When selling a business how do you deal with the transfer of staff?

A pivotal question for businesses of all sizes following a sale is what happens to the staff when the business changes ownership and what must the employer consider.

The staff often make up a significant proportion of a company’s annual costs, and this is even more so the case for small businesses. As such, the issue of the number of employees, their rights and their remuneration becomes key when a potential buyer weighs up whether the purchase of the business is a viable option.

There are two main ways a business can be sold, and we will address the implications of each for their staff below.

Share sale

In the event that a business is sold by way of a share sale then essentially control of the company passes from shareholders to a new shareholder by way simply of transferring these. In this scenario, its legal status, the company, directors and contracts all remain the same and the employees’ contractual relationship is unaltered. It’s just the ownership that changes.

Asset purchase

If a business is sold by way of asset purchase, this involves the transfer of certain activities or assets related to a business and does not include the sale of the business entity that owns the assets. This may be where the buyer plans to operate the business in largely the same manner as before. For this purpose, the seller is the entity that owns and operates the business, such as a limited company. An asset purchase may be more attractive to a buyer as it allows them to identify the assets they wish to purchase and the liabilities they do not want to take on.

In this instance, it will almost certainly involve the application of the Transfer of Undertakings (Protection and Employment) Regulations (TUPE).

What is TUPE and when does it apply?

TUPE applies to employees of businesses of all sizes in the UK. The implications are that when a business changes owner, its employees may be protected under the Transfer of Undertakings (Protection of Employment) regulations (TUPE). Giving them certain rights, protection from dismissal and changes that unfairly prejudices them.

What if the company is overseas and only some staff operate in the U.K.?

The business could have its head office in another country, but the part of the business that’s transferring ownership is in the UK then TUPE will still apply when:

  • the employees’ jobs usually transfer over to the new company; so
  • their employment terms and conditions transfer; and
  • continuity of employment maintained

What happens during a TUPE transfer?

Every TUPE transfer may be different, but the usual process involves the following:

  1. the old and new employers identify who is affected by the transfer
  2. the old and new employers inform, and in some cases consult, employees who are affected by the transfer
  3. the old employer provides the new employer with information about the employees who are transferring, for example their age and identity
  4. the employees who are transferring transfer to the new employer along with their employment contracts and length of service

What about poorly performing staff, and can you make redundancies?

The seller will often be keen to understand the roles and performance of members of staff that are being transferred to their new business. There may be concerns over staff that are not performing well. In this scenario, both the seller and buyer must proceed with caution before dismissing staff or making redundancies, as it could leave them open to claims for unfair dismissal.

As such, both the seller and the buyer must retain a process of consultation with the remaining employees and adhere to a fair process if any redundancies are to be made.

Dismissals may not be deemed automatically unfair if the reason for termination was “economic, technical or organisational”. Of course, the reason must be legitimate and not simply that the incoming employer perhaps cannot afford to fund the current employment contracts.

If the buyer does not want to take on all of the employees, which could be for various reasons not necessarily related to poorly performing staff, the easiest way to avoid any problems (and most common) solution is to use “settlement/compromise agreements”. These are essentially redundancy packages that employers can offer to employees making them fully aware of their statutory rights under TUPE. The employees can take these agreements to an independent legal advisor and seek advice on the rights that they are giving up in return for the redundancy package. Provided that all parties agree, the transaction can proceed without the terminated employees transferring. This process is however time consuming and costly and must be done ideally before the sale

What are the consequences of getting it wrong, and who is liable, the seller or buyer?

In the event that an employer fails to comply with their duty to consult and inform about a transfer when managing TUPE, they could face severe penalties. For example, an employer could be ordered to pay compensation to each affected employee of up to a maximum of 13 weeks’ pay each.

If an outgoing employer fails to supply the necessary information to the incoming employer, the new employer can also apply to the tribunal for compensation. This penalty is paid to the new employer but is calculated on the basis of a minimum award of £500 for each employee whose information was incorrect or not provided at all. There is no maximum cap, so again awards can be expensive.

If the new employer seeks to amend the contracts is this acceptable?

A unilateral variation – so an amendment not agreed by the employee would be a breach of contract and TUPE regulations. If the term is putting the employee at a disadvantage; it’s a detriment or discriminatory the new employer would face contractual or an unfair dismissal claim.

It could be that it makes changes across the structure but then it must follow a fair and transparent redundancy process.

In the event that an employee feels they have been forced to resign or it’s terms amended unfavourable following a transfer, they may be able to complain to an employment tribunal and seek an award.

Buyers and sellers need to ensure they understand the regulations and process, carefully document all employees and contract terms; follow a fair process and advisable to have consultations early to avoid problems.

What if a new owner has current staff already and wants to align everyone’s contracts?

Again, under TUPE rules this is not possible if amending the transferring staff terms is unfavourable and not consented too. As such consultation and agreements are essential.