Transfer of a business

The EU Acquired Rights Directive (implemented in the UK as TUPE) does not apply in the Isle of Man and there are no equivalent Isle of Man provisions for the automatic transfer of employees on a business sale/acquisition. Continuity of employment on a business transfer may, however, be achieved by means of a two-step process involving (a) termination of employment by the transferor and (b) the transferee offering (and the relevant employees accepting) contracts of employment with the new employer in accordance with Section 11 of the Redundancy Payments Act 1990 (“RPA”).

To ensure continuity of employment, an offer of employment by the new employer would need to be made prior to the termination of employees’ contracts with the transferor and the new contracts would have to take effect immediately upon termination of the employees’ existing contracts or within four weeks after that (the “Statutory Conditions”). The effect of achieving continuity of employment on the basis outlined above is that employees are not regarded as being dismissed (by reason of redundancy or otherwise) and no redundancy payment is therefore due.

If an employee unreasonably refuses the offer of employment with the new employer outright or unreasonably terminates the contract with the new employer within the trial period (see below) and, in either case, the new employment is suitable for the employee, then no redundancy payment will be due, notwithstanding the termination of the employee’s original employment by reason of redundancy (sections 2(5) and (6) of the RPA). The suitability of alternative employment will be a question of fact for the Employment & Equality Tribunal (“Tribunal”) to determine.

A trial period applies where the terms and conditions upon which an employee is offered alternative employment (such offer being made in compliance with the Statutory Conditions) differ in whole or in part from the corresponding provisions of his or her existing contract. A trial period lasts four weeks from the termination of the individual’s previous employment or such longer period as may be agreed if re-training for the new role is required. Note that where an employee, for whatever reason, terminates his or her contract during the trial period, and assuming that the employee is not again re-employed under a new contract, he or she is regarded as having been dismissed by his or her previous employer as from the date, and for the reason, that the original termination took effect (section 4(6) of the RPA).

An employer who terminates an employee’s contract in circumstances where it is intended for such employee to transfer to the new owner of a business may still be liable to make a statutory redundancy payment if the relevant employee reasonably refuses an offer of alternative employment or reasonably terminates the contract with the new employer during the trial period. Whether the refusal or termination is reasonable will be a question of fact to be determined by the Tribunal having regard to the particular circumstances.

To avoid liability for unfair dismissal when carrying out a termination and re-engagement process, the transferor will need to follow a fair procedure, which will include notification and employee consultation as a minimum. Sometimes it is effective to arrange “town hall” meetings and share information in this way before consulting 1:1 with affected employees depending on the scale of the business and any established practice(s) of informing and consulting. It is most often helpful for the “outgoing” employer and the “new” employer to coordinate on employee communications and the timing of rolling out information as well as arranging for representatives of the purchaser to be on hand during key meetings to answer questions on the plans of the intended new owner of the business.

From a commercial perspective, some of the key employment-related discussions which are likely to take place between the parties to a business sale/purchase include:

• the disclosure of information (i.e. what information, whether it is to be disclosed in anonymised, redacted or unredacted form and any confidentiality undertakings or employee consents to which such disclosure is to be subject);
• the terms and conditions that will be offered by the purchaser and how these compare to employees’ existing terms of employment;
• who[1] is to be responsible for the financial consequences (if any) of employees not taking up the offer of employment with the purchaser, resigning from their position with the transferor as a result of the business sale/purchase or being dismissed pre-completion.

It is usual, in addition, for a business transfer agreement to contain certain warranties and indemnities concerning employment matters and employee claims.

We can: carry out vendor employment due diligence/health checks, enable the prospective new owner of a business to appraise the risks involved in acquiring staff, advise on the transfer mechanism and process steps (whether vendor or purchaser side), plus assist with post-acquisition harmonisation of terms and conditions and related matters such as restructuring.

_______________________________________________________________________________

Reference:

[1] (contractually speaking, if not from the point of view of the provisions in the RPA – see above)