Sunday, June 14th, 2009

Employment obligations on transfer of a business


Part 6A of the Employment Relations Act 2000 was introduced in 2004.  Despite that fact, our experience shows that those involved in the sale and purchase of businesses, and, to some extent, their advisers, are either oblivious to the provisions or do not fully appreciate the implications.

In November last year, the full Employment Court (three judges sitting together) delivered a decision on the implications of the restructuring provisions.

Anyone who was involved in the sale or purchase of a business, either as a party, agent or adviser, should be aware of the decision.

Recap — what do the restructuring provisions saying?

The purpose of Part 6A is to provide protection to employees if, as a result of a proposed restructuring, their work is to be performed by another person.

The Act identifies two categories of employees.  Those involved in protected services have a statutory right of transfer.  Employees in this category are those involved in cleaning services, food catering services, caretaking and laundry services.  This article is not concerned with the protected category.  The Employment Case which I will discuss applies to the second category of employees (i.e. anyone else).

Statutory requirements.

In the case of “non-vulnerable” employees, the ERA firstly requires employment agreements to contain employee protection provision is relating to negotiations between the employer and the “new employer”.

The employment provisions which must be included in the employment agreement must:

  1. have , as their purpose, provision of protection for the employment of employees affected by restructuring and
  2. have specific provisions saying what will happen if there is a restructuring.

For the purposes of this article, for “restructuring” read “sale”.

The specific provisions that must be present are:

  1. a process that the employer will follow when negotiating with a new employer;
  2. matters relating to the affected employee’s employment that the employer will negotiate with the new employer, including whether the employee will transfer to the new employer on the same terms and conditions, and
  3. the process to be followed if the employee does not elect to transfer to the new employer.

Section 69OK stipulates that an affected employee can choose between transferring to the new employer or not.

The Olsen case

So far, I have identified the obligations on an employer to ensure it that the employer’s agreements comply with the act (i.e. by containing restructuring provisions) and the right of an employee to elect to transfer to the new employer in accordance with any arrangements that may have been made.

The Olsen case (Olsen v Carter Holt Harvey IT Ltd) is significant because Mrs Olsen made a claim against a new employer which decided not to take on her services.

Mrs Olsen was the company accountant for DMS.

DMS was formed as part of a joint venture by three companies, of which Carter Holt Harvey was one.

In 2005, a new company was formed. It was subsequently renamed Carter Holt Harvey IT limited. The business owned by DMS was transferred to that company.

Mrs Olson was offered employment in the new company. However CHH decided that her work could be done in-house and the offer was withdrawn.

She took action against the new employer. There were a number of causes of action some of which were resolved on the facts of the case. For example, it was found as a fact that she was offered and had accepted employment and therefore there was unjustified dismissal.

Of greater note, however, is the way in which the Employment Court dealt with the obligations of the new employer under Part 6A.

The sale agreement made the following provisions for employment of existing staff:

  1. DMS would consult its employees before giving notice of termination.
  2. Once consultation had taken place, the new company was required to make offers to the employees on no less favourable terms than those that already existed .
  3. The offer of employment had to be kept open until five days before completion.
  4. The offer must be to commence employment with the new employer with effect from close of business on completion.
  5. The employee’s service was to be treated as continuous.
  6. The joint venture parties and the new employer were to use reasonable endeavours to persuade all of the employees to whom an offer was made to accept employment with the new employer.
  7. The new employer was to notify DMS of all employees who had accepted that offer of employment five days before completion.
  8. There was also a clause specifying that none of the obligations listed in the contract were intended to create any rights on a third party. In other words, it was not an intended that any employee be able to take action the basis of the agreement between the joint venture parties. [ Ordinarily, only a party to a contract can take action on a contract. The Contracts (Privity) Act 1982 does however enable third parties to take action in certain circumstances. The exclusion clause was intended to ensure that the Contracts (Privity) Act did not apply. ]

The Employment Court made the following findings:

  1. Mrs Olsen had been unjustifiably dismissed by the new employer.  Although it had made an offer of employment and then offer referred to an attached employment agreement, the new employer had failed to provide an employment agreement and was in breach of its obligations.  Mrs Olsen could not accept the offer of employment in the manner mentioned in the letter of offer because the new employer had made that impossible.  It did not matter that Mrs Olsen had not commenced employment.  She became an employee once she had accepted the offer of employment.
  2. Regardless of the findings of fact (i.e. that there had been an offer and acceptance of employment) Mrs Olson had a right to take action against the new employer because it had failed to comply with the provisions of the sale agreement.  Mrs Olsen had rights under those provisions.  . She did not have to rely on the Contracts (Privity) Act . Part 6A of the ERA created those rights.
  3. The new employer had failed to use reasonable endeavours to persuade Mrs Olsen to accept the offer of employment. It failed to comply with the most important aspect of the arrangement which was to ensure that Mrs Olsen had a real choice to transfer to the employment of the new company on the same terms and conditions and with continuity. By its actions, it denied Mrs Olsen that choice.

Lessons to be learned when selling or buying a business.

An intending seller must check all employment agreement to ensure that they contain a restructuring provision which is practical and with which the seller can reasonably comply. All employers must do this regardless of any intention to sell.

The purchaser of any business should, as part of any due diligence, see all employment agreements and be aware of the terms and conditions applicable to each employee. If any vulnerable employees are affected, these employees have a statutory right to transfer. Check to see whether, for example, cleaning work is outsourced.

The vendor should also check to ensure that redundancy provisions are in place. The seller may not be able to persuade the buyer to take on all employees (other than vulnerable employees) in which case a redundancy situation will arise. Any employer should do this regardless of any intention to sell.  Addressing redundancy provisions in an agreement having regard to the likelihood of an imminent sale does not accord with the obligations of good faith.

Particular care must be taken when drafting the sales agreement. Both parties must be aware that if the provisions in the agreement involve any arrangement for the transfer of employees, then those provisions can be enforced by the employees affected. The agreement must be drafted with that in mind. Make provision for consultation in particular. There should be timeframes and a process for offering employment and identifying the means of acceptance.

Most importantly, both parties must comply with their obligations and do so having regard to the good-faith obligations on the act.

Before selling or buying, ensure that you take appropriate advice.

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