Employee Entitlements Due Diligence When Buying a Business in Australia
Employee entitlements due diligence is one of the most underestimated parts of buying a business in Australia. When you acquire a business — particularly in an asset sale — you may be taking on obligations for staff leave balances, prior service credit, and notice periods that were accrued under the previous owner. Get this wrong and you can inherit a liability worth tens of thousands of dollars that the seller has already spent.
This is covered in depth in Module 5 of the Playbook.
Here's what you need to check, what the asset sale versus share sale distinction means for your obligations, and the specific numbers to look for when you're sitting across from a trades business owner who hasn't kept a clean payroll in years.
Why employee entitlements catch buyers off guard
Most buyers focus on the financials — revenue, EBITDA, customer lists. Staff entitlements are an afterthought until they're not.
I spoke to a broker last year about a deal where a buyer purchased a commercial cleaning business in Brisbane. Forty-two employees, mostly casual. The buyer did solid financial due diligence but skimped on the HR side. On settlement day, he discovered three long-serving supervisors had annual leave balances of over six weeks each, none of which had been provisioned properly in the accounts. Add in accumulated personal leave and long service leave for the two staff who'd been there more than seven years, and the inherited liability was close to $85,000 (which is a lot when your EBITDA was $220,000).
The seller hadn't been hiding it exactly. The balances were in the payroll system. Nobody had looked.
Asset sale vs share sale: the critical distinction
The structure of your purchase determines your default exposure. This is one of the most important things to understand before you sign anything.
In an asset sale, you are buying the business assets — equipment, goodwill, customer contracts, stock — but not the legal entity. This means you are not automatically the employer. You need to make an offer of employment to each staff member, and if you offer employment on terms that are "no less favourable" than their existing arrangement, the law generally requires you to recognise their prior service for leave entitlements.
In a share sale, you're buying the company itself. Every obligation that company has — including every accrued entitlement from every employee — transfers to you automatically. Long service leave, annual leave balances, superannuation arrears, pending WorkCover claims: all of it.
The rule of thumb: asset sales give you more flexibility in theory, but the Fair Work Act and most modern awards still require you to recognise prior service when you make employment offers. Share sales eliminate that ambiguity by handing you the lot.
You can read more about the broader implications in my post on asset sale versus share sale.
What to verify during due diligence
1. Employee register and contracts
Request a full list of all employees — name, start date, employment type (full-time, part-time, casual), hourly rate or salary, and current leave balances. Cross-reference this against the payroll system, not just what the seller tells you verbally.
For a trades business with 10 or fewer staff, this is a half-day exercise. For a cleaning or landscaping business with 30+ employees, you need a full week and ideally someone who knows payroll.
Watch for:
- Staff listed as casuals who have worked regular and systematic hours for more than 12 months (they may have accrued entitlements)
- Long-serving employees with suspiciously low leave balances (it might mean the leave hasn't been properly tracked)
- Part-timers who were quietly converted from full-time without updating leave accruals
2. Annual leave balances
Annual leave accrues at the rate of four weeks per year for full-time employees under the National Employment Standards. For a business with five full-time staff who've been there an average of three years with limited leave taken, you could easily be looking at $40,000–$60,000 in accrued annual leave.
Ask for the payroll export. Check the dollar value of the accruals. If the seller can't produce that figure within 24 hours, that's a red flag — either the payroll system is a mess, or the numbers are being withheld for a reason.
3. Long service leave
Long service leave is where the numbers get serious. Most Australian states require employers to provide long service leave after seven to ten years of continuous service — at a rate of around 8.67 weeks (in most states).
For a trades business that's been running for fifteen years with a core team of four long-serving staff, the long service leave liability alone can exceed $100,000. The exact rules vary by state (Queensland, New South Wales, and Victoria all have slightly different thresholds and accrual rates, and the Australian Capital Territory is its own adventure), so get state-specific advice.
The thing most buyers miss: long service leave often doesn't appear on the profit and loss statement because the previous owner has been treating it as someone else's future problem.
4. Superannuation arrears
The Australian Taxation Office takes superannuation seriously. A seller who has been struggling with cash flow may have deferred super payments — which means on settlement day, you could be acquiring a business with an outstanding SGC liability.
Request ATO confirmation that superannuation guarantee contributions are up to date for all employees. If the seller can't provide this, or if there's any hedging about timing, pause the transaction and verify directly with the ATO or a tax adviser.
This links into the broader tax due diligence process — super arrears are a tax liability, not just an HR one.
5. Redundancy and termination costs
If you're buying a business and planning to restructure — let's say you want to reduce headcount or reorganise the management layer — you need to understand what redundancy entitlements look like before you proceed.
Under the National Employment Standards, genuine redundancy entitlements depend on years of service. An employee with five years' service might be entitled to eight weeks' pay in redundancy alone, plus notice. Multiply that across three or four positions and you've got a material cost that needs to factor into your purchase price.
Don't assume you can restructure on day two without consequence. Some buyers build a redundancy reserve directly into their offer price.
Structuring the purchase to manage entitlement risk
There are a few practical levers worth knowing.
Price adjustment at settlement. The most common approach is to negotiate a purchase price adjustment equal to the outstanding entitlement liability at settlement date. The buyer and seller agree on the verified entitlement figure, and that amount is either deducted from the purchase price or held in escrow until the liability is confirmed. This means the seller can't run up leave balances in the final months before settlement (which does happen — I've seen staff given "approval" to take leave they never actually took, with the leave balance conveniently zeroed out just before completion).
Vendor warranty. Ask for a specific warranty in the sale and purchase agreement that all employee entitlements have been accurately disclosed and that superannuation is current. A warranty without teeth is just paper, so tie it to an indemnity that allows you to recover any undisclosed liability from the seller for a defined period post-settlement.
Employment offers as a tool. In an asset sale, you are required to make employment offers but are not required to offer employment to everyone. If there are staff whose entitlements make them economically unviable to retain, you can structure the sale to exclude them — but this needs to be done carefully and with proper legal advice. Getting it wrong creates unfair dismissal exposure for the seller and reputational risk for you.
The checklist items most buyers miss
In my experience reviewing deals, these are the entitlement items that most buyers gloss over:
- Rostered days off (RDOs) — common in construction-adjacent trades, often not tracked
- Time off in lieu (TOIL) — informal arrangements that aren't in the payroll system
- Commission or bonus accruals — for sales staff in commercial services businesses
- Parental leave — employees on parental leave still accrue annual leave during some periods
- Portable long service leave schemes — construction, cleaning, and security industries have portable LSL schemes in some states; check whether the employer has been registering and contributing
For a thorough approach, pair this with the full due diligence checklist which covers the complete HR and employment section alongside financial and legal checks.
Want a complete walkthrough of what to check? The Due Diligence Checklist covers the full employment and entitlement section, along with financial, legal, and operational checks — free download.
Red flags in a trades business context
Blue-collar businesses have some specific patterns worth knowing.
High casual workforce with long tenure. A plumbing or electrical business with a core crew of casuals who've been there five or six years isn't unusual, but it creates ambiguity. Under the Fair Work Act, long-term regular casuals may have a right to request conversion to permanent employment — and if the seller has been ignoring those requests, you're inheriting the problem.
Owner as "working director" who pays themselves as a contractor. The seller might not have been on the payroll at all, which seems like a clean situation until you discover two of their family members are employees with leave balances that were never actively managed.
Subcontractor arrangements that might actually be employment. Trades businesses often use subcontractors. If those arrangements look more like employment — fixed hours, no ability to work for others, tools and equipment provided — you could be inheriting an employment relationship that hasn't been formalised. The ATO and Fair Work Australia both pursue these arrangements aggressively.
For the financial verification side of the due diligence process — including how to cross-check payroll figures against the P&L — see my post on how to verify the financial records.
For the legal side — contracts, restraints, PPSR — the legal due diligence post covers the territory in full.
FAQ
Do I have to recognise prior service when I buy a business in an asset sale?
Generally yes, if you make an offer of employment on comparable terms. The Fair Work Act requires you to recognise continuous service for annual leave purposes when the employment transfer meets the definition of a "transfer of business." Get legal advice on the specific facts of your deal.
What happens to long service leave in an asset sale?
It depends on the state. In most Australian states, if you offer employment and the employee accepts, their prior service is recognised for long service leave purposes. In some states (e.g., Victoria), the seller remains liable for accrued LSL and must pay it out at settlement — which then becomes part of your negotiation on price.
Can I just not offer employment to staff with high entitlements?
Technically you can choose not to offer employment to some staff in an asset sale, but you need to be careful about the reason and the process. Selecting people based on their entitlement balances creates unfair dismissal and adverse action risk for the seller. Get legal advice before taking this approach.
How do I find out if superannuation is up to date?
Ask the seller to provide an ATO employee payment summary or a payroll system report showing super paid and super accrued for the current financial year. You can also ask the seller to obtain a clearance certificate or written confirmation from their accountant. If anything is unclear, hold funds in escrow at settlement pending confirmation.
What's a typical entitlement liability for a small trades business?
For a business with five to ten employees and a three-to-five year average tenure, you'd expect accrued annual leave of $30,000–$80,000 depending on headcount and wage rates. Long service leave adds another layer for businesses over ten years old. Superannuation arrears can be zero or material depending on how the seller has managed cash flow.
The bottom line
Employee entitlements aren't glamorous due diligence. They don't show up in the headline EBITDA figure, and sellers don't volunteer them in the information memorandum (because they haven't provisioned them properly and would rather you didn't notice).
But they're real liabilities — and unlike some other risks you take on when buying a business, they come due quickly. Staff expect their leave balances to be honoured. The ATO expects super to be paid. You can negotiate a price adjustment, build in a warranty, or structure your way around the worst of it — but you can only do any of that if you've actually done the work to find out what's there.
Do the work.
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