Wynn Williams - Articles | Avoiding costs of a business sale or restructure | Amanda Douglas

Introduction

If you sell or transfer your business, you need to consider the employment consequences of selling the business or transferring the business to another entity. Many employers do not think about this. However, when you do sell your business to a third party, or even transfer it to an associated entity, you trigger the restructuring and redundancy provisions of the Employment Relations Act 2000 ("ERA 2000"). If you don’t have the right measures in place, this can be costly – even where the employees continue in their same roles with the new employer or entity.

Employee Protection Provisions
The ERA 2000¹ requires employment agreements to contain employee protection provisions. These provisions must set out a process to be followed by the employer in negotiating with a new employer about the restructuring of a business, and to protect employees in a restructuring.

What is a "Restructuring"?

"Restructuring" includes "selling or transferring the employer's business, or part of it to another person". This includes the sale of a business to a new purchaser and also the transfer of a business to another entity that may be related to the original employer. A restructure triggers the requirement to follow the employee protection provisions, contained within the ERA 2000 and your employees' employment agreements.

When are Steps Required?

You need to consult with employees about the restructuring of your business, before it occurs. Whilst the employer has the ultimate right to decide about restructuring matters, you should give the employees an opportunity to have their say on the restructuring proposal, as well as the impact that it may have on their employment. Even where the planned transfer of employees may happen at a date after the business is sold or restructured, consultation still needs to take place prior to the restructure taking effect. It also needs to take place before all final decisions on the transaction have been made. Where company resolutions are made, consultation needs to occur prior to the passing of final resolutions.

Steps Required

You will need to look at both the provisions of the ERA 2000 and the specific restructuring and redundancy provisions contained within employees' employment agreements. Consultation needs to occur, and discussions should take place with the new employer early in the process, and before decisions are made.

If consultation takes place when it is proposed to transfer the employees to a new entity or new employer and after the transaction, itself, takes place, the employees would not be able to have an input into the proposed new structure.

Redundancy and Notice Periods

If the employment agreements provide for redundancy payments, these clauses will be triggered in a sale or transfer of a business where employees will also be transferred. In these scenarios, the original employer is no longer requiring their services.

The employees will also need to work out their notice period or receive payment in lieu of that notice, if the employment agreements provide for payment in lieu. This can result in a significant cost for an employer as such payments will need to be made to every employee in the organisation affected by the restructure. Across all employees, this can add up to a large amount. This is often a cost of a restructure or sale that is not taken into account when making decisions as to whether to take those steps in the first place. It is essential that these matters are carefully considered, at the infant stages of any restructuring or sale process.

Technical Redundancy

If there is a clause providing for technical redundancy in the employment contract, it may prevent the employer having to pay redundancy and/or notice period payments.

A technical redundancy clause will usually state that, if the employee's duties are changed or the operations moved to another legal structure, the employee will not be considered to be redundant. It will then state that the employee will not be entitled to any redundancy entitlement in those situations. This is usually restricted to situations where the employee is offered alternative employment with the employer or a new employer / owner on the same terms and conditions, which are generally no less favourable then their current conditions.

This clause covers a scenario where the employer effectively changes (due to restructure or sale of the business), but the employee keeps their job and continues in the same role for the other entity. It is important to have a technical redundancy clause in your employment agreements to ensure the smooth transition of employees into a new structure or following the sale of a business.

Potential Issues

As outlined above, without a technical redundancy clause, the employee will be technically redundant and you will be liable to pay any redundancy payments provided for in the employees' employment agreements and meet notice period requirements.

There is also the risk of having a personal grievance raised against your business if you do not recognise your obligations in these scenarios and so do not follow the required procedure. This can add to the costs.

Conclusion

By law, you need to have restructuring and redundancy provisions in your employment agreements.

In the above scenarios, restructuring and redundancy provisions will be triggered, requiring payment of any applicable redundancy payments to your employees. You will also be obliged to pay out the notice period to employees if they have not been told of the decision to restructure and been able to work out the notice period before the restructure takes effect. This is the case even if the employees are continuing their employment, except under a different employer. However, if you have a technical redundancy clause in your employees' employment agreements, this can overcome these difficulties.

We recommend that you check your employment agreements to ensure that you have, both, the clauses required by law, and the clauses that will ensure that any changes to business operations can run smoothly.

You should also obtain advice on the procedures required in these scenarios well before you embark on any restructure or sale of your business. This will ensure that you do not become liable for further costs.

¹ Subpart 3 of Part 6A of the Employment Relations Act 2000

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