A prospective buyer of a business will generally have limited knowledge about the target business. They will carry out what is known as ‘due diligence’ to understand more about the target’s assets and liabilities. The due diligence process broadly involves collating, reviewing and reporting on information relating to the organisation to identify any possible risks and to give the seller a better idea about running the business itself after completion.
From an HR perspective, the buyer will need to know what terms are offered to employees, workers and contractors so that it can: comply with its obligations after completion; assess wage costs; consider restructuring or other changes post-completion; and assess risk in terms of employee-related liabilities. The seller will want to be able to demonstrate to prospective buyers that all is in order in respect of its employees and their contractual arrangements.
Do the TUPE regulations apply?
A key question will be whether the proposed sale is of the company’s shares or its assets. A share sale means that the identity of the employer will not change, but an asset sale will mean that TUPE is likely to operate thus transferring those employees assigned to work in the part of the business being sold, to the buyer. In both cases the buyer will want information about employees, but a TUPE process will be more prescriptive in terms of the information provided and the process followed.
In preparation for an asset sale, the seller will need to collate what is known under TUPE as the employee liability information (ELI) about its staff who would transfer to the buyer. This must be given a minimum of 28 days before the transfer and must include the following about each transferring employee:
- Identity and age
- The terms of employment that an employer is obliged to give under section one of the Employment Rights Act 1996 (as amended in April 2020)
- Disciplinary and grievance procedures in the last two years
- Any court or tribunal claim or action brought against the seller in the previous two years, or that the seller has reasonable grounds to believe may be brought by an employee arising out of the employment with the seller
- Any applicable collective agreement
- Other employee information
While a share sale does not require the ELI, such information will generally be requested so that the buyer can understand how the business is structured in terms of its employees, their entitlements, wage costs and possible risks.
In both types of transaction, buyers are likely to want more information about employees than just the ELI, including, for example, whether employees are bound by obligations of confidentiality and restrictive covenants (particularly those in senior and key roles); what their contracts, policies and staff handbook contain; how holiday pay has been calculated (in particular by reference to variable pay such as commission and overtime); absence and statutory leave records.
Often standard contract templates are provided to the buyer, but the seller will need to be able to explain if there are employees on different terms to the templates and whether they have contracts signed by the employees.
Sellers should be prepared to provide information about:
- off-payroll workers providing their services to the business such as agency workers, contractors and self-employed consultants and how they are engaged; and
- Covid emergency funding, furloughed staff and any furlough agreements.
ELI provided pursuant to TUPE obligations may identify transferring employees. Any additional information provided by the seller in the due diligence process should be anonymised and provided separately to the ELI.
How can HR prepare efficiently?
- Collate the relevant employee information and documents in good time
- Create clear employee lists detailing the ELI/ main terms of employment
- Ensure information is accurate and up to date
- Anonymise information as far as possible
Clare Gilroy-Scott is a partner in the employment team at Goodman Derrick