Employment Issues in Mergers and Acquisitions

Mergers and acquisitions (M&A) are complex operations that have extensive legal, financial and operational considerations. Amongst these considerations, labour relations and employment regulations are an often-overlooked source of potential legal problems. Conducting thorough due diligence on employment matters is a crucial step in any acquisition or merger with another business. This article looks at employment issues in mergers and acquisitions in Australia.

Understanding mergers and acquisitions

The term “Mergers and Acquisitions” (M&A) refers to the process of consolidating companies. This consolidation can take different forms: one company acquiring and absorbing another entirely, companies merging to form a new entity while discontinuing the original entities, or several companies combining some of their business assets into a new separate entity. In M&A transactions, a company may acquire some or all of another company’s major assets, make a tender offer for its stock, or even initiate a hostile takeover. This article predominantly applies to acquisitions where one entity absorbs either part or the whole of another entity.

Due diligence

Prior to embarking on a merger or acquisition, all the involved companies need to complete due diligence. When a company acquires another entity or the assets of another entity, it is vital that the purchaser review all documentation that relates to the status of employees involved in the transaction. Only when the purchaser has all the information can they make an informed decision about the best way to approach employment issues. For instance, a business may have recently gone through corporate restructuring, which can provoke complex employment issues that significantly impact the viability and profitability of a proposed merger or acquisition. The purchaser may discover information about the workforce that prompts them to offer a lower purchase price or smaller financial investment, insist on indemnities in the contract, or choose to walk away from the deal altogether.

The types of employment issues that might impact a merger or acquisition include:

• pending and ongoing employment litigation;
• existing employment contracts;
• accrued statutory entitlements;
• redundancy entitlements and obligations around change management;
• work health and safety compliance and workers’ compensation claims;
• senior executive liabilities (such as golden parachutes and restraint clauses);
• union membership and industrial activity;
• employee entitlements under short-term and long-term incentive schemes;
• industrial coverage and underpayment exposures;
• independent contractor issues;
• workplace culture issues;
• reference checks on key personnel; and
• report on the transfer of business obligations under enterprise bargaining agreements.

Additionally, a purchaser may need transitional legal support following the acquisition. The purchaser may need to update workplace policies and employment contracts, seek advice on workforce retention strategies and termination procedures, and devise executive incentive packages.

Transfer of employee entitlements

Under the Fair Work Act 2009, after a transfer of a business, a new employer must recognise some of the entitlements that an employee had with the previous employer. For instance, an employee’s service before the acquisition is considered when calculating entitlements such as sick and carer’s leave, parental leave and requests for flexible working arrangements. However, there are other entitlements that the new employer may not have to recognise, such as long service leave, annual leave, redundancy, unfair dismissal and notice of termination.

Redundancy

A new owner who is not a legally associated entity of the previous owner can choose to disregard an employee’s service for redundancy purposes. In that case, the previous owner will have to pay out the employee’s redundancy upon termination. Notably, an employee is not entitled to a redundancy payout if they reject the new employer’s employment offer when:

• the terms of employment are similar to the old position;
• the offer recognises the employee’s previous service for redundancy pay; and
• there would be a transfer of employment if the employee took the position.

Annual and long service leave

With the transfer of a business, the new employer can either agree to carry over accumulated annual leave or if they refuse, the old employer must pay out the leave. Similarly, the new employer does not have to acknowledge an employee’s tenure for long service leave purposes unless the employee is entitled to transfer the balance under a registered agreement.

Unfair dismissal

On occasion, a new employer does not have to recognise an employee’s previous service when it comes to unfair dismissal. This applies if the worker is a transferring employee, the businesses are not associated entities, and the employee is notified in writing before the new employment starts that the service will not be recognised.

Termination

When a business is transferred, it ends the employee’s employment with the old employer. Therefore, the old employer must give notice of termination or payment in place of notice. If the transfer happens before the end of the notice period, the old employer must pay the remainder of the notice period.

The importance of due diligence on employment issues during a merger or acquisition cannot be understated. At Go To Court Lawyers, we offer many services in the area of labour and employment relations, including due diligence for mergers and acquisitions. Please contact our employment law team today on 1300 636 846 for any legal assistance.