In this part we 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.
Pursuant to section 23(2) of the Employment Act 2000 (Act), an employee’s severance payment is calculated as an amount no less than the equivalent of (a) two weeks’ wages, for each completed year of continuous employment up to the first 10 years, (b) three weeks’ wages for each completed year of continuous employment thereafter; up to a maximum of 26 weeks’ wages.
That said, the Act provides exceptions to the requirement to pay an employee severance allowance. The relevant exception for the purposes of this article is where an employee unreasonably refuses to accept an offer of re-employment by the employer at the same place of work under no less favourable terms than he was employed immediately prior to termination.
It is important to note that the employer may still be exposed to the obligation to pay severance if there is an offer of re-employment by the employer which is found to be on less favourable terms than those on which he was employed immediately prior to the termination, or if the employee has reasonable justification for not accepting an offer of re-employment. If the terms are effectively identical, then there is unlikely to be an issue. However, where they begin to diverge, careful consideration will need to be given to the changes and their cumulative effect.
A purchaser may limit their liability for such payments following a sale or transfer by ensuring that any terminations occur prior to the sale or transfer of the business and are carried out by the seller. The parties may also negotiate setting aside a portion of the purchase price to account for any potential terminations which occur following the sale or transfer. Another option is the inclusion of a suitable indemnity clause in the sale and purchase agreement. How to structure this limiting of liability in each case will certainly be subject to negotiations between the purchaser and seller, and it is important that these issues are addressed at an early stage in the process, including the opportunity to take legal advice on the specific transaction. However, by knowing what liabilities may lay ahead, the purchaser will be better placed to ensure that any inherited obligations are dealt with prior to entering into a sale or transfer of the business.
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.