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One of the tasks a seller must complete in the lead up to the sale of their business is to tell their employees that the business has been sold.  

There may be employees who have been with the business since its inception and it is likely close relationships have formed.  Regardless of the circumstances, there is no denying that telling employees that your time is up and a new employer will be taking over the reins is never easy.

The question is often asked: when is the best time to tell your employees you’ve sold?

A sale of business results in all employees being terminated by the seller with effect from close of business on the day before the settlement date.  All employees must be given prior notice of termination and either required to work out the notice period or paid in lieu of notice.  The notice periods required to be given to employees vary depending on the terms of the relevant employment contracts.

Employers should review the existing employment contract for each employee to check if there is a required notice period or whether the notice periods prescribed by law apply.  If the notice period in a contract is less than the notice period required by law, the period required by law must be given to the employee.

As notice periods vary between employees, it is common for some employees to be given more notice than what would otherwise be required.   This is because it is almost impossible to stagger the issue of notices to different employees.  Once one employee knows, the news is out.

Sellers need to carefully consider when to give notice of termination to their employees.  If sellers want the employees to work out their notice periods rather than paying employees in lieu of notice, that may mean telling the employees about the sale of the business before the contract is unconditional.  The risk of providing employees with notice of termination before the contract is unconditional is that either the contract may not be completed (ie. it may be terminated) or settlement may be delayed which can cause some angst and uncertainty amongst the employees.  

Often when employees are notified of termination of their employment, they become distressed, disengaged and may look for alternative employment.  This can be disruptive to the seller and the day to day operation of the business.  To minimise the risk of employees reacting negatively to the news that the business is being sold, the seller can delay giving notice until there is greater certainty of settlement. However, if there is not enough time between giving notice and the settlement date for the employees to work out the notice period, employees will need to be paid in lieu of notice.  If giving notice is left until close to settlement, there is also a risk that the employees will find out about the sale from a person other than the seller.  That’s never an ideal situation. 

In short, the answer to the question is not easy.  Employers who are selling their business should calculate the notice periods required to be given to employees and weigh up the benefit of having employees work out the notice period against the risk of employees becoming distressed or disengaged and the cost of making payment in lieu of notice. 

Sellers should also consider whether the buyer wants to interview the employees prior to settlement.  If so, the employees should be fully aware of the sale before being asked to meet with their potential new employer. 

This article originally featured in the August 2023 edition of Retail Pharmacy Magazine. This article is intended to be for general information only. It does not constitute legal advice nor does it establish a relationship of client and lawyer. Specific circumstances or changes in law may vary the accuracy or applicability of the information published. We recommend seeking specific legal advice particular to your circumstances before taking any action, or refraining from taking any action, on any issue dealt with in this article.