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Becoming Succession Ready: Employee leave entitlement

Updated: Mar 12, 2023

When preparing for your practice succession, you should review your employees and their entitlements. In a previous blog, we reviewed issues around employee agreements – please review if you have not addressed this matter in your practice. Second, to employment agreements is employee entitlements. When you review employee entitlements, ensure each employee's leave entitlements are appropriately managed and not excessively accumulated.

If employees have excessive leave entitlements and this situation continues through due diligence, your successor may view this negatively. Such circumstances may cause concerns around work/life balance. When your successor takes over, and an employee wants to take their accumulated annual leave for a long holiday, this may not work during the transition period – for you or your successor. As a point of planning, in the lead-up to your practice succession, you may want to encourage staff members who have excessive accumulated leave to schedule some holidays to bring their leave balances to more acceptable levels.

When a business is sold in Australia, employees' leave entitlements typically transfer to the new owner meaning the new owner becomes responsible for the accrued leave entitlements of employees employed by the previous owner.

Under the Fair Work Act 2009, when a business is transferred from one employer to another, the new employer must recognise the employee's service with the previous employer as continuous service to calculate their leave entitlements. Any leave entitlements accrued by the employee with the previous employer will be transferred to the new employer.

On Completion, typically, there will be an adjustment to the Purchase Price for Leave Entitlements. As a guide, the adjusted sum will account for the tax deduction once the entitlements are paid. Of course, your successor will receive the tax deduction when the leave entitlements are paid, so the leave entitlements adjustment is reduced accordingly to account for the tax deduction.

Personal/Sick Leave is perhaps the most contentious because it is generally not paid out when employment ends unless an award, contract or registered agreement says otherwise. Thus, if a transferring employee resigns shortly after moving to employment with your successor, the leave entitlement obligations effectively disappear, as the Personal/Sick Leave entitlements are no longer payable. Different approaches can be implemented in these scenarios, but legal advice is always recommended.

It is important to note that depending on the legal structure of your business, different legislation will apply to the continuation of employment. Companies fall under federal jurisdiction, whilst individuals and partnerships (not involving companies) fall under state jurisdiction. HR Laws are complex matters concerning your succession, and you must seek the right legal advice.


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