moving forward into a knowledge vacuum.
2) Undertake a thorough due diligence process.
Identify employee liabilities before the deal is finalised. This includes any potential underpayment of entitlements. As a minimum, Rachael suggests reviewing award or agreement coverage and classifications to ensure payroll inputs are correct, before reviewing payroll outputs for any potential concerns.
3) Use redundancies wisely.
If the new business owner does not want to recognise employee entitlements or does not want to take on certain existing employees, the current owner must commence a redundancy process and pay out relevant entitlements. If only select employees are being made redundant, these decisions should be sound and well defensible. Any discriminatory practices could give rise to claims in several jurisdictions, in addition to possible reputational damage.
4) Protect key employees.
“Of course, the most valuable asset for any business is the people,” Rachael says. “Sometimes, it helps to offer sign-on or time-based retention bonuses to your most valuable team members.”
5) Indemnities can be used to protect against people issues.
Should any concerns arise during the due diligence process, you could consider setting money aside in escrow or working the potential cost of those concerns into the value of the deal. If those concerns relate to underpayments of wages and entitlements, the parties might want to consider resolving those matters prior to the sale.
By taking the right steps, Kev adds, businesses can ensure cultural success, financial sustainability and a smooth transition for everybody involved.
“Staff can be deal makers or deal breakers,” he says.
“Communicate well, make sure all entitlements are paid and look after the key players. You’re not selling a business, you’re selling a set of relationships. People are everything.”
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