Employer obligations when selling your business

Sylvie Thrush Marsh, Head of Platinum Services
By Sylvie Thrush Marsh, Head of Platinum Services

It's not every day a business owner leaves their company. Employees may resign or be moved on, but we wanted to address this less common but still twisty situation.

Because selling or buying a business is a big deal. It can be exciting, stressful, and exhausting. There’s a lot to contemplate, organise and sort out, so it's no wonder that your employees might not be top of mind when you're in the middle of negotiating the sale.

But there are some legal obligations to your people and other considerations that you need to bear in mind when you’re looking at selling a company.

This article focuses on the legal requirements to your (soon to be ex-) employees, how this can impact the sale and purchase (S&P), and the risks of getting it wrong.

Share sales vs asset sales

What obligations you have to your employees when the business changes ownership will depend on the type of sale you’re entering into.

The 2 most common ways for a business to change hands is through either a share sale or an asset (or business) sale:

  • A share sale involves the transfer of the shares in the company that owns the business (or majority holding) from one owner to another.
  • An asset sale involves the transfer of the business entity itself, and some or all its assets and equipment, from one company or individual to another.

In a share sale, the same company continues to own the business, but the owner and controller (shareholders and directors) of the company change. The business and its operations remain the same and none of the equipment, assets, or contracts are transferred, which can make for a smoother transition (any liabilities also come, too). A share sale doesn’t trigger any of the employment obligations that an asset sale does, as the legal entity which employs the company’s staff doesn’t change.

Asset sales, on the other hand, can be complicated, and, as the legal framework around the employment relationships is changing, it triggers numerous obligations to employees. Contracts with other parties, e.g. suppliers, customers, and contractors, are also transferred.

Financial obligations

Obviously, there are financial obligations when you sell or purchase a business or shares in a company. Money is changing hands, after all. New Zealand doesn’t have a capital gains tax but there are other tax liabilities that differ depending on whether the sale involves assets or shares.

Given it is such a big decision and requires due diligence, getting advice from an accountant and other legal professionals is essential.

Find out more about your tax obligations at IRD.govt.nz

Administrative obligations

Again, the process of selling a business and the administrative requirements, such as updating shareholder details with the Companies Office, mean you need the oversight of legal professionals. You’ll need a lawyer to draft a sales agreement, which is reviewed by the buyer’s lawyers and then the parties negotiate until they agree on the terms of the sale.

Find out more at Business.govt.nz

Employment obligations when selling

This is the area we are going to focus on, under an asset or business sale. We recommend discussing the details of your staffing - including headcount, salaries, and roles - with the buyer, so you can coordinate the transition process and provide more surety to your people.

Employee protection provisions

These are one of the 11 things that employment agreements must have and you should check these obligations before you sell. The employee protection provision covers what happens to employees after the business is sold and is intended to support a fair process, usually requiring the seller to try their best to get the buyer to employ existing employees under substantially the same, or similar, terms and conditions as their existing employment.

Watch out for: vulnerable workers

If your business has 20 or more employees and provides services such as cleaning, food catering, caretaking, and laundry services in certain industries (education, health, and aged care), your people may have stronger employment protection under the Employment Relations Act.

These workers (often known as vulnerable workers) are entitled to continue their employment with the buyer of the business, if they choose to, and be on the same terms and conditions of employment under the new owner.

It’s not uncommon for businesses to not know their employees are covered by these added protection provisions, so check the categories of employees that are covered.

Learn more about common mistakes when restructuring.

If the buyer decides to hire existing employees

If the new owner is going to keep the existing team members, they will put offers of employment to the employees.

If the employees accept this offer from the buyer, the seller confirms technical redundancy, which means their employment with the outgoing seller finishes at the time of sale and new ones begin with the incoming buyer.

As part of this process, the vendor needs to negotiate with the buyer whether they will treat employment as continuous, in which case all the employees’ existing entitlements, e.g. annual and sick leave balances, come across to the new owner. If the new owner wants to treat it as new employment, the seller will pay out those entitlements, e.g. annual leave, alternative leave, when the sale goes through. In the case of continued employment, the purchase price is often adjusted to account for the liabilities the buyer is taking on.

If employees decline the offer of employment from the new owner, it is treated as a resignation and doesn’t trigger any redundancy clauses in their employment agreement (they are not being made redundant but are choosing not to take a role with the new employer). The seller then ends their employment as per the notice period and pays out all their entitlements, including any redundancy compensation.

If the buyer decides not to hire existing employees

A new owner deciding not to offer employment to the existing team members makes things a bit more complicated for the seller, as they will have to run a formal restructure process with their employees.

This may seem a bit unnecessary, given you have already agreed to sell your business and the new owner is not hiring the existing staff. However, you are still required to present the restructure (and reasons for it) to your team members, give them time to seek advice and prepare their response, then consider it when deciding on the outcome (redundancy). Once you confirm the redundancies, you must end employment as per the notice period in the employment agreement, and pay out all entitlements.

Manage your time frames

The restructure process can take anywhere from about 8 days to 3 weeks, so you need to factor this (and notice periods) into the sale and purchase time frames. Failing to manage the timing correctly could mean you have to pay employees for their notice period etc, even when you no longer own the business!. The sale and purchase date does not neatly sever your employment obligations to your employees.

In all cases, sellers need to meet the legal obligation to follow fair and reasonable process, as they would in any other restructuring and redundancy situations.

Find out more about the restructure and redundancy process.

Obligations when buying

The good news for someone buying a business is there is less to worry about, as you are not the existing employer.

You can choose whether to hire the existing employees (if they are not vulnerable workers), and can review the terms of their individual employment agreements, interview employees for positions, and decide to bring some (or none) of the existing team into the new business.

If you do decide to hire, new offers of employment must be provided with fair and reasonable time for people to review them before you take over as owner of the business.

As mentioned before, employment can either start fresh (using trial or probation periods, if desired), or be a new period of employment.

When should I tell my team I’m selling?

There’s no legal obligation to inform your employees of the impending sale of the business until the sale and purchase documentation has been signed. So, it’s up to you when you let your team members know.

There are some advantages to letting your people know ahead of time, such as:

  • You are being a transparent and open employer.
  • Your employees are prepared.
  • You can get your team to work on projects that support the sale.

There are some disadvantages, too:

  • People may get spooked and leave the business, which then causes resourcing problems.
  • The sale may not eventuate.
  • Confidentiality issues - word may get out that you are selling and affect the value the company. 

If you are working with a business advisor or broker to sell the business, they will be able to help with guidance on when is the best time to tell your employees.