Selling a small business, like a café or restaurant, is an exciting step for any business owner. It often represents the culmination of hard work and the start of a new chapter. However, amidst the negotiations, valuations, and legalities, one critical aspect can sometimes be overlooked—employee entitlements.
If you’re preparing to sell your business, understanding how to handle employee entitlements is crucial to ensuring a smooth transition for everyone involved. This blog will provide a practical guide for navigating this process, with insights into what entitlements mean, how they’re calculated, and how they should be managed during a sale.
Why Employee Entitlements Matter During a Business Sale
Employee entitlements represent a legal obligation to your team. They include various types of payments such as accrued annual leave, long service leave, personal leave and redundancy pay. When selling your business, these obligations don’t simply disappear—they need to be addressed either by you (the seller), the buyer, or a combination of both. Mismanaging entitlements can lead to disputes, financial penalties, and even damage to your professional reputation.
By taking the time to understand and calculate entitlements properly, you can ensure fairness for your employees and avoid unnecessary legal complications during the transition.
What Are Employee Entitlements?
Employee entitlements refer to payments or benefits owed to employees under Australian employment law (primarily the Fair Work Act 2009) and any applicable awards, agreements, or contracts. Here’s a breakdown of the most common entitlements you need to consider:
1. Accrued Annual Leave
This includes any unused paid leave that employees are entitled to at the time of sale. If an employee’s contract ends, any unused annual leave must be paid out. If they transfer to the new owner, this accrued leave typically carries over.
2. Long Service Leave (LSL)
Long service leave applies to employees who have worked for an extended period with the same business (typically 10 years, but as few as 5–7 years in some states). Both full entitlements and pro-rata entitlements need to be calculated.
For example:
- Full entitlement might include 8.67 weeks of paid leave after 10 years.
- Pro-rata entitlement applies to employees with significant tenure but less than the required full entitlement period, depending on state laws.
3. Outstanding Wages
Any unpaid wages, commissions, penalty rates, or overtime owed to employees must be settled at the time of sale.
4. Redundancy Pay
For businesses with 15 or more employees, redundancy pay applies if staff are terminated due to the sale. Small businesses (fewer than 15 employees) are generally exempt. The redundancy payment is based on an employee’s length of service.
5. Payment in Lieu of Notice
If employment is terminated without the required notice period, employees must be paid for this time instead.
6. Sick Leave
Unused personal leave is generally not paid out unless explicitly stated in the employee’s contract or award.
Understanding these components will help you determine what entitlements apply to your workforce during the sale.
Key Steps to Manage Employee Entitlements When Selling
To effectively handle employee entitlements, follow these actionable steps:
1. Evaluate Employee Entitlements
Start with a clear assessment of what each employee is owed. Review their employment records, including time worked, leave balance, and applicable awards. Online tools like the Fair Work Ombudsman’s Pay Calculator and Leave Calculator can help simplify this process.
For instance, if you’re selling a café under the Hospitality Industry (General) Award 2020, check both the award requirements and the National Employment Standards (NES). This will ensure accuracy and compliance.
2. Clarify the Sale Agreement
The sale agreement between you and the buyer should explicitly address who is responsible for paying out employee entitlements. There are two main scenarios to consider:
- Employees Transfer to the Buyer
If employees remain with the new owner, their accrued entitlements (like annual leave and LSL) typically transfer to the buyer. The sale price may be adjusted to reflect this liability. Under Fair Work law, the buyer usually inherits the employees’ service continuity, which ensures their rights are preserved.
- Employees Are Terminated
If employees are not retained by the new owner, you (the seller) must terminate their employment and pay out all entitlements owed, including redundancy if applicable. These payments must be processed before the business changes hands.
3. Notify and Communicate with Employees
Transparency with your team is critical. Inform them of the sale as early as possible, outlining their options and how their employment may be affected. If termination is required, provide the appropriate notice periods based on their tenure:
- 1–3 years of service → 2 weeks’ notice
- 3–5 years → 3 weeks’ notice
- 5+ years → 4 weeks (add 1 extra week if the employee is over 45 years old).
Make sure employees receive their final payslips, which should detail all entitlements paid.
4. Calculate and Pay Entitlements
Once responsibilities are clarified, calculate entitlements accurately and ensure payments are processed promptly. Payments must comply with tax (PAYG) and superannuation requirements. If employees transfer to the buyer, provide the new owner with clear records of accrued entitlements.
5. Address Long Service Leave
Handling long service leave (LSL) requires special attention. If employees transfer to the new owner, their LSL entitlements generally carry over. If they’re terminated, you must pay out any qualifying LSL amounts. Refer to state-specific rules for exact thresholds, as they vary.
For example:
- NSW → Employees with 5+ years of service may qualify for pro-rata LSL if terminated.
- VIC → Employees with 7+ years of service are eligible for pro-rata LSL for most termination scenarios.
6. Seek Professional Advice
Employee entitlements can be a legally complex area. Engaging a professional—such as an accountant, lawyer, or HR consultant—ensures compliance with employment law and avoids costly mistakes.
Common Challenges and How to Overcome Them
1. Disagreements About Entitlement Responsibility
To avoid disputes, ensure the details are clearly written into the sale document. Both parties should understand their obligations before signing.
2. Overlooking Long Service Leave (LSL)
Avoid surprises by reviewing state-specific LSL laws early in the sale process. The rules differ across Australia, making it easy to miscalculate or overlook eligibility.
3. Rushing the Process
Take the time needed to calculate entitlements with precision. Rushed calculations can lead to errors, requiring costly adjustments post-sale.
Final Steps for a Smooth Transition
Selling a business that employs staff comes with significant responsibility. Properly managing employee entitlements is an important step in facilitating a smooth transition for your team, the buyer, and yourself. By following the outlined steps, you can protect yourself from legal challenges and ensure employees receive their well-deserved benefits.
If you’re selling a café or other small business, handling entitlements doesn’t have to be overwhelming. With careful planning, clear communication, and professional advice, you can complete the sale confidently.
Need help with the details? Speak to an employment law expert or accountant for tailored guidance. When it comes to your business, thorough preparation is always worth the investment.
