businessman with many questions

Do I have to keep staff when buying a business?

When entrepreneurs buy businesses, they need people to work in them and run them. That might mean keeping all the staff already in the business, just some of them, or even none of them, because of the way things will be integrated.

It’s likely you will have legal obligations towards those existing staff. As the incoming employer, you have to make sure you are aware of your responsibilities and liabilities, and take care to abide by employment law. The penalties if you don’t can be punitive.

Navigating Business Acquisition with Employees

A key element of buying a small business is dealing with existing employees when you take over. Any changes to staffing must be planned and managed to ensure compliance with the law. When you restructure and perhaps change or do away with people’s jobs you need appropriate business rationale and must follow proscribed procedures.

If things aren’t dealt with correctly people may take you to an employment tribunal, citing unfair dismissal. Complying with legal requirements can mean you avoid the stress and expense of dealing with disputes.

Understanding the UK’s Legal Landscape

Tupe Regulations

The key legislation applying to existing employees is the Transfer of Undertakings (Protection of Employment) Regulations 2006, more commonly known as TUPE. It applies to the employees of UK businesses, no matter what size the business may be.

TUPE protects employment terms and conditions, but allows for redundancies to be made. However, you may not dismiss an existing employee without a valid reason, and doing so could lead to a claim for unfair dismissal.

Being aware of TUPE regulations and taking steps to ensure compliance can help make the transition of ownership run smoothly.

When TUPE is Applicable

There are two situations where TUPE applies: business transfers and service provision transfers. Here, we’re interested in business transfers. That’s defined as a business or part of a business moving from one employer to another, meaning the legal entity that employs people changes. That can be as a result of mergers and acquisitions.

When TUPE is Not Applicable

If the deal is a share sale, there is continuity of business and the staff continue to work for the same entity. There is no change to the legal identity of the company, so TUPE does not apply.

Employment Law

If a business with existing employees is to be sold, the seller is legally required to announce the change of ownership. If there are ten or fewer staff a director can make the announcement. If more people are involved, then an employee representative or trade union official should notify staff.

The announcement should cover three key areas: details of the transfer of ownership, including the reason for the sale; what the implications are for employees; and what changes there will be to the status quo, in terms of, for example, job roles and share schemes.

Consultations need to be carried out during which all issues may be discussed, including whether an individual’s job role will change or become redundant.

Addressing Unfair Dismissal Concerns

UK employment law and TUPE regulations mean that when a business changes ownership, an employee may only be dismissed for a valid reason. Once that has been established, it is usual to offer a settlement agreement to those affected. The minimum amount of redundancy pay due is set out in law.

Take advice as necessary to make sure you remain compliant with regard to employment rights and avoid facing legal action for breach of employment law.

Pre-Acquisition Stage

Due Diligence

As part of the due diligence process, you should review staff employee liability information. This includes: identity and age; employment particulars; disciplinary and grievance records from the last two years, including any ongoing cases; any collective agreements between the old employer and a trade union that affect employees’ terms and conditions; any claims made by an employee against the old employer in the last two years related to their employment, or that the old employer believes they might make when they transfer.

ELI must be provided at least twenty-eight days before the transfer date. You need this information to get a clear picture of the business’s employees and your employment obligations.

The Transfer Process

Inform and Consult

TUPE obliges both the outgoing employer and the new buyer to inform staff members about the transfer and to consult with them about what that means to them. Things to be discussed include changes in pay (amount and/or pay date) and changes in working patterns and/or conditions.

If there is an HR department, potential buyers should consult with it. If there isn’t, consult with the seller, and possibly their solicitor. Whatever the setup, make sure staff are kept informed.

Get the specialist support you need

It’s unlikely you will have the knowledge and expertise to navigate the process of transferring employees yourself. The best thing to do is to get the specialist support you need. Hiring an HR professional to handle this part of the process for you is a good move, and you might also want to consult with a solicitor for legal advice.

Transfer of Undertakings

The new employer accepts responsibility for employees and their employment rights on completion of the sale. Abiding by TUPE helps ensure they are treated fairly.

Continuity of Employment

Continuity of employment is assured by TUPE and means that for existing staff who will remain in the business the changeover is seamless. Things including employment contracts, benefits and entitlements, holiday and sickness entitlements and length of service are preserved during the changeover and continue afterwards.

Post-Acquisition Considerations

Employee Contracts

Employment contracts will continue from the outgoing employer to the new owner, and so it’s important you appreciate your obligations. Review contracts and ensure you fully understand them and your resulting obligations. If there is anything you need to change, do it through consultation and negotiation.

Redundancy and Dismissal

If you are going to be instigating redundancy as a result of the takeover, tell people as soon as possible. Be open and honest, and let them know where they stand. Make sure communications come from you or your HR person, and aim to head off rumour and supposition.

Public Sector Transfers

Any public sector employees transferred to a new company in the private sector are covered by TUPE. There are three main reasons this might happen: outsourcing, creation of a public-private partnership, or privatisation.

Be aware that there might be specific procedures to follow in these circumstances, such as, for example, consultation with trade unions; make sure you understand what is necessary.

Market and Sector Implications

You can’t change an employee’s terms and conditions just because of the business sale and transfer of ownership – there have to be legitimate reasons. That’s where TUPE ETO reasons come into play.

Economic, Technical and Organisational Factors

If the reason is economic, technical or organisational (ETO) then terms and conditions of employment may be changed. This might, for example, be due to changes resulting from redundancies. The employee needs to agree to the change.

Economic reasons are related to how the business is performing. If the condition of the market and the level of competition means demand has dropped, then restructuring may be necessary and staffing levels might need to be reduced. Equally, if things are looking positive, they might need to be maintained or increased.

Technical reasons are related to the equipment used or processes followed. If these are outdated, then investment in new technology and implementation of more up-to-date processes might result in a need for fewer staff. It might also be that existing staff are unable to operate any new equipment. That said, a skilled, flexible workforce could represent competitive advantage that could be leveraged for growth.

Organisational reasons are related to the structure of the business. Say you decide to relocate; it might not be possible for your new employees to commute to the new location. They also involve core values, culture and morale. If things have been tricky for a while, or the changeover comes out of the blue, then the news could be met with antipathy or confrontation. Keeping existing staff in place can help mitigate this, as should open and clear communication throughout.

Services Sector

While employee retention strategies matter in all sectors, it can be argued that, when buying an existing business, the services sector warrants especial care and consideration.

Here in particular the staff are the face of the organisation shown to customers. They are also likely to be well-trained and highly skilled, and possess an excellent understanding of how things work and what people like. Retaining staff with a proven record of excellence is good for the reputation of the business, and means you retain the relationships and accompanying goodwill they have established with customers. This can be very valuable to the company.

Professional Legal Obligation

There are legal obligations to existing staff that business owners must abide by. You must also maintain high ethical standards throughout the acquisition process.

Put yourself in the shoes of the people affected – they deserve to be treated honestly and fairly, and, especially if you need to keep them on board, it makes sense to do that. The better people might find it easier to gain work elsewhere and you don’t want to lose them. As well as the cost of employing and training someone new, a great deal of experience can walk out the door when you lose an existing member of staff.

The other side of the coin is the punitive actions that the company might be opened up to if things are not handled properly and a new employer fails to meet their liabilities. It is absolutely worth putting the work in to make sure you get this right, and to take legal advice where necessary.

Talk to experts

When you plan to buy an existing business there’s a lot to take into account. Dealing with transferring employees can be time-consuming, and it’s a high-risk area should you get things wrong and leave yourself open to unfair dismissal claims. Taking advice from experts is a wise move. Dealmakers FastTrack programme helps you navigate all aspects of buying a business. It could be the ideal next step.

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