Effects of the Sale of a Business on Employees (Part 1)

The three main scenarios for a business sale typically encountered in Bermuda are as follows. Firstly, a direct share purchase (where Company A purchases the shares of Company B), and, given that there are no changes in the legal identity of the employer, an employee’s employment contract, benefits and statutory rights will remain unaffected. In the scenario where Company A merges with Company B, given that as from the date of the certificate of amalgamation, the two amalgamated companies continue as one with their assets and liabilities remaining unchanged, the effects on the employees in an amalgamation are likely to be similar to those in a share purchase (although note that this point has not yet been tested in Bermuda law).  Lastly, there is also the asset sale, whereby Company A buys the assets of Company B, but there is no transfer of the business as a going concern. In this scenario, there would be no automatic transfer of employments contracts, and the existing employer would be responsible for conducting any redundancy exercise and for severance payments. This scenario potentially allows Company A to ‘cherry pick’ which employees it would like to engage on new terms and conditions but could be open to challenge if, in reality, the sale goes beyond a mere asset sale.

It is therefore important to consider at an early stage of planning, what the objectives of the purchaser are in relation to employees, and how best to achieve these objectives. The key potential issues that employers often fail to properly consider when a business sale or transfer arises are whether (i) employees will automatically transfer over to the new employer, (ii) whether redundancies will be required and who is going to be responsible for those payments, and (iii) the potential restrictions on a purchaser from altering the existing terms and conditions of employment.

The relevant Bermuda statutory provision is Section 5(6) of the Employment Act 2000 (Act) which states as follows:

“Where a business is sold, transferred or otherwise disposed of, the period of employment with the former employer shall be deemed to constitute a single period of employment with the successor employer, if the employment was not terminated and severance pay was not paid pursuant to [the] Act.”

This section of the Act protects continuity of employment upon the sale, transfer or disposal of a business, together with preserving the employee’s terms and conditions. Further to the Act, where an employee who has completed at least one year of continuous employment has their employment terminated (whether upon sale or after), that employee will be entitled to a statutory severance payment.  In this regard, the Act defines “termination of employment” as termination by reason of (i) redundancy or (ii) the winding up or insolvency of employer.

Part 2 of this series will consider the calculation of severance pay, the application of the statutory exception to the obligation to pay severance in a business transfer situation, and steps that can be taken by a purchaser to limit liability for such payments following a sale or transfer.

This note is intended as a high level overview of this topic and there are a number of other issues which will also require consideration on the sale of a business, including immigration and payroll tax issues. Legal advice should always be sought on a case by case basis.