When buying a business, whether you are buying the shares of a company or just the assets of the business to continue it as a going concern, you need to be aware of the position in respect of employees.

Where there is a share purchase, the issue of employees is straightforward. The employees will continue to work for the company and the only thing that changes is the ownership of the shares in the company. However where there is an asset purchase, the situation is more complex although the net result can often be the same.

In the case of an asset purchase, where the assets such as contracts, property, goodwill etc are transferred, the employees of the business may be subject to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) which may apply to protect employees in certain situations. If TUPE applies on an asset purchase, the employees will automatically transfer over to the new owner together with the business assets.

Although there are a few different circumstances where TUPE will be triggered, the most applicable for the purposes of an asset purchase is where firstly, a business undertaking or part of an undertaking is transferred and secondly, that undertaking retains its identity.

In order to satisfy the first requirement, the undertaking must be an economic entity (whether or not it operates to make profit) and more than a mere collection of assets. This requisite for more than a collection of assets serves to prevent a purchaser being required to take on employees where the assets being purchased don’t amount to their own undertaking in isolation.

To determine whether the second requirement has been satisfied, consideration needs to be given to the position of the business both before and after the transfer. For example, does the business have the same customers, name, assets etc. A strong indicator that a business has retained its identity is where the business has the same goodwill i.e. it relies on the name, reputation and customers built up by the previous owner.  

Should the above requirements be satisfied then any employees of that business will automatically transfer together with the assets. Before doing so however, employees can opt out of the transfer in which case their employment will end on the date of the transfer and they will have no ability to make a claim in relation to their employment terminating. Those remaining employees will be subject to TUPE and enjoy special protections both before and after the transfer.

Any changes to employees’ contracts of employment by reason of the transfer are automatically void unless the employees have consented. It is clear that should such changes occur around the time of the transfer there is a strong implication that it is by reason of the transfer and a purchaser should be aware that they are likely to face fierce opposition should they propose any changes that are not to the benefit of the employees.

Additionally, should any employees be dismissed by reason of the transfer then the dismissals will be deemed automatically unfair. That is not to say that each individual will automatically have a claim for unfair dismissal as they must still meet the other requirements necessary to make a claim such as having continuity of employment of 2 years etc. Again, any dismissal around the time of the transfer will carry with it the same implications as above.

There are also statutory requirements to inform and consult affected employees in respect of the transfer.

Any purchaser who disregards the provisions of TUPE is likely to face substantial costs or find itself unable to make the workforce changes it wishes to make.

For advice on buying or selling your business, please give us a call on 0116 289 7000.

Andrew Spiers, Trainee Solicitor

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