Buyer beware - Business purchases present numerous traps for the unwary particularly in terms of the employment liabilities which may be transferred. In this article we consider the 'top 10' such liabilities a buyer may face when purchasing a business.
What the law says
Where a business, or part of a business, is being sold (as opposed to shares in a company) the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (TUPE) will almost always apply. The dramatic effect of this legislation can come as a nasty surprise for a buyer!
By virtue of TUPE, all employees employed in a business immediately before a sale will transfer to the purchaser automatically on their existing terms and conditions of employment, with their continuity of employment preserved and with nearly all of their existing employment rights and liabilities. It is these rights and liabilities that can cause a major headache for purchasers, in particular:
1. Ongoing disputes, disciplinary and grievance matters
Details of any employees who have been disciplined or have raised a grievance and confirmation that the Acas Code has been followed should be sought from the seller to identify whether there are any potential employment disputes in the pipeline. Where disciplinary and grievance processes are ongoing, for example at appeal stage, these will need to be completed by the purchaser which may be difficult if the disciplining or grievance officer is not also in scope to transfer. A successful appeal against a dismissal will result in an ex-employee transferring to the purchaser unexpectedly if this information is not disclosed.
Details of any on-going or threatened legal proceedings by former or current employees, such as employment tribunal claims, also need to be fully disclosed so the purchaser can form a reasonably accurate assessment of the possible liabilities stemming from employment litigation which it will inherit. These can then be dealt with through indemnities or an adjustment to the purchase price.
2. Holiday pay calculations
Recent cases to determine how holiday pay is calculated, in particular whether payments for overtime and commission should be included, have been high profile and have resulted in many employers reassessing how they should calculate holiday pay. Any historical liability for incorrectly paid holiday will transfer across to a purchaser and therefore indemnity protection would be needed where this is identified as an issue.
3. Absent employees
Details of any employees who are absent from the business, for example on maternity leave or long term sickness absence should also be sought from the seller. These individuals will transfer to the purchaser so it needs to be aware of the potential management issues it will be taking on and whether there are any potential disputes in the pipeline.
4. Equal pay issues
Differences in pay between male and female employees across similar job roles may indicate the existence of potentially expensive equal pay issues which the purchaser could inherit. This is particularly a concern when acquiring businesses or contracts directly from the public sector or which were previously carried out by a public sector body. Such issues should be addressed through indemnity protection for the historical shortfall. In addition, the purchaser will need to factor in the cost of removing the difference going forward.
5. Changes to terms and conditions
Because the purchaser inherits the transferring employees on their existing terms and conditions of employment, the purchaser is vulnerable to generous changes agreed by the seller with existing employees and taking on new employees on generous terms prior to completion. Adequate restrictions should be included in the contract to prevent this, perhaps requiring the seller to seek the purchaser's agreement for any changes other than those in the normal course.
6. Lack of immigration checks
Where an employer employs an individual who does not have permission to work in the UK there can be liability for a fine of up to £20,000 for each individual as well as for a criminal offence with a penalty of a two year prison sentence or unlimited fine (or both) unless the employer carried out specified checks on the individual prior to employment commencing. Buyers on a transfer have a grace period of 60 days after the transfer 'in which to carry out the appropriate document checks and get an excuse'. The implication is that original documents ought to be checked if the buyer is to avoid a civil penalty being imposed. Particularly where the business is in a sector which relies on migrant labour, prior due diligence will be vital and any potential liabilities discovered should be dealt with through indemnities or an adjustment in the purchase price.
7. Pension provision
Where there is an occupational pension scheme in place prior to the transfer, a purchaser must offer any employees who were members of that scheme access to a money purchase (defined contribution) scheme or a final salary (defined benefit) scheme after the transfer and must match the employee's contributions up to 6%. In addition, rights to early retirement pensions and enhanced pensions on redundancy will transfer and this can be very costly if the purchaser is obliged to provide benefits that were previously funded by the seller's scheme. While an indemnity may provide comfort, it should be remembered this is only as good as the seller's creditworthiness in the future!
8. Continuation of existing benefits
Consider what employee benefits are in place and whether these can be maintained or replicated post transfer? For example, can insurance policies regarding private medical schemes be taken over or replaced with equivalent policies by the purchaser? Some benefits may not be capable of transfer where they can only be provided by the current employer such as staff discounts or share options. If so the purchaser will be obliged to provide some sort of scheme which replicates the benefit as closely as possible. These costs should be factored in when calculating the value of the target business.
9. Reliance on restrictive covenants
If key employees transfer to the purchaser, it is important that it has protection in the event that those employees leave and go to work for a competitor. Existing restrictive covenants in the employee's contracts of employment will transfer but may no longer be appropriate to protect the legitimate business interests of the purchaser, for example if the business has changed. For this reason the restrictive covenants should be reviewed and if necessary new covenants entered into following transfer. There can also be issues relating to enforcement if a key employee leaves just before the purchaser takes over so warranty protection should be sought.
10. Trade union recognition
If the business recognises a trade union this can remain in place following the transfer providing the relevant bargaining unit is still identifiable. If a union is recognised, the purchaser needs to know in respect of what matters and on what terms. In addition the purchaser should consider whether there has been any historical industrial unrest within the business as the level of trade union activity/militancy is relevant to the running of the business going forward. This could be particularly relevant where the business will be integrated with an existing non-unionised workforce.
Implications for buyers
With so many potentially unknown liabilities for the purchaser of a business, comprehensive due diligence prior to any sale is a must. Where employment risks are identified a purchaser can protect itself (and save significant future costs) by taking timely employment law advice to ensure that sale documentation contains adequate provisions to mitigate those risks.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.