A business purchase by way of asset sale does not result in the employees being transferred with the
business. The purchaser instead has the choice to re-hire the employees on the purchasers own terms with
new employment agreements. However, this general rule is altered if the business has vulnerable
employees, as they are afforded more protection by the Employment Relations Act 2000 (ERA).
Who are vulnerable employees?
Vulnerable employees are people whose jobs are particularly vulnerable to restructuring. The groups of
people protected under Part 6A of the ERA as vulnerable employees are as follows:
- cleaning services, food catering services, caretaking, or laundry services for the education sector
- cleaning services, food catering services, orderly services or laundry services for the health and age-related residential care sectors
- cleaning services or food catering services in relation to any other workplace.
There is no distinction between full time employees and part time employees, therefore part time employees
are also vulnerable employees.
What extra protection are vulnerable employees given?
Vulnerable employees will be given protection if, as a result of a restructure, the employee is no longer
required to do their job for the vendor and the purchaser will require someone to do similar work. The
following are the restructuring situations that give rise to protection for vulnerable employees:
- a business (or part of it) is sold or transferred
- a business contracts another business to perform work that was done in-house
- a business which is a contractor loses a contract to perform services and the contract is granted to another business or to in-house
If one of these situations occurs the vulnerable employees have a choice between being transferred to the
new employer or being made redundant. If they are transferred they will be transferred with their existing
employment agreement, which essentially means nothing changes for them. If the employee doesn’t want to
be transferred they can be made redundant by their existing employer as per the terms in their employment
contract. The employee has five working days to decide if they want to be transferred.
If the new owner of the business is transferred vulnerable employees and doesn’t want to employ them,
then the new owner is able to make those employees redundant. If the employment agreement provides for
redundancy entitlements upon restructuring, then this will apply to the new employer. If the employment
agreement is silent on redundancy entitlements then the new employer and vulnerable employee can
negotiate a compensation amount. If the parties are unable to agree, then the Employment Relations
Authority can decide for the parties.
How does this effect you as a vendor or purchase in a business sale?
As a vendor or purchaser of the business you need to establish if any of the employees are vulnerable. If they
are, then the vendor needs to notify the vulnerable employees within 15 working days of the decision to sell
the business. As part of the notification to employees the vendor needs to tell them they have a choice to be
transferred to the new employer and provide all relevant information so they can make an informed
decision.
As a purchaser you will need to decide if you want to keep the employees or if you will make them
redundant. Either way you will want to review the employment contracts to see what obligations you owe to
the vulnerable employees before purchasing the business. If you decide to make the employees redundant
you will need to factor in the cost of redundancy to the cost of purchasing the business.
Small and medium enterprises which have fewer than 20 employees may be exempt from the vulnerable
employee rules. However, in calculating whether a business has 19 employees all employees from parent
companies, subcontractors, subsidiaries and franchises will be counted.