Transfer of Business in Australia: Employment Law Issues for Buyers and Sellers

Buying or selling a business often looks straightforward until the employment issues surface. A buyer assumes the staff will simply move across, a seller assumes employee entitlements stop on settlement, and both sides rely on the sale contract without checking what workplace laws actually require. That is where expensive mistakes happen.

A transfer of business can affect continuity of service, annual leave, personal leave, redundancy exposure, unfair dismissal risk and who pays which employee entitlements. It can also trigger disputes if staff are told the wrong thing before you sign, or if the sale documents do not line up with what happens in practice on handover day.

This guide explains what a transfer of business means in Australia, when employee service carries over, what buyers and sellers should agree before signing, and the common traps that catch founders and SMEs during an asset sale, business purchase or internal restructure.

Overview

A transfer of business does not just involve moving customers, equipment and goodwill. It can also mean workplace obligations follow the business activity, especially where employees move to a new employer and keep performing substantially the same work.

• Whether there is a transfer of business for Fair Work purposes
• Which employees will be offered employment by the buyer
• Whether prior service will count for leave, notice, unfair dismissal and redundancy purposes
• Who will pay accrued annual leave, long service leave and other entitlements
• Whether the existing modern award, enterprise agreement or workplace policy position will change
• How employee communications and consultation will be handled before settlement
• What the sale agreement says about indemnities, warranties and employee records

What Transfer of Business Means For Australian Businesses

A transfer of business can happen when one employer stops employing a worker and another employer employs that same worker within a short period, in connection with the transfer of business assets or work. The label used in the deal documents does not decide the issue. What matters is the substance of what is transferred and what work the employee does after the change.

In Australia, this concept often comes up in asset sales, outsourcing arrangements, insourcing, franchise changes, corporate restructures and some service contract transitions. Share sales can raise different issues because the employing entity may stay the same, even though ownership changes.

When does a transfer of business usually arise?

The Fair Work framework generally looks at whether there is a connection between the old employer and new employer, and whether the employee becomes employed by the new employer within a relevant period and performs substantially the same work. A connection may exist where:

• assets are transferred, such as plant, equipment, stock or intellectual property used in the business
• work or outsourcing arrangements are transferred between related or unrelated entities
• the new employer owns or has the beneficial use of assets that relate to the transferring work
• the employers are associated entities

This matters because prior service may count for some employment rights, even if the buyer and seller privately agree that they want a clean break. A contract between businesses cannot simply remove statutory employee rights.

Why founders and SME owners need to care

The main risk is assuming employment obligations stay neatly on one side of the deal. In practice, workers may claim continuity of service, argue they were dismissed unfairly, or seek payment of entitlements that the sale documents did not clearly allocate.

For buyers, the concern is usually inherited risk. You may end up with staff whose previous service counts towards notice, unfair dismissal eligibility or redundancy calculations. You may also inherit practical issues such as underpayment risks, policy inconsistencies and missing employment records.

For sellers, the concern is often exit cost and post-sale liability. If employment ends at settlement, you may need to pay termination-related entitlements. If employees transfer, you still need clarity on what is paid out, what carries over and what the buyer will reimburse if a historical issue emerges later.

Employee entitlements do not all work the same way

One of the most confusing parts of a transfer of business is that different entitlements are treated differently. There is no single rule that covers everything.

Depending on the facts, annual leave may transfer or be paid out, personal leave is often treated differently to annual leave, long service leave depends heavily on State or Territory legislation, and redundancy treatment can turn on whether the buyer recognises prior service and whether an offer of employment is made on substantially similar terms. This is where founders often get caught, because they rely on a broad statement like “staff transfer across” without checking each entitlement separately.

Workplace instruments also matter. Employees may be covered by a modern award, enterprise agreement, employment contract, bonus plan or workplace policy that affects what must happen during the handover. Before you sign a contract, match the legal position against the real workforce arrangements, not just the payroll summary.

Legal Issues To Check Before You Sign

Before you sign, the buyer and seller should map out the workforce position employee by employee. General drafting is rarely enough. The sale documents should reflect who is staying, who is leaving, who is being offered new employment and who bears the cost if something was missed.

1. Identify the transaction structure

The first question is whether you are dealing with a share sale, an asset sale or another form of business restructure. In a share sale, the employing entity often remains the same, so employment usually continues without termination by reason of the sale itself. In an asset sale, employees are commonly terminated by the seller and may be offered employment by the buyer, which is where transfer of business issues become more active.

This distinction affects drafting, risk allocation and the employee communication plan. It also shapes whether continuity of service is automatic, likely or unlikely.

2. Decide which employees are transferring

Not every worker attached to the business will necessarily move. The parties should identify:

• employees the buyer must take on as a condition of the deal
• employees the buyer may choose to offer roles to
• employees the seller will retain in another part of its business
• fixed term, casual, part time and full time workers
• contractors who may in fact be employees
• key managers whose contracts have change of control or restraint clauses

Misclassifying a worker is a common problem. Before you classify someone as a contractor, check whether the arrangement reflects the real legal position. If a person is really an employee, the buyer may inherit a problem that should have been identified in employment due diligence.

3. Work out whether prior service will be recognised

This point needs express attention. The buyer may choose to recognise prior service for some purposes, and the law may require service recognition for others if there is a transfer of business. The documents should state whether prior service will count for:

• annual leave
• personal or carer’s leave
• long service leave
• notice of termination
• redundancy pay
• eligibility periods for unfair dismissal or other workplace rights

The parties also need to consider whether there is a break in service, whether offers are made immediately, and whether the new role is substantially similar. Small factual differences can change the outcome.

4. Allocate responsibility for accrued entitlements

One of the most negotiated issues in a transfer of business is who pays what. The answer depends on the type of entitlement, the transaction structure and the deal terms.

The agreement should deal clearly with:

• accrued annual leave
• accrued but untaken long service leave, where applicable
• personal leave treatment
• bonuses, commissions and incentive payments
• superannuation compliance issues
• expense reimbursements
• any payroll tax or tax treatment questions, which should be reviewed with an accountant or tax adviser

If the seller is paying out some entitlements at settlement, the agreement should say exactly how those amounts are calculated. If the buyer is taking employees on with transferred entitlements, the purchase price adjustment and indemnity wording should match that commercial outcome.

5. Review awards, enterprise agreements and contracts

Employees do not work only under the National Employment Standards. They may also be covered by a modern award, enterprise agreement or individual contract terms that affect hours, overtime, classification, allowances, restraint clauses, bonuses or termination rights.

Before you rely on a verbal promise about “same terms”, compare the current and proposed arrangements in writing. If the buyer intends to offer new contracts, those contracts should be checked against minimum legal standards and any workplace instrument that continues to apply.

6. Check consultation and communication obligations

Some awards and enterprise agreements require consultation where there is a major workplace change. A business sale can trigger those obligations. Even where formal consultation rules are limited, poor communication creates practical and legal risk.

The buyer and seller should agree:

• who tells staff about the transaction
• when announcements will be made
• what is being offered to transferring employees
• how questions about service recognition and leave will be answered
• how customer-facing or key operational staff will be managed during handover

Mixed messages are a common cause of disputes. Employees often rely on informal statements made by founders or managers before settlement, especially about job security and continuity of benefits.

7. Conduct employment due diligence properly

A buyer should not stop at reviewing payroll totals. Employment due diligence should test whether the workforce position is legally and operationally sound.

That usually includes checking:

• employment contracts and any side letters
• modern award coverage and classifications
• leave balances and records
• underpayment or wage compliance issues
• superannuation records
• independent contractor arrangements
• existing disputes, complaints or investigations
• workplace policies relevant to conduct, leave, safety and flexible work

If a seller cannot produce reliable employment records, the buyer should treat that as a risk issue, not just an admin problem.

8. Draft the sale agreement to match the real risk

The transfer of business clause should not be left as a short schedule item. This part of the agreement often needs detailed provisions on offers of employment, timing, employee acceptance, termination by the seller, apportionment of entitlements, warranties about compliance and indemnities for pre-completion breaches.

Buyers commonly ask for protections against historical underpayments, sham contracting claims and record-keeping failures. Sellers usually want limits on post-settlement claims where the buyer changes roles, hours or conditions after completion. Both sides should make sure the legal drafting matches the operational handover plan.

Common Mistakes With Transfer of Business

The most common transfer of business mistakes happen when the deal team focuses on the purchase price and leaves workforce issues until the week of settlement. Employment risk then becomes urgent, expensive and hard to unwind.

Assuming employees transfer automatically

Employees do not always move across just because the business is sold. In many asset sales, the buyer needs to make offers of employment and the employees need to accept them. If this process is handled late or poorly, the seller may be left with unexpected termination liabilities.

Treating all entitlements the same

Annual leave, personal leave and long service leave can operate differently. Redundancy treatment can also change depending on whether the buyer recognises service and whether there is a transfer of business. A broad spreadsheet entry called “leave liabilities” is not enough.

Forgetting about old underpayment risk

A buyer may not become legally responsible for every historic issue in every scenario, but underpayment problems can still affect value, staff retention and post-completion disputes. If staff transfer and continue doing the same work, historical mistakes often become a live commercial issue even where the legal allocation is being negotiated.

This is particularly relevant for hospitality, retail, healthcare, logistics and other sectors with award complexity, overtime patterns and allowance issues.

Missing consultation obligations

Businesses sometimes assume consultation only matters during redundancies. Some awards and enterprise agreements require consultation about major change, including changes linked to a sale or outsourcing arrangement. Failing to follow the process can lead to claims even where the commercial transaction itself proceeds.

Using generic new employment contracts without checking the context

A buyer may want all transferring staff on its standard contracts. That can be sensible, but it should not be done blindly. New contracts need to work with any applicable award or enterprise agreement, preserve any service recognition commitments that have been made, and avoid terms that create conflict with the sale agreement.

Not documenting verbal assurances

Founders often speak directly to staff during a sale. Promises about “no change”, “all leave transfers”, or “your job is secure” can create later arguments if the written documents say something else. Before you rely on a verbal promise, put the actual position in written communications reviewed against the transaction documents.

Ignoring post-completion integration issues

The legal risk does not end on settlement day. After completion, the buyer still needs to manage onboarding, payroll migration, policy rollouts, position descriptions, visa checks where relevant, and consistency with any recognised prior service. Errors in the first few pay cycles can undo a well-negotiated deal.

FAQs

Does a transfer of business always happen when a business is sold?

No. Whether there is a transfer of business depends on the legal and factual connection between the old and new employer, the timing of re-employment and whether the employee performs substantially the same work. A sale of shares and a sale of assets can produce very different outcomes.

Do buyers have to take on all employees?

No. A buyer may choose which employees to offer employment to, unless the deal terms say otherwise. But that choice affects redundancy exposure, service recognition issues and handover planning, so it should be considered early.

Who pays accrued leave when employees transfer?

There is no single answer. The law and the sale agreement both matter. Some entitlements may be paid out by the seller, others may transfer to the buyer, and long service leave often needs separate review under the relevant State or Territory rules.

Can a buyer refuse to recognise prior service?

Sometimes a buyer can limit service recognition by contract for certain purposes, but not where the law requires recognition because a transfer of business applies. Even where a buyer does not voluntarily recognise service for all purposes, the practical and legal effect needs to be checked carefully before you sign.

What is the biggest employment risk in a transfer of business deal?

For many SMEs, the biggest risk is poor allocation of employee liabilities. That includes unclear drafting on entitlements, missed award obligations, underpayment exposure and inconsistent communications to staff before settlement.

Key Takeaways

• A transfer of business can affect continuity of service and employee rights, especially where staff move to the buyer and perform substantially the same work.
• Buyers and sellers should check the transaction structure, identify which employees are transferring and confirm how prior service will be treated.
• Accrued entitlements need to be dealt with specifically, not grouped together under a generic liability line.
• Employment due diligence should cover contracts, awards, leave records, contractor arrangements, superannuation and any underpayment risk.
• The sale agreement should clearly allocate responsibility for offers of employment, entitlements, warranties, indemnities and post-settlement claims.
• Staff communications matter. Informal promises can create disputes if they do not match the legal documents or the final handover process.

If you want help with sale agreement terms, employee entitlement allocation, employment due diligence, or staff transfer documents, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.