Succession planning: Importance of reviewing employment contracts

When conducting due diligence in advance of a business purchase, buyers may use employment related issues as a bargaining chip to reduce the purchase price. Given the strict rules preventing sellers from making changes to employee’s terms and conditions of employment as a result of a business sale, in some circumstances sellers have little option but to agree a discount or risk losing the sale.

This risk can be reduced by regularly reviewing employment related contracts and procedures, and well in advance of any proposed sale of your business.

Contracts of employment are the foundation of the relationship between any business and its employees and sets out what services are expected from the employee and in turn, what is expected from the employer.

However not all persons working for your business will have standard employment contracts. For example, individuals who are not engaged to work a standard 9 till 5 such as casual workers or those working on a self-employed basis will require different types of contracts tailored to accurately record the true working relationship.

Section 1 of the Employment Rights Act 1996 provides for the minimum amount of information that an employer must legally provide an employee in writing at the outset of the relationship.  This includes (but is not limited to) information relating to pay, working hours, benefits, notice entitlements, training entitlements and whether the employee is subject to a probationary period. This “section 1”  information must be provided on or before the first day of employment, failing which could result in the employee being awarded up to four weeks’ pay.  

Rather than simply rely on the “section 1” statement employers should have in place relevant and detailed contracts of employment to ensure that the business is fully protected both during and after the employment relationship comes to an end. Well drafted and tailored contracts can protect an employer (and any prospective purchaser) from problems such as misuse of confidential information, attempts by employers to poach clients, repayment of training costs or other debts.

In a family-owned/ owner managed business, it is often the case that the business starts off being managed by a close-knit team of family members but this means the approach to contracts of employment can be somewhat informal but this can lead to problems if a dispute arises. Any business purchaser will want to be satisfied that the business is properly protected and therefore appropriate restrictive covenants and confidentiality provisions will be seen as key. If these protections are not in place then this could adversely affect the value of the business and make it less attractive to prospective purchasers.

Therefore to retain the value in your business and reduce the risk of price renegotiations on sale we recommend you put in place relevant contracts of employment and ensure that these are kept under regular review.

It is important to note that where contracts are being updated and/or changed in anticipation of the sale of the business, the employer should always seek agreement to the changes beforehand and conduct appropriate collective and individual consultation. Advice should be taken to avoid breaching contractual terms or falling foul of statutory consultation obligations. An employer cannot unilaterally vary the terms of the contract, except in very limited circumstances. Even where the right to make changes in the contract this is only in relation to specific terms. If employers do vary the contract without agreement, this could amount to a breach of contract and may lead to any changes including post-termination business protection measures being void.

Contact Us

If you require any assistance drafting or reviewing contracts relating to employees, workers or self-employed consultants, with any matters, please do not hesitate to get in touch with me or a member of our Employment Team, who will be pleased to advise and assist.

This article contains a general overview of information only. It does not constitute, and should not be relied upon, as legal advice. You should consult a suitably qualified lawyer on any specific legal problem or matter.