More than you bargained for: could your new hire still be entitled to their previous employment benefits?

Acquisitions and spin outs in the innovation and high-tech sectors sometimes involve the sale or assignment of specialised equipment and intellectual property. Highly skilled staff members trained for specialised work with such equipment and IP often follow those assets when transferred. Acquiring entities need to be aware that new employees may also come with their former employment benefits and accrued leave ─ and the associated (and potentially significant) additional cost burden.

This trap for the unwary is tucked away in the transfer of business provisions under s311 of the Fair Work Act 2009 (Cth) (Act). Under that section, if certain conditions are met, where assets are transferred from an employer (transferor) to another employer (transferee) and an employee follows those assets, commencing employment with the transferee, the employee may still be entitled to their former employment benefits and leave accruals.

Section 311 of the Act provides that a transfer of business occurs where:

• the employee ceases employment with the transferor and within three months becomes employed by the transferee;
• the transferring work the employee performs for the new employer is the same, or substantially similar, as the work the employee was previously performing; and
• there is a connection between the transferor and transferee, which may be satisfied through:
  • an arrangement between the transferor and transferee under which the transferee owns or has beneficial use of some or all of the tangible or intangible assets that the transferor owned or had beneficial use of, and that are related to or are used in connection with the transferring work;
  • the outsourcing or insourcing of the transferred work between the transferor and the transferee; or
  • the transferor and transferee are associated entities within the meaning of the Corporations Act 2001 (Cth).

Section 311 may operate more broadly than might be typically expected, so it is important that businesses consider whether a transaction may spring this trap. If the transferee’s employment benefits are less generous than the employee was previously entitled to receive under the transferor’s enterprise agreement, the transferee may unwittingly breach the Act. There may be material risks if the employee in question was the beneficiary of a generous enterprise agreement.

For example, enterprises such as research startups spun out of a university often seek to engage academic personnel from the university, as directors or employees. Employment of those personnel by the startup could potentially trigger a transfer of business under the Act if their engagement meets the requirements. This is a particular risk when engaging executive directors or employees. There is a lower risk associated with non-executive directors as they are not typically deemed employees at law and so outside the scope of the Act.

Taking the example of a company acquiring a software program developed by a university and at the same time employing a postdoctoral researcher who was previously part of the university research unit working on the program, we step through application of the limbs of s311 below.

Arrangement involving transfer of assets

There must be a transfer of assets for s311 to apply. In this case, the copyright and any other IP in the software program is IP which constitutes an asset for the purposes of s311. The transferee is also employing the postdoc to continue working on the program; the postdoc is starting immediately as they just finished a fixed term contract with the university. The transfer of beneficial use of the software program asset, alongside the related employee transfer, creates the connection between the transferor and transferee.

Work is substantially the same

In order for a transfer of business to arise, the transferring work the employee will be performing for the transferee must be substantially the same as the work performed for the transferor. The work is not just limited to tasks carried out and can also include other aspects relating to performance of the tasks comprising the work.

This does not mean that all tasks carried out must be the same. Depending on the circumstances, it may ‘include the location at which the work is performed and other aspects related to the performance of the tasks comprising the job or work’.¹ The requirement is satisfied overall where the work is the same or substantially the same, even if the precise duties of the employee, or the manner in which they are performed, have changed.²

In our example, let’s assume the postdoc will be continuing to use their specialist knowledge or specific technical expertise to further develop the program, as well as providing support and maintenance for the program from the same work location. Previously, the postdoc was only involved in writing new code. This transfer for the purpose of continuing the same work is likely to meet the threshold requirement under the Act, even though the employee will be undertaking additional responsibilities.

Transfer of business

The other requirement is that employment must commence at the transferee within three months of ceasing employment with the transferor. In our example, this will be the case.

Given the above, there will be a transfer of business in our example scenario.

Employment entitlements

As there has been a transfer of business in our example, the transferee will inherit:

• some or all of the postdoc’s accrued leave entitlements; and
• the terms of the university enterprise agreement which covered the postdoc immediately prior to the termination of their employment with the transferor (this is known for the purposes of the Act as a ‘transferable instrument’).

Generally, when there is a transfer of employment, service with the transferor will count towards service with the transferee. In those circumstances, the transferee will be required (as a matter of law) to recognise the transferring employee’s prior continuous service with the transferor for the purposes of calculating certain service-related entitlements, including personal/carer’s leave. The transferee may also inherit the transferring employee’s annual leave accrual and their long service leave accrual.

Even new employees (non-transferring employees) engaged by the transferee after the transfer, to perform the same type of work as transferring employees, may also be covered by the transferring instrument.³

Varying terms through the Fair Work Commission

An employer may bring an application before the Fair Work Commission seeking to vary the terms of a transferable instrument. The Fair Work Commission may make orders to vary the effect of a transferable instrument so that (for example) it will not cover the transferee and certain categories of employees, including transferring and non-transferring employees.⁴ Transferees should weigh up whether such an application should be made prior to the transfers occurring.

What should employers do?

Businesses should take into consideration the potential impact a transfer of business may have on their organisation prior to acquiring assets together with bringing on new employees.

Consider:

• whether the transfer of business provisions will be triggered;
• which employee entitlements the business may inherit with the transferring employees;
• whether any other non-transferring employees may be caught by transferable instruments;
• the drafting of any letters of offer to the transferring employees, especially ensuring it is clear if the employer will not be recognising an employee’s prior service for a particular entitlement (to the extent permitted at law); and
• the terms of any applicable transferable instruments, and whether the employer should make an application to the Fair Work Commission seeking orders to vary the instrument.

HWL Ebsworth’s Workplace Relations and Safety team and Intellectual Property team have broad experience advising businesses on transfers of employment as well as the assignment and licensing of high-tech equipment and technology. If you have concerns or are seeking advice on how you may be impacted by employee rights transfer, please contact us.

This article was written by Luke Dale, Partner, Jessica Nicholls, Partner, Nikki Macor Heath, Special Counsel, Isabella Lehmann, Law Graduate and Bellarose Watts, Law Graduate.

¹ Crown Sydney Gaming Pty Limited v United Workers’ Union [2022] FCA 97 [14].

² Community and Public Sector Union, NSW Branch v Northcott Supported Living Limited [2021] FCA 8 [159].

³ Fair Work Act 2009 (Cth) s314.

⁴ Fair Work Act 2009 (Cth) s317 – 320.