Two business people sitting down to discuss employers business sale review paperwork

When selling a business there are some advisable “musts” in the ways that employers should prepare in advance. Forethought and planning can save time in your transaction along with legal costs and put you as a seller on the front foot when it comes to negotiating the terms of your sale.

Henry Cross, a solicitor in our Employment team outlines our Top 10 Steps for employers when selling a business:

#1 – Consider the structure of your business sale – share sale or asset? 

This is important when it comes to your employees, in particular, when considering if the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) apply.

Broadly speaking, if you are only selling the shares of your company, TUPE will not apply. If you are undertaking an asset sale of your business TUPE is likely to apply.  If you are unsure whether it applies and bear in mind there can be complicating factors when a share sale is accompanied by a restructure or reorganisation, take legal advice. We are on hand to assist.

If TUPE applies, there are additional important legal obligations in relation to your workforce which you will need consider and factor into your transaction (see below). If TUPE does not apply you can skip to step 3!

#2 – Comply with TUPE

The commercial written agreement reached with the Buyer in the transaction will likely include provisions requiring the seller to confirm that it has complied with TUPE. It is therefore sensible to ensure early that you will be able to comply with all aspects of TUPE to avoid potential delay and problems later down the line.

TUPE will oblige you to inform and consult with employee representatives (or directly with your staff depending on the circumstances), potentially arrange employee representative elections, and there will be certain additional protections for employees. You will need to provide what is referred to as Employee Liability Information (“ELI”) to the Buyer, which is basic due diligence information. This includes information such as their identity, age, terms and conditions, length of service, disciplinaries, grievances and claims and potential grounds for claims. Although it is likely the seller will require you to provide substantially more information on your staff to enable it to carry out its due diligence review (see step 3 below).

The ELI must be given no later than 28 days before the transfer of staff. Although in practice it is helpful to provide this information sooner. If there are any changes then the information should be updated. If the ELI is not correctly provided, the Buyer can make a claim for compensation for a minimum award of £500 per employee, which could prove costly.

#3 – Due Diligence

To ensure the due diligence process is as smooth as possible, it would be sensible to have the following information ready to share, and preferably set out in an easily accessible format, for example, an Excel Spreadsheet can be helpful, to help summarise:

  • ELI, which will overlap with due diligence requests (see above);
  • The legal entity which employs the individual, for example company within a group structure, or partnership;
  • Bonuses/ commission (details of amount and frequency paid over the last three years);
  • Length of notice periods;
  • Type of contracts (e.g., whether fixed or part-time, or permanent);
  • Any benefits provided to employees, e.g., private healthcare, company car;
  • Holiday pay entitlement and calculation method;
  • Details of any employees absent or due to be absent from work, e.g., due to maternity/ paternity/ adoption/ shared parental/ bereavement leave or sickness absence;
  • Details of changes in the workforce, including employees serving notice periods and new recruits; and
  • Details of any night-working, “sleep-in” shifts, on-call hours, overtime, in particular the contractual status of these practices and staff remuneration.

This information should be anonymised in compliance with legal data protection obligations.

Also collate standard employment documentation, including standard employment contracts e.g., senior and junior employment contracts, (where there are non-standard contracts or different versions provide these) and staff handbook/ freestanding policies (including disciplinary/ grievance procedures, equal opportunities policy, sickness absence policy, health and safety policy).

#4 – Self-employed contractors

You should be prepared to provide information on individual contractors. The Buyer may be interested to assess whether these individuals are in fact self-employed individuals, as opposed to employees and workers. There are a variety of factors that are used to determine employment status, if you are unsure seek legal advice.

In April 2021, the off payroll working rules (IR35) were introduced meaning that if an individual is engaged via an intermediary (often known as a personal service company or “PSC”) and they are a “deemed employee” for tax purposes, they must be paid with PAYE deducted at source, in the same way as regular employees and workers, see our article on this topic for more information. Your compliance with this may be a concern to the Buyer.

#5 – Right to work checks

The Buyer will want to know whether you have been correctly carrying out right to work checks. This requires a three-step process:

  1. You must obtain employee’s original identity documents;
  2. Check the documents are valid with the employee present; and
  3. Copy the documents, record the date and check, and keep the copy securely and in accordance with data protection principles.

Due to COVID-19, there is currently in force a relaxation of these rules which has recently been extended to 5 April 2022, whereby employers may carry out their right to work checks via video call.

There is an alternative to the three above steps, the Home Office Right to work online service. If using this service, an employer does not need to see of check the individual’s documents, as right to work information is provide in real time directly from Home office systems.

It is essential to carry out these steps, because if you are found to be employing someone illegally and you have not carried out the prescribed checks you may face sanctions including a civil penalty of up to £20,000 per illegal worker.

#6 – Holiday pay

It is wise to pre-empt queries about how holiday is treated in your business and some employers may wish to take action to remedy any faulty practices prior to a sale. Otherwise, be prepared for requests to disclose information to the Buyer and deal with corresponding requests for warranties and indemnities. For example, it is legally incorrect to pay staff in lieu of statutory holiday during employment because holiday is intended to be taken as a health and safety measure, to provide the employee with genuine rest. Nevertheless, it is not uncommon for some employers to do this, for example, when an employee has accrued holiday during maternity leave or furlough.

Another common issue is that employers will miscalculate and underpay holiday pay. For example, variable payments may need to be included in holiday pay calculations, for example if an individual has received commission, a performance bonus or works overtime regularly. A Buyer may consider the possibility of claims for underpaid holiday pay and accordingly request an indemnity.

Additionally, since April 2020, holiday for staff with irregular hours should be calculated against a reference period of 52-weeks (or if employed for less than 52 weeks, the amount of time they have been employed), rather than 12 weeks as was the case previously.

#7 – National minimum wage

You may assume that you are paying individuals the national minimum wage, but employers need to be careful. For example, if an individual is salaried, and is regularly working over their contracted hours, this might mean that in some circumstances the individual is receiving less than the national minimum wage. Employers should take particular care in situations where employee are “on call” or otherwise need to remain available for work. Buyers may seek further information and an indemnity in respect of any future claims for underpayment of national minimum wage.

#8 – COVID-19 considerations 

For individuals furloughed during the COVID-19 pandemic, the Buyer will frequently want to know whether you have:

  • Complied with the scheme;
  • Obtained the employees’ agreement when putting them on furlough; and
  • Complied with other new laws introduced as a result of the pandemic, for example, allowing employees to carry over unused annual leave for up to two years if they were not reasonably able to take their leave due to the pandemic, along with compliance with health and safety obligations.

You should be prepared to provide:

  • A list of furloughed staff;
  • Written terms on which staff agreed to be furloughed; and
  • Records of claims (which must be kept for six years).

#9 – Absent staff

Buyers will want to know about staff that are absent from the workplace or have been recently, for example, on long-term sick leave, maternity, paternity or parental leave or secondment.

During the pandemic, you may have experienced an increased level of staff absence due to furlough, self-isolation or shielding requirements. You should be prepared to provide details on staff in relation to this and how they were paid. For example, were they paid under the furlough scheme, or did they receive sick pay and how might you have dealt with staff who were not able to attend work due to pregnancy and health and safety concerns?

#10 – Recruitment and outgoing staff  

You should be prepared to disclose information on current recruitment drives and any offers of employment, which have been made. The Buyer may want to be informed or involved pre-sale in any decisions to employ individuals as it will be they who are responsible for them going forward.

The Buyer will be interested to know of staff who have left the business recently, are under notice, or may leave shortly and the reasons for this. It may be that the Buyer does not want to retain all the staff once it buys the business, particularly if there is a TUPE transfer, you will be under an obligation to pass this information onto the staff.

Getting advice when selling a business

These Top 10 Steps are not an exhaustive list, but if you take them into account and the have the relevant information organised and to hand at an early stage, the sale of your business is far more likely to proceed smoothly.

We are experienced in providing specialist corporate support advice and services to clients, including on employment issues. This includes supporting to business owners prior to and all the way through a sale process. Do contact us for further information.