Employment Law Considerations in Business Sales and Purchases

Business sales and purchases are often driven by commercial priorities, valuations, and deal structure. However, employment law considerations play a critical role in any business sale or purchase in New Zealand, particularly when considering what happens to employees, consultation obligations, and potential liabilities. 

Both vendors and purchasers need to carefully navigate their obligations to employees, taking into account statutory and contractual protections, privacy implications, and commercial sensitivities. A failure to do so can result in legal risk, unintended consequences and liabilities, and operational disruption.  

This article outlines the key employment law issues that arise in business transactions, and the practical steps parties should take from both a vendor and purchaser perspective.  

The starting point: What happens to employees when a business is sold in New Zealand? 

In New Zealand, there are two primary ways in which business ownership can change. How employees are impacted differs depending on the structure of the transaction: 

• Share sale: The purchaser acquires shares in the employing entity. The employer does not change, and employees continue their employment uninterrupted. 
• Asset sale: The purchaser acquires the business’ assets (such as goodwill, plant, stock, etc). In this scenario, employment does not automatically transfer to the purchaser. 

This distinction is fundamental and should be considered early, as it drives the employment processes that must be followed. 

Vendor Obligations 

Focussing on asset sales, vendors must be aware of their obligations owed to employees when selling the business.  

Under the Employment Relations Act 2000, all employment agreements must contain employee protection provisions. These provisions are required to: 

• Outline the process to be followed in the event of restructuring (including a sale of the business);  
• Specify how the employer will engage with a prospective purchaser regarding employee transfer; and  
• Set out how employees’ entitlements will be addressed if they do not transfer. 

Practical Implications 

In practice, this requires vendors to: 

• Inform employees of the proposed transaction and its potential impact at an appropriate stage;  
• Undertake a genuine consultation process before making decisions that may result in redundancy;  
• Engage with the purchaser regarding the availability of ongoing employment for affected employees; and  
• Ensure any restructuring process complies with both contractual obligations and principles of good faith. 

Failing to follow these requirements may expose the vendor to personal grievance claims, most commonly for unjustified dismissal.  

Well drafted employment agreements will also assist vendors in managing transition risks and reducing uncertainty during the sale process. 

Purchaser Considerations and Due Diligence 

For purchasers, employee-related due diligence is essential to understanding both the risk profile of the business and the practical implications of making offers of employment. 

Without a clear picture of the workforce, purchasers risk inheriting liabilities, mispricing the transaction, or making offers that are commercially unworkable. 

At a minimum, purchasers should obtain sufficient information to assess the nature, cost, and associated risk of the workforce. This commonly includes: 

• The number of employees, their roles, and overall structure of the workforce;  
• Identification of key personnel and business-critical roles;  
• Whether any “vulnerable employees” are involved (who may have statutory transfer rights);  
• Employment agreements and core terms, including remuneration, hours of work, and incentive arrangements;  
• Leave balances and length of service (which may have cost implications if recognised); and  
• Any known issues, such as ongoing grievances, performance concerns, or disciplinary processes. 

This information directly informs: 

• Which employees the purchaser wishes to make offers to;  
• Whether offers will be made on substantially similar terms;  
• The allocation of employment-related risk in the Sale and Purchase Agreement (including warranties and indemnities); and  
• The overall value of the transaction. 

Timing, Privacy, and Coordination 

One of the most challenging aspects of employment law compliance in business transactions is timing.  

There is an inherent tension between the purchaser’s desire to obtain information, the vendor’s obligation to comply with employment and privacy obligations, and the need to maintain confidentiality and commercial certainty until the transaction is finalised. 

In practice, early due diligence is typically conducted using aggregated or anonymised data. More detailed, identifiable information is disclosed later in the process.  

Purchasers should ensure that the Sale and Purchase Agreement allows sufficient flexibility to obtain detailed employee information at an appropriate time, and make informed offers of employment. 

At the same time, vendors must ensure that any disclosures are consistent with their obligations, and timeframes allow for genuine consultation to occur.  

Conclusion 

Employment considerations are integral to the success of any business sale or purchase. A failure to properly address these issues can result in significant legal exposure, operational disruption, or other unintended consequences.  

By taking a proactive and structured approach, supported by clear contractual provisions, careful due diligence, and a compliant consultation process, both vendors and purchasers can effectively manage these risks to help achieve a smooth transaction.  At DTI Lawyers, employment considerations are managed in conjunction with the commercial considerations of business sales and purchases, in a constructive and collaborative manner between our teams of experts.

For further advice on managing these processes effectively, the Commercial and Employment teams at DTI Lawyers are available by phone on 07 282 0174 or email [email protected].