What happens to your employees when you sell your business

For every business owner, whether you own a small family run company or a muti-national corporation, there may come a time when you consider selling your business. There are a multitude of reasons you may wish to sell; for profit, to retire or to move onto another business. However, while you may be ready to move on from the company, your employees will most likely will not. So, what happens to you employees when the company changes hands?

How will employees be protected?

In some cases when a business is sold, employees will be protected by an important piece of legislation called The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). In broad terms, when a relevant transfer occurs, TUPE regulations will:

  • allow the automatic transfer of all employees from the seller to the buyer of the business;
  • allow employees to keep the same terms and conditions in their original employment contact, without the new employer changing their terms as a result of the transfer; and
  • will protect employees from dismissal, if the reason for dismissal is the transfer of the business. 

Has there been a relevant business transfer?

As mentioned above TUPE will apply when there has been a ‘relevant transfer’. This is defined in the regulations as: 

“A transfer of an undertaking, business or part of an undertaking or business situated immediately before the transfer in the United Kingdom to another person where there is a transfer of an economic entity which retains its identity” (regulation 3(1)(a), TUPE).”

Generally, this means that TUPE will only apply to asset transfers, and not to share transfers. This is because when a company takes over another company by buying its shares, there is no change of identity. As such, shares sales do not generally meet the definition of a ‘relevant transfer’

What are the buyer and seller obligations under TUPE?

Both the buyer and the seller have certain obligations under TUPE. The purpose of these obligations are to ensure that employees affected by the transfer are properly notified, and the buyer has the necessary employee information to run the business. 

Generally, the process for a TUPE transfer is as follows:

  1. Employees who will be affected by the transfer must be identified;
  2. The employees who are affected are informed of the transfer and, in some cases, are consulted if there are proposed changes to their employment (which are called ‘measures’);
  3. The seller provides certain information about the affected employees to the buyer, including the names, ages and length of service of each employee.
  4. The affected employees transfer to the new employer, whilst retaining their old terms and continuity of employment.

The duty to consult applies mainly if any employees are likely to be affected by the transfer, and this is not limited to the transferring employees. For example, some of the buyer’s employees may be affected by the transfer, if the transfer will result in an increase in workload. Any employee who is affected by the transfer should be informed and consulted (if necessary).

Changing Terms

Once the employees have transferred, the buyer will be prohibited from changing the affected employee’s terms of employment (and any such changes would be void), unless:

  • the terms are improved (e.g. an increase in holiday entitlement); or
  • there is an economic, technical or organisational (ETO) reason involving a change in the workforce.

The buyer could still look to change terms by seeking employee consent. However, the buyer would be unable to dismiss employees who reject the changes, as to do so would be automatically unfair pursuant to regulation 7(1) of TUPE.

Dealing with redundancy if TUPE applies

After the transfer, the buyer will only be permitted to make redundancies related to the transfer if there is both:

  • a genuine redundancy situation; and 
  • a requirement to make changes to the workforce for ETO reasons.

By way of example, an ETO reason could be:

  • a change in the location of work; or
  • too many employees transferred in to the same role.

If the reason for the redundancies is not linked to the transfer, then the buyer will be permitted to make redundancies following the usual process, and does not require an ETO reason.

What can you do to make a sale go more smoothly?

As general good practice, business owners should ensure their employees’ contracts are compliant with current legislation and reflective of their terms. Furthermore, employers should keep accurate employee records to ensure smooth transfer of information to the buyer, in the event of a sale of the business.

How Moore Barlow can help

It is always advised to seek professional advice when buying or selling a business, particularly when TUPE applies, as it is a complex area of law. If you require advice on employment law arising from the sale or purchase of a business, contact our experienced employment lawyers, who would be pleased to assist you.