What Happens to Employees in a Sale of Business?

If you are a small or medium-sized business and are planning on a sale of business, you should understand what will happen to your employees. Knowing the employment rights of existing employees and the effect of a business transfer is essential as a current employer. This article will outline some of the key considerations you should bear in mind, including your legal obligations.

Overview

Suppose you are selling a small or medium-sized business. In that case, the number of employees you have tied to an employment contract will affect your business sale negotiations. It can influence the purchase price and how attractive your business looks to potential buyers, as well as the value of your business. In addition, having existing employees can help the new business owner save time and money in recruiting. 

Generally, the law on what happens to employees is relatively straightforward. Usually, employment contracts are transferred to the business’s new owner, and the employees will continue with the same contract terms.

However, there has been a recent change in the law. The government introduced the Transfer of Undertakings (Protection and Employment) Regulations (otherwise known as the ‘TUPE’) in 2014. This article will explain your responsibilities under the TUPE.

What Does the TUPE Do?

The TUPE applies when a business is sold to a new owner who will operate with the same identity. This means that the business will be run in the same way as before the purchase.

The TUPE sets out that:

• an employee’s job is transferred to the new company run by the new owner;
• the terms and conditions within the employment contracts stay the same; and 
• the employees continue to be employed by the company as if ownership had not changed.

What if the Buyer Does Not Want to Take All the Employees?

It may be the case that the potential buyer does not want to take all of the employees. For example, the potential buyer may want to recruit new employees, or they might want to reduce the number of employees.

If the new owner wants to do this, they will have to seek a settlement with the employee representatives for any employees they do not want to come as part of the transfer. This can be a time-consuming process, but it is the new owner’s primary way to avoid taking on all employees. Failing to do this properly can result in you or the new owner being in breach of employment law. This can mean that you may be liable to pay compensation to the affected employees.

What Should I Do as a Seller?

As a seller, you will want to ensure that you do not breach any legal obligations. You will also want to confirm that you have informed the potential buyer about all relevant employment contracts in place.

As a result, you should:

• provide information on the employees (sometimes known as ELI or Employee Liability Information) to the new owner or potential buyer;
• consult the transferring employees and let them know what is happening; and
• make sure that you have a process for dealing with questions about redundancies after the sale of your business.

Key Takeaways

As a business seller, you will want to ensure that you are familiar with your legal obligations under the TUPE, the main law that deals with employee transfers. In particular, you should guarantee that you comply with regulations, including ensuring that there is no unfair dismissal. Failure to comply with these regulations can result in you being in breach of employment law and liable for compensation. Therefore, it is best to seek professional legal advice, especially if you are dealing with legal employee representatives.

If you need help with your obligations when selling your business, our experienced business sale and purchase lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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