Carissa Prescott

Employment law changes in Victoria affect M&A purchase price negotiations

Carissa Prescott

25 October 2018

Uncategorized

Changes to the way long service leave can be accessed by employees in Victoria effective 1 November 2018 will likely make changes to the way we treat negotiations on the purchase price in M&A transactions and the importance of due diligence on accrued employee entitlements.

In M&A some negotiation points have become accepted as reasonably ‘standard’ concepts.

One of these is that the buyer of a business taking on employees will accept and honour the accrued service and entitlements of transferring employees on the basis of the transmission of business concept in the Fair Work Act.

To compensate a buyer for assuming that liability at completion, the seller will often afford the buyer a discount to the purchase price.

How that discount is calculated varies, but parties will usually agree that the value of accrued Long Service Leave will reduce the price.

Then the parties will discuss what time period should be used for calculations.

The seller may not want to give a discount today in relation to a staff member who has only currently served (say) four years.  The buyer would have no liability to pay any funds on the ending of the employment for long service leave until year seven.  The seller will argue no one is to know that the employee will stay for that time period. Buyers in turn argue that depending on the industry, employees who have stayed for a certain period are likely to hit the relevant time period to access a payment if the employment is ended (or in fact go on to reach 10 years and the entitlement to take the leave).

Overall, sellers and buyers land on a calculation method that they think is fair to compensate each of them, and with regard to the tax effect.

This change in Victoria could have the effect of making that thought process a little more complicated where there is a workforce in multiple jurisdictions and with staff potentially being able to access payments or the leave (possibly necessitating additional expense for cover) at different times.

What the changes certainly highlight as well is the need for good due diligence on accruals, particularly given the changes include that LSL can be taken one day at a time.

Click here to see our blog post by Rebecca Best, Special Counsel and Paul Ronfeldt, Partner, on the specifics of the changes in employment law.