When you buy a business in Australia, you are not just acquiring assets, goodwill and customer relationships. If that business has workers, you may also be acquiring employment obligations, entitlement liabilities and legal risks that are not visible on a balance sheet.
Employment law is one of the most commonly overlooked areas of business acquisition due diligence — and one of the most expensive to get wrong. This article sets out what purchasers need to check, why it matters, and what should go into the business sale agreement to protect their position.
1. Does the Fair Work Act Apply to the Transfer?
The starting point is whether the transaction triggers the transfer of business provisions under Part 2-8 of the Fair Work Act 2009 (Cth). Under section 311, a transfer of business occurs where:
- the employee’s employment with the seller ends;
- within three months, the employee starts work with the buyer;
- the employee performs the same or substantially the same work; and
- there is a relevant connection between the old and new employer — such as a transfer of assets, outsourcing, insourcing, or an associated entity relationship.
In most business acquisitions, the asset connection is the relevant trigger. If the buyer acquires plant, equipment, intellectual property, customer lists, premises, stock or systems used in the transferring work, that connection is likely to exist.
Whether these rules apply matters because they affect which employee entitlements follow the employees into the buyer’s business, and whether enterprise agreements or other industrial instruments transfer with them.
2. Do Employees Automatically Transfer to the Buyer?
In an asset sale, the short answer is no. Employment contracts are personal service arrangements and cannot simply be assigned to the buyer without the employee’s consent. The buyer typically decides which employees it wants, makes written offers to those employees, and the seller terminates the existing employment relationships at or before completion.
In a share sale, the position is different. Because the employing entity itself changes hands, rather than its assets, the employment contracts generally remain on foot. The employees continue to be employed by the same legal entity — now under different ownership — and the buyer inherits the full employment history of the business.
For asset sales, offers of employment should be in writing and should specify the role, remuneration, employment status, commencement date, applicable award or enterprise agreement, and whether prior service will be recognised. In Protop Australia Pty Ltd v Jer Yang [2014] FWC 5424, the sale agreement required the buyer to identify employees who would receive offers and to make those offers on terms no less favourable than existing conditions. While this is not a universal statutory requirement, it is a common contractual mechanism used to manage redundancy risk and service recognition.
3. Which Entitlements May Carry Over?
This is where the detail matters — and where purchasers frequently underestimate the liability they are assuming. Under section 22(5) of the Fair Work Act, service with one employer may count as service with another in a transfer of employment situation. However, the treatment differs entitlement by entitlement, and depends on whether the parties are associated entities, whether the buyer recognises prior service, and what the sale agreement says.
Annual leave
In transfers between non-associated entities, the buyer may choose not to recognise prior service for annual leave purposes. If recognition is declined, the seller is generally required to pay out accrued annual leave on termination. In associated entity transfers, recognition is usually required. The purchase price should reflect who bears this cost.
Personal/carer’s leave
Unlike annual leave, personal/carer’s leave is generally not paid out on termination. If prior service is recognised, employees may retain their accrued balances. Buyers should confirm what balances exist and whether they are being assumed.
Redundancy
Sections 119 to 122 of the Fair Work Act govern redundancy in transfer situations. A buyer’s offer of employment may reduce or eliminate redundancy pay that would otherwise be owed by the seller — but this depends on the terms of the offer and whether prior service is recognised. The sale agreement must clearly allocate redundancy liability for both transferring and non-transferring employees.
Long service leave
Long service leave is primarily governed by state and territory legislation, which varies significantly across jurisdictions. Prior service and portability rules must be checked against the applicable law for each location where the business operates. Accrued long service leave balances should be identified early and factored into price adjustments.
Unfair dismissal protection
Where prior service is recognised, employees may already satisfy the minimum employment period for unfair dismissal protection — currently one year for small business employers and six months for others — from their first day with the new employer. This was considered in Harland v Paradigm Cleaning & Professional Services Pty Ltd [2015] FWC 8425, which examined how prior service applies to the minimum employment period in a transfer context. A buyer cannot reset the clock simply by issuing new employment contracts. Similarly, in Gittins v Amitik Pty Ltd [2016] FWC 5007, the Fair Work Commission considered whether an employee had become employed by the buyer following a dental business sale, and whether the minimum employment period for unfair dismissal had been satisfied — illustrating the real-world application of these rules.
Parental leave and flexible work
Eligibility for parental leave and flexible work requests can depend on length of service. If prior service carries over, employees may already meet service thresholds from day one with the buyer.
| Before buying a business, ask: are we taking on the seller’s employees, and if so, which entitlements are coming with them? Annual leave, personal/carer’s leave, redundancy, long service leave, parental leave, flexible work rights, notice entitlements and unfair dismissal service periods may all be treated differently. These issues should be addressed before completion and reflected expressly in the business sale agreement. |
4. Employment Due Diligence: Documents to Request
Before signing — and certainly before completing — purchasers should request and review a comprehensive set of employment records. Inconsistencies between documents often reveal hidden problems. Key documents to request include:
- Full employee list with names, roles, duties, locations and start dates
- Employment status for each worker: full-time, part-time, casual, fixed-term, contractor or consultant
- Signed employment contracts and all variations or amendments
- Applicable modern awards, enterprise agreements and individual flexibility arrangements (IFAs)
- Award classification levels and pay rates
- Payroll records, payslips, rosters, timesheets and annualised salary reconciliation records
- Leave balances: annual leave, personal/carer’s leave, long service leave, parental leave and TOIL/RDOs
- Superannuation contribution records, clearing house records and fund details
- PAYG withholding records, STP reports and BAS records
- Bonus, commission and incentive arrangements — including any amounts accrued but unpaid
- Contractor agreements, invoices and ABN records
- Visa and right-to-work records for all workers
- Workers compensation policy, premium history and current injury or return-to-work plans
- WHS policies, incident reports and any regulator correspondence
- Employee complaints, warnings, disciplinary records and unresolved investigations
- Fair Work claims, underpayment issues or settlement agreements
| Employment due diligence is not just an administrative exercise. A business with large leave balances, incorrect award classifications, underpaid employees, unpaid superannuation or outstanding employment claims may carry significantly more cost than the purchase price suggests. |
5. Modern Awards, Enterprise Agreements and Underpayment Risk
One of the most commercially significant checks is whether employees are being paid correctly — not just what they are being paid.
Modern awards may cover employees depending on the industry, occupation and duties performed. Award coverage is not determined by job title alone. In Health Services Union v Catering Industries (NSW) Pty Ltd [2022] FCA 754, the Federal Court confirmed that award coverage turns on the actual work performed, the business context and the terms of the coverage clause — not the label given to a role. This matters because a buyer cannot safely assume that the seller has identified the correct award.
Where employees are covered by an award, the buyer needs to check classifications, ordinary hours, overtime entitlements, penalty rates, shift and weekend loadings, allowances, annualised salary arrangements and break entitlements.
Where an enterprise agreement applies, the award generally does not apply to that employment under section 57 of the Fair Work Act. However, the agreement may transfer to the buyer in a transfer of business, binding the buyer to wage rates, consultation procedures, dispute resolution clauses and rostering rules it did not negotiate.
If the seller has incorrectly classified employees, failed to pay award entitlements or used annualised salaries that do not genuinely absorb all award components, the buyer may inherit serious underpayment exposure after completion. Warranties and indemnities in the sale agreement should address pre-completion non-compliance.
6. PAYG, STP and Superannuation Compliance
Employment due diligence should extend to payroll tax compliance and superannuation obligations. Purchasers should request evidence that PAYG withholding has been correctly calculated and remitted to the ATO, and that payroll has been reported through Single Touch Payroll (STP). They should also request confirmation that superannuation guarantee contributions have been paid on time and in full, including clearing house records and fund details.
Late or unpaid superannuation can expose the employer to the superannuation guarantee charge, interest and penalties. Note also that from 1 July 2026, proposed payday super reforms would require superannuation to be paid at the same time as wages — a significant compliance change that buyers should factor into post-completion payroll planning (verify current status before publication).
Where the business uses contractors, there is an additional risk. Under section 12 of the Superannuation Guarantee (Administration) Act 1992 (Cth), some contractors may be treated as employees for superannuation purposes if the contract is wholly or principally for the labour of the individual. Contractor agreements and payment history should be reviewed to assess whether any contractor super obligations have gone unaddressed.
7. Contractors, Casuals and Sham Contracting
Buyers should not accept at face value that a worker is genuinely an independent contractor simply because they have an ABN, issue invoices or are described as a contractor in their agreement. The substance of the working arrangement — not its label — determines employment status.
Relevant factors include whether the worker operates an independent business, can delegate the work, supplies their own equipment, bears commercial risk, works for multiple clients, is integrated into the business like permanent staff, and is paid for results rather than time.
Section 357 of the Fair Work Act prohibits an employer from misrepresenting an employment arrangement as independent contracting. In Fair Work Ombudsman v Quest South Perth Holdings Pty Ltd (2015) 228 FCR 346, a key sham contracting authority, the Full Federal Court confirmed that this risk can arise even where arrangements are structured through a third party — the courts look at the totality and reality of the relationship, not its form.
If misclassified contractors are identified during due diligence, the buyer needs to understand the full exposure: unpaid wages, leave entitlements, superannuation, penalties and regulatory risk. This should be reflected in the purchase price or addressed through indemnities.
For casual employees, buyers should verify that the casual loading has been correctly paid, that regular and systematic casuals are identified, and that any requests under the employee choice or permanent employment pathway have been disclosed and handled appropriately.
8. WHS, Workers Compensation and Employee Claims
Workplace health and safety and workers compensation form part of any complete employment due diligence review. Purchasers should request current workers compensation insurance policies, premium history, and details of any current or recent claims — including psychological injury claims and return-to-work plans.
A business with unresolved long-term workplace injuries, deteriorating premiums or material WHS compliance gaps carries a higher operating cost and risk profile than one with a clean record. Any employees on restricted duties or currently absent due to workplace injury should be specifically identified. The sale agreement should address how pre-completion workplace injuries and resulting ongoing obligations are allocated between the parties.
9. Key Employment Clauses in the Business Sale Agreement
Identifying employment risks during due diligence is only half the job. Those risks must then be allocated clearly in the business sale agreement. In Butcher v Specialist Diagnostic Services Pty Ltd [2010] FWA 2856, the Fair Work Australia examined how the contractual allocation of seller and buyer obligations at and after completion affected the employment position of a transferring employee — a practical illustration of why careful drafting of these clauses matters.
Employee offers
The agreement should identify which employees will receive offers, state whether offers must be on terms no less favourable than existing conditions, and — where relevant — make acceptance by key employees a condition precedent to completion.
Recognition of prior service
The agreement must specify whether the buyer is recognising prior service and, if so, for which entitlements. This affects annual leave, personal/carer’s leave, long service leave, redundancy, parental leave, flexible work eligibility and unfair dismissal protection.
Accrued entitlements and purchase price adjustments
The agreement should specify which entitlement balances the buyer is assuming and which the seller will pay out at or before completion. Where the buyer is assuming balances, the purchase price should be reduced accordingly. In Spotpress Pty Ltd v Spotpress Newspapers Pty Ltd [2025] NSWSC 1094, the New South Wales Supreme Court considered the operation of accrued employee entitlement adjustments in an asset sale agreement, illustrating how consequential these clauses can be in practice.
Redundancy and non-transferring employees
The agreement should state who is responsible for redundancy pay, notice and final entitlements for employees who are not offered employment, who reject the buyer’s offer, or whose terms are materially changed.
Warranties and indemnities
The seller should warrant compliance with the Fair Work Act, the National Employment Standards, applicable awards and enterprise agreements, payroll obligations, PAYG withholding and STP reporting, superannuation, WHS legislation and workers compensation requirements. The seller should indemnify the buyer against pre-completion breaches, underpayments, unpaid superannuation and any employment claims arising from pre-completion conduct.
Records and transition cooperation
The seller must deliver complete and accurate employment records, leave balance schedules, payroll records, contractor documents and details of any outstanding claims. The agreement should also include cooperation obligations to assist with the employee transition.
10. Practical Pre-Settlement Checklist
Before completing the transaction, buyers should confirm:
- All employee offers have been made in writing and acceptances received
- Key employee conditions precedent (if any) have been satisfied
- Leave balances, accrued entitlements and payroll records have been finalised and reconciled
- The purchase price adjustment for assumed liabilities has been agreed and documented
- The buyer’s payroll system is ready to pay employees from day one
- Workers compensation insurance is in place from completion
- Superannuation fund arrangements and clearing house access are established
- All employment records and contractor documents have been delivered by the seller
How OpenLegal Can Help
Employment law issues in business acquisitions can be complex, and the cost of getting them wrong — through underpayment exposure, inherited claims, misclassified contractors or a poorly drafted sale agreement — can significantly exceed the cost of getting the right advice upfront.
OpenLegal assists buyers with employment due diligence, reviewing contracts, awards and payroll records, identifying employment liabilities, and drafting employment-specific warranties, indemnities and adjustment clauses in business sale agreements. We also advise sellers on managing their obligations to existing employees when a sale is in progress.
If you are considering buying or selling a business, contact OpenLegal to discuss how we can help you manage the employment law aspects of the transaction.
This article is for general information only and does not constitute legal advice. Employment law outcomes depend on the specific facts of each transaction, including the structure of the sale, the applicable industrial instruments, the jurisdiction in which employees are located, and the terms of the business sale agreement. You should obtain legal advice specific to your circumstances before acting on any information in this article. Verify all legislation, case treatment and regulatory guidance before publication.
