Australia: 8 simple rules to help acquirers in M&A deals hit the ground running with employee issues

Summary

• Human capital is often a major asset of the target in a commercial transaction. The transaction itself will almost always create uncertainty in the minds of many employees.
• The ability to develop plans for the integration of the target into the successful bidder’s organisation can greatly assist with employee retention and, at the same time, facilitate a swift return on investment post deal.
• Plans for integration can be developed during the pre-deal/negotiation period with minimal additional work, enabling the successful bidder to implement organisational change quickly post-deal and minimising uncertainty for affected employees.

1. Determine the integration plan you need

Depending on the nature of the acquisition, an integration plan will be more or less complex. Ultimately there are two ends of the integration spectrum:

• ‘bolt on’ where the target maintains almost all of its independence and continues to operate its own business, and
• ‘full integration’ where the target becomes a fully integrated business unit of the successful bidder.

Most post-deal plans aim for something toward the full integration end of the spectrum, but balance this position with a desire to maintain part of the essence of the new acquisition, which can be a complicated task. Further complications can also arise due to the need to divest or fundamentally change sub-groups within the acquired organisation to realise value.

There are a variety of statutory and contractual obligations that need to be complied with in order to effect organisational change. These should not be seen as road blocks, but rather as rules of engagement that can assist to structure both pre and post-close plans.

2. Confirm who is making the decisions

The identity of the decision maker in business re-organisations in the employment context is important as the:

• timing of a decision usually activates obligations to notify, consult or otherwise engage with employees and their representatives regarding either the decision or how it is implemented,
• decision maker’s considerations can be challenged on the basis that they are unlawful or discriminatory by disaffected employees, and the
• outside world may consider the decision was made at a different time or by a different person, leading to challenges based on a failure to comply with the employer’s obligations under statutes, collective agreements, contracts or policies.

Being clear about who will actually make the final decision, and the information that they base their decision on is not only sensible, but sets up the best defence to such claims. Where decisions are made by other companies in a corporate group to effect change across the group, consultation obligations of other employing entities in the group should be carefully considered.¹

3. Understand the employment arrangements you will inherit

Consideration should be given to whether the employment and industrial arrangements in place within the target are suitable for the business going forward. This is unlikely to be identified by simply applying a financial materiality threshold on a due diligence report.

Comparatively, changing contractual and policy arrangements is a simpler process than dealing with collective agreements made under the Fair Work Act and its predecessors. However, key areas to consider in employment contracts include:

• protection of the business’ interests, including confidential information, intellectual property and other intangible assets,
• whether service has been recognised (this may impact the successful bidder financially but also in terms of staffing and leave management practices),
• whether company policies are incorporated and apply as contractual terms, and
• the interaction between the employment contract and any applicable modern awards or enterprise agreements.

Collective agreements reflect the cultural history of the target and can contain provisions that impede flexibility and lead to delays in implementing organisational change. In some circumstances, collective agreements can enable the Fair Work Commission (or other appointed dispute resolution provider) the ability to arbitrate organisational change issues with limited possibility for appeals.

The Fair Work Act’s transfer of business provisions² mean that the bidder will inherit and be bound by the target’s collective agreements when an employee’s employment is terminated, they commence new employment with the bidder within 3 months, the work performed is the same or substantially the same and:

• there is a transfer or beneficial use of assets that relate to the work,
• there is an outsourcing of work,
• there is an insourcing of work, or
• the old and new employers are ‘associated entities’.

4. Plan how to consult on any post-deal changes

Obligations to genuinely consult in line with statutory or contractual obligations or in line with target or bidder policies can create additional hurdles to effecting organisational change.

Modern awards and enterprise agreements will contain mandatory clauses (other older collective agreements will likely have some form of consultative mechanism as well)  requiring employers to consult with employees if changes to usual working hours are to be implemented and where organisational changes are likely to have a significant effect on employees’ employment.

Complexities also arise as consultation on change will often result in three groups of employees being created, those who:

• will continue in their roles,
• will exit the business, and
• are in a position or team whose future is yet to be determined.

The approach taken with each of these groups following the initial announcement about changes can be tailored to ensure the decision maker(s) has all relevant information they require to ensure efficient and fully informed decision making.

5. Conduct a risk assessment on information and business protections

During the due diligence phase, it is usual to consider the protections that employment arrangements attempt to provide. However, it is often difficult to truly understand the enforceability of these provisions in the abstract – this is particularly true with respect to restraints of trade where an understanding of the circumstances giving rise to the contractual arrangements is required.

The question that must be asked is: do the target’s employment arrangements provide for adequate and enforceable:

• protection of intellectual property and confidential information,
• restraints of trade for key personnel,
• notice periods and garden leave provisions for key personnel?

6. Decide what to do with existing employment arrangements

Standardisation of employment contracts and policies makes managing employment issues simpler. In an asset sale transaction, new employment contracts can be offered to transferring employees and this is a great opportunity to refresh and standardise existing employment contracts.

If collective agreements in place at the target are not suitable for the business longer term, there are a number of options at the pre and post completion stage that can prevent the agreement from applying to the business:

• seek to vary (if possible) or terminate the collective agreement by agreement with the employees or on application to the Fair Work Commission (in certain circumstances),³
• seek orders from the Fair Work Commission that the collective agreement does not transfer or that the collective agreement applies to certain employees (in an asset sale transaction),⁴
• do not hire any employees from the target for at least 3 months (in an asset sale transaction).⁵

Prior to completion, it is possible for a bidder to request that the target take steps to address issues with employment arrangements. This is more likely to be successful where employees of the target can see a material benefit for themselves in the transaction. Care should be taken to ensure that employees are not coerced, placed under duress or undue pressure to agree to changes to their terms and conditions in breach of the Fair Work Act and/or anti-discrimination legislation.

7. Develop an appropriate communication plan

Developing communication plans and identifying the company spokesperson for employee issues can assist to resolve employee queries or concerns before they become issues. Considering how market or other public announcements will be interpreted by employees will also aid in smoothing the transition process.

Once the deal closes and target employees become bidder employees, clear, effective and simple communications for employees in each of the three groups listed above in point 0 will save the implementation team time and effort in scrambling to get answers while consultation and change management is occurring.

8. Using the due diligence process to develop management plans for target employees

During the due diligence phase, it is very easy to obtain background information to start briefing relevant target personnel on employee matters. In most circumstances the information required to commence work in preparing the plans discussed above is readily available and does not require significant investment of time by the deal team to collate.

Utilising available information allows frameworks to be developed in parallel with the due diligence report. While based on the same information as the due diligence report, these planning frameworks will necessarily have a more practical management focus and can assist in developing strategies to standardise employment arrangements and effect change in a structured and coherent way. Common management plans that can help to show that the new management team is focused on continuous improvement include:

• incentivising key employees or teams to remain with the business post-deal,
• actively managing performance from day one,
• reviewing and actively managing long term ill and injured employees,6
• engaging with employees to start cultural integration of the new business; and
• conducting a risk assessment of contractor arrangements to identify potential sham contracting arrangements, and/or
• reviewing contracting arrangements with a view to updating them to reduce the risk of any potential sham arrangements.

Written by Drew Pearson, Partner and Susan Duc, Senior Associate

¹ Patrick Stevedores Holdings Pty Ltd v The Maritime Union of Australia [2013] FWC 4391.

² Fair Work Act 2009 (Cth) ss 311-317.

³ For further information on recent termination applications see our earlier legal update at 'Australia: Full Bench in Aurizon turns tide on enterprise agreement terminations'.

⁴ Fair Work Act 2009 (Cth) ss 318-319.

⁵ Prospective employers are protected by s 341(5) of the Fair Work Act 2009 (Cth)  from discrimination and general protection claims arising from transfer of business situations.

⁶ For further information on managing ill and injured employees see our earlier legal update at 'Australia: Employment Insight – Managing ill, injured and chronically absent employees – a robust approach'.