Understanding transfer of employment: how a transfer of business affects contracts, entitlements and job security

A transfer of employment can occur due to a sale, merger or restructuring. These changes can affect contracts, entitlements and job security. Employers must follow the Fair Work Act to ensure a smooth transition.[ez-toc]

A quick guide to a transfer of employment

A transfer of employment happens when a business changes owners and employees move to a new employer. The Fair Work Act protects workers by setting rules for job continuity, entitlements and contracts. Some benefits transfer, while others may be paid out. Employers must follow legal steps to avoid unfair dismissal and ensure a smooth transition.

What is a transfer of employment?

A transfer of employment occurs when a business changes ownership and employees are shifted to a new employer. This can happen due to a transfer of business, merger, or restructuring. The Fair Work Act 2009 sets rules to protect employees in these situations. Businesses must understand how a transfer affects jobs, contracts, and employee entitlements.

How business changes impact employment

A transfer of business happens when:

• The old employer stops operating, and a new employer takes over.
• Employees perform largely the same work for the new employer.
• A business is transferred from one company to another within a corporate group.
• A service, such as cleaning or IT, is outsourced or taken back in-house.

When this happens, employees may keep their existing roles, but their rights and entitlements may change.

Key concerns for businesses

A transfer of employment raises important issues:

• Job continuity: Will employees keep their jobs under the new employer?
• Employee entitlements: Will leave balances and other benefits continue to apply?
• Legal compliance: Is the new employer required to honour past agreements?
• Termination risks: Can employees be terminated if the new employer does not take them on?

Understanding these rules helps business owners and managers prepare for a smooth transfer.

What constitutes a transfer under the Fair Work Act?

Fair Work sets clear rules for when a transfer of employment happens. It applies when an employee leaves their old employer and starts with a new employer within three months. The new employer must also run the same or similar business, or the employee must perform largely the same work.

The legal test for a transfer of employment

To decide if a transfer has taken place, the following must occur:

• The employee’s employment first terminated with the old employer.
• The employee starts working for the new employer within 3 months.
• The work previously performed remains the same or very similar.
• The old employer to the new employer has a legal or financial connection.

A connection exists if:

• The business is transferred from one employer to another.
• The new employer buys or takes control of assets from the old employer.
• The new employer and old employer are associated entities.

If these conditions apply, employees may keep their continuous service. This means their time with the old employer still counts for things like annual leave and long service leave.

Associated entities vs. non-associated entities

The type of transfer affects whether the new employer must recognise past service.FactorAssociated entitiesNon-associated entitiesEmployment continuityUsually recognisedWould not be recognised unless agreedAnnual leaveTransfers to new rolePaid out by old employerLong service leaveMay continue to applyDepends on state lawsRedundancy payNot requiredOld employer must pay if service is not recognised

When does a transfer not happen?

A transfer of business happens only if there is a legal or financial link between employers. A transfer does not occur if:

• A company hires a former employee after more than three months.
• An employee applies for and starts a new job with no connection to their previous employer.
• The old employer would have kept operating without the new employer taking over.

Understanding these rules helps employers follow the law and protects employees' rights.

Impact on employee entitlements and contracts

A transfer of employment can affect an employee’s rights and benefits. Some entitlements continue to apply, while others may be paid out or reset. The outcome depends on whether the new employer recognises prior service and whether the transfer of undertaking includes existing agreements.

What entitlements are affected in a transfer of employment?

Some entitlements transfer to the new employer, while others depend on agreements between parties.EntitlementTransfers to new employerPaid out by old employerMay resetAnnual leaveYes, if new employer agrees to recognise prior serviceYes, if service is not recognisedNoLong service leaveDepends on state laws and employer agreementsYes, if service is not recognisedNoSick leaveYes, if new employer recognises prior serviceNoYes, if service is not recognisedRedundancy payNoYes, if old employer must pay due to non-recognitionNo

When do entitlements transfer, reset, or get paid out?

Entitlements transfer if:

• The new employer must recognise the employee’s prior service.
• The new employer is an associated entity of the old employer.
• The employee’s role remains the same.

Entitlements reset if:

• The new employer chooses not to recognise prior service.
• The old employer and new employer are non-associated entities.

Entitlements are paid out if:

• The old employer must pay accrued leave before the employee starts with the new employer.
• The employee’s employment ends and the new employer does not take them on.

How a transfer of undertaking affects contracts and agreements

A transfer of undertaking can impact employment contracts, awards, and agreements. In most cases:

• Employment contracts transfer, but the new employer may offer new terms.
• An award or enterprise agreement may continue to apply if linked to the business.
• If a contract does not transfer, the old employer may need to terminate employment and pay out final entitlements.

Checklist for employers and employees

Employers must:✔ Confirm if they will recognise prior service.✔ Review the impact of awards or enterprise agreements.✔ Provide employees with written terms before the transfer.Employees and managers should:✔ Check if entitlements like annual leave and long service leave will transfer.✔ Ask if the new employer will honour previous contracts.✔ Understand whether redundancy applies if the role does not transfer.By knowing their rights, both employees and employers can ensure a smooth transfer of business.

Employer obligations and best practices during a transfer

A transfer of business affects employees’ rights and working conditions. Fair Work sets rules that employers must follow to ensure a fair transition. A well-planned transfer policy can help employers manage this process smoothly.

Employer obligations during a transfer

Employers must:

• Provide employees with written notice of the transfer. This should include whether the new employer will recognise their past service.
• Outline any contract changes before the employee becomes employed by the new employer.
• Confirm whether accrued leave, redundancy, or other entitlements are affected.
• Ensure any termination follows legal requirements if the new employer does not take on the employee.

Failing to meet these obligations can lead to legal claims, including unfair dismissal disputes.

Best practices for a smooth transfer

Employers can take steps to ensure a smooth transition:✔ Communicate early – Inform employees about the transfer as soon as possible.✔ Consult with employees – Address concerns and explain how their rights will change.✔ Review contracts and agreements – Ensure compliance with awards, bargained enterprise agreements, and workplace policies.✔ Seek legal advice – Get expert input on complex cases, especially when dealing with non-associated entities.

Key elements of a transfer policy

A transfer policy ensures clear rules for managing staff transitions. It should include:

• Notice periods – Define when and how employees are informed of a transfer of employment.
• Entitlement protection – Explain how leave, redundancy, and other benefits are handled.
• Dispute resolution – Outline how conflicts are managed if employees disagree with the transfer.

Sample framework for a transfer policy

Employers can use this framework to create a clear policy:1. Purpose – Explain the aim of the policy and why it applies.2. Scope – Define which employees and situations the policy covers.3. Notice period – State how much notice employees receive before a transfer of undertaking.4. Entitlement management – Clarify whether the new employer must recognise past service.5. Redundancy and termination – Outline conditions for layoffs and payouts.6. Dispute handling – Provide steps for employees to raise concerns.A clear transfer policy ensures employees and managers understand their rights. Employers should review it regularly to stay compliant.Streamline your business documentation even further with Business Kitz. Business Kitz offers over 100 policy and agreement templates in our Document Library, provides secure storage for documents and employee data, and offers many more features for employee and company management. Get started today!

Termination, redundancy, and unfair dismissal risks

A transfer of business can lead to job losses if employees are not offered roles with the new employer. Employers must follow strict rules when making roles redundant to avoid unfair treatment. Fair Work sets out rights and protections for affected employees.

Redundancy obligations when employment is not transferred

If a new employer does not take on an employee, the old employer must treat the role as redundant. This means:

• The employee may be entitled to redundancy pay if they have worked for at least 12 months.
• The old employer must provide notice or pay in lieu of notice.
• The old employer must consult with affected employees if an award or enterprise agreement applies.

Redundancy does not apply if the employee is reemployed by the new employer and their continuous service is recognised.

Redundancy payments: associated vs. non-associated entities

The type of transfer affects whether an employee gets redundancy pay.Employer connectionRedundancy payment required?Associated entity of the old employerNo, as service continuesNon-associated entitiesYes, if service is not recognisedIf the new employer does not recognise prior service, the old employer must pay redundancy entitlements.

Employer responsibilities in handling layoffs

Employers must ensure fair treatment by:✔ Giving proper notice before termination.✔ Paying all owed entitlements.✔ Offering support, such as redeployment within a company.✔ Explaining why the role is no longer needed.

Unfair dismissal protections during a transfer

Employees are protected from unfair dismissal if they are let go for invalid reasons. A dismissal may be unfair if:

• The employee’s service was not properly considered.
• The termination was due to discrimination or retaliation.
• The employer did not follow a fair process.

A dismissal may be valid if:

• The business no longer needs the role.
• The employee’s performance or conduct was unsatisfactory.

Employers should refer to Fair Work rules and the National Employment Standards to ensure dismissals are managed in accordance with legal requirements.

How are annual leave and long service leave handled in a transfer of employment?

A transfer of employment can affect an employee’s leave entitlements. The new employer may choose to recognise prior service, or the old employer must pay out leave balances before the transfer. Understanding how these entitlements work helps both employers and employees plan for changes.

When annual leave and long service leave transfer

Leave entitlements may be transferred, paid out or reset depending on the type of transfer. If the new employer is an associated entity of the old employer, leave entitlements usually carry over. If the old employer and the new employer have no formal connection, the old employer must pay out leave balances.

Employer discretion in recognising prior service

The new employer decides whether to recognise past service for leave accrual unless required by law. If they do, the employee keeps their period of service for future leave entitlements. If they do not, the old employer must pay out accrued leave before the employee’s employment ends.

Decision tree: managing leave entitlements

Use this decision tree to determine how leave is handled:

1. Is the new employer an associated entity of the old employer?
   • Yes → Leave transfers
   • No → Go to step 2
2. Does the new employer agree to recognise prior service?
   • Yes → Leave transfers
   • No → Go to step 3
3. Did the employee work long enough to qualify for long service leave?
   • Yes → The old employer must pay out long service leave
   • No → Leave resets

Employers should refer to Fair Work legislation or engage a lawyer if unsure about how to manage employees leave during a transfer of employment.Businesses can strengthen their leave processes during a transfer by accompanying your transfer policy with Business Kitz Leave Policy Template. Ensure you have the right policies for your business and gain access to over 100 agreements, forms and policy templates - sign up today!

Frequently asked questions about a transfer of employment

How does a transfer of business affect employees?

A transfer of business may impact an employee’s contract, entitlements or obligations. If the new employer agrees to recognise prior service, leave and redundancy rights may transfer. If not, the old employer must pay out accrued entitlements. Employees should check if their role, pay and conditions will stay the same under the new employer.

What is a transfer of undertaking?

A transfer of undertaking happens when an entire business or part of it moves to a new employer. This may only occur when the incoming business owner takes over assets or operations. The Fair Work Act and the National Employment Standards apply to protect the rights of employees. Workers should confirm how the transfer affects their contracts and entitlements.

Why is a transfer policy important?

A transfer policy helps businesses manage staff transitions fairly. It provides a clear guide on notice periods, entitlements, and how the new employer will handle existing agreements. Employers must ensure policies comply with the National Employment Standards and other legal requirements. Employees who need more information should speak to a workplace relations professional or seek legal advice.

How do associated entities and non-associated entities affect entitlements?

If the new employer is an associated entity of the old employer, prior service usually carries over. This means the transferred employee’s service counts for leave and redundancy. If the businesses are non-associated entities, the old employer must pay out entitlements before the transfer.

What happens to service with the old employer when moving to a new job?

If the new employer recognises prior service, employees keep their benefits, including long service leave and redundancy. If not, the old employer must settle any outstanding entitlements. The service with the new employer then starts fresh. Employees should check their contracts to understand how the transfer of undertakings in Australia affects them.

Do new employees get the same rights as transferring employees?

No. New employees who join after a transfer of business do not get the same entitlements as those who transfer. Their conditions depend on the agreement they sign with the incoming business owner.

What should employees do if they are unsure about their rights?

Employees should review their contracts, check their leave balances and ask how their service with the old employer is treated. If they have concerns, they should seek advice from a workplace relations professional. Employers should provide a list that sets out any changes before the transfer happens.

Are there any exceptions where employment does not transfer?

Yes, exceptions exist even in circumstances where a transfer of business takes place. If an employee takes a break of more than three months or applies for a new job elsewhere, their previous service does not count. The new employer does not have to recognise past entitlements unless they agree. Employers should seek legal advice if unsure of their obligations.

Where can I get more information?

If you need more information, visit the Fair Work Ombudsman website or speak to a legal professional. Each transfer has a number of complexities, so it is important to understand how applicable legal provisions govern situations specific to your case.

Ensuring a smooth transfer

A transfer of employment affects jobs, entitlements and legal obligations. Employers must follow Fair Work requirements to ensure a fair process.Key takeaways for businesses

• A transfer of business can impact leave, redundancy and contracts.
• The new employer must decide whether to recognise prior service.
• The old employer must pay out entitlements if service is not recognised.
• Employees may be entitled to redundancy pay if their job does not transfer.
• Unfair dismissal laws protect employees from wrongful termination.

Checklist for compliance✔ Notify employees in writing about contract or entitlement changes.✔ Confirm if leave and redundancy entitlements will transfer or be paid out.✔ Ensure fair consultation and avoid wrongful termination.✔ Review workplace policies to meet Fair Work Commission standards.✔ Seek legal advice if unsure about obligations.A transfer of business involves complex legal and HR processes. Business Kitz provides legal templates and business and employee management resources to help businesses manage employment contracts and entitlements. Sign up for a free Business Kitz account today! Disclaimer: This content is intended to be used for educational and informational purposes only. Business Kitz does not offer legal advice and cannot guarantee the accuracy, reliability, or suitability of its website content for a particular purpose. We encourage you to seek professional advice from a licensed professional and verify statements before relying on them. We are not responsible for any legal actions or decisions made based on the information provided on our website.Unless expressly stated otherwise, all content, materials, text, images, videos and other media on this website and its contents are the property of their respective copyright owners.