Employee Entitlements
Employees are an integral part of any practice, especially non-professional staff who are the first face patients see entering the practice or speak to whilst booking appointments.
Long serving employees are usually regarded as enhancing a practice and its goodwill. Purchasers will likely seek to engage the employees as transferring employees from the settlement date, as compared to not engaging them – non-transferring employees.
Purchasers can select the employees they require as transferring employees. Both vendors and purchasers need to ensure their dealings with employees and their entitlements are also Fairwork compliant!
Fully Disclosed Figures
Part of any practice sale/acquisition due diligence for purchasers and vendors is to ensure the Employee Entitlements (EE) are fully disclosed. Expect to disclose figures for accrued long service leave (seven years or more), contingent long service leave (four to seven years), annual leave and personal/carer’s/sick leave.
Figures for practices with a number of long servers who have not taken all their accrued sick leave over the years, let alone their long service leave and/or annual leave, are likely to be high. This can cause concern during due diligence especially when a party has not been properly advised or fully appreciated the magnitude of the EE liability figure.
So, how is this efficiently handled?
An Example
Dr P is purchasing Dr V’s practice for $750,000.00. There are 3 long serving employees and 1 employee who has been at the practice for 4.5 years.
Dr P wishes to take the 3 long servers as transferring employees but Dr P elects that the 4.5 year employee will be a non-transferring employee. That employee will cease service at settlement and all owed entitlements will be paid out directly by Dr V.
The 3 long serving employees have taken most of their annual leave and long service leave, but hardly any sick leave which has accrued to $40,000.
What the sale contract states:
The sale contract states that Dr P is responsible to pay the sick leave when it becomes due. But, the sick leave liability may never become a live liability as the transferring employee may resign from the practice a few weeks after settlement (and sick leave is not payable upon termination).
Dr P and Dr V should nevertheless reach a fair agreement and the appropriate allowance should be made.
The sick leave quantum was accrued on Dr V’s watch, so Dr V should agree to allowing and adjusting a percentage of the sick leave quantum in favour of Dr P as a deduction from the purchase price (at settlement).
How it may look in practice:
As this is an unknown factor, the protocol is that Dr V and Dr P will share the commercial risk for example; at 50/50, $20,000 will be deducted from the purchase price, at 25/75 $10,000 will be deducted from the purchase price.
Dr P then takes a transfer of the live sick leave liability after settlement and pays the employee the necessary sick leave as and when that employee needs to take the leave.
This is called sharing the commercial risk because at the time of settlement no one is to know how much sick leave, if any, a particular employee will need to take during their employment.
Speak with your Aintree Group Lawyer:
The adjustment of accrued long service leave is uncomplicated. The fair adjustment of contingent long service leave has its idiosyncrasies, e.g., the opening of trust accounts for nominal time periods prior to accruals turning into live liabilities can be burdensome.
An agreed specific adjustment is best negotiated between the parties so that the matter is closed at settlement. Get in touch with your Aintree Group Lawyer to discuss.
It Isn’t One-Size-Fits-All
Whilst the adjustment of accrued long service leave is uncomplicated, the fair adjustment of contingent long service leave also has its idiosyncrasies. Get in touch with Aintree Group Legal today to discuss these.
Vendors:
- What are the employee dates of commencement of service?
- What are their days/hours worked per week?
- What is their rate of remuneration?
- Detail their long service leave, annual leave and sick leave figures – accept that there will need to be allowances at settlement in the purchaser’s favour.
- Always keep your employee records updated and expect to provide the figures early to the purchaser and to warrant the figures are true and accurate.
Purchasers:
- Be mindful as to how you treat your employees, it can be a stressful time for them too.
- Ensure your lawyer asks the proper due diligence EE questions.
- Make sure you and your accountant are comfortable with the EE figures and the adjusted allowances in your favour.
- If EE figures are not readily forthcoming, query why? This is likely a red flag.
The due diligence process surrounding EEs needs to be thorough to ensure purchasers have a clear picture of their transferring employees EE status and a purchaser is not burdened with unwarranted expense in the future.
If you have any questions about your due diligence, get in touch with your Aintree Group adviser today.
About Julian Whitehead
Assisting with practice sales and acquisitions, property and lease negotiations, start-ups, compliance, risk management, due diligence and dispute resolution, Julian is passionate about providing advice that is strategic, pragmatic, and tailored to each client’s circumstances.
Julian places great importance on his clients’ long-term objectives. He believes that clear, candid communication and close collaboration with both his clients and their broader advisory team are key to achieving the best outcomes.
That collaborative approach aligns naturally with Aintree Group’s integrated model, with his clients able to access coordinated legal, accounting, wealth and business advisory expertise as their needs evolve.
