Transactions involving the sale of a business must be managed in a way that preserves employment continuity and minimises disruption. This requires careful legal structuring and clear communication. Each transaction must be assessed on its own facts, including the employment model, the terms offered by the buyer, the treatment of statutory and contractual benefits, and the legal implications of employee refusal.

From an employees perspective, the key considerations would be whether they can refuse the proposed transfer, terms of engagement under the new employer, continuity of employment for the purpose of statutory entitlements like Gratuity, adjustments to compensation and benefits, including retirement entitlements. For employers, the employees would form a critical part of the business being transferred, so ensuring the employees’ accept the transfer is important.

What happens to employees when a business is sold in Sri Lanka?

Where a business transfer is structured so that the buyer wishes to retain the seller’s existing workforce, the affected employees are often offered employment by the buyer from the completion date of the transaction. The objective in many transactions is to preserve employment for as many employees as possible and to ensure that the transfer is handled with minimal disruption.

In such cases, the buyer may offer employment in the same role or a substantially similar role, often on terms that are not less favourable than those enjoyed immediately prior to completion.

Will employees continue in the same or a similar role?

In a well-managed business transfer, the buyer will usually undertake a role-mapping exercise to align employees to positions within its own organisational structure. In some cases, there may be an exact role match. In others, the structure of the buyer’s organisation may differ, meaning that the employee may be placed in a similar or substantially similar role rather than an identical one.

In determining if a role is comparable, the parties will have to consider aspects such as the type of work and required skills, level of responsibility, seniority, remuneration, etc.. For instance, changes to the job title in itself may not necessarily mean the role is not similar.

Will there be any changes to the terms and conditions of employment?

More often than not, efforts should be made to ensure that the employee moves to the buyer on terms that are broadly comparable, particularly in relation to fixed remuneration and core employment status.

But sometimes such alignment may not always be feasible. A buyer may operate different benefit schemes, insurance arrangements, staff loan programmes, incentive frameworks, grading systems, and internal policies. Therefore, once the transfer is completed, certain aspects of employment may eventually be governed by the buyer’s own policies and programmes.

What factors are relevant in determining whether a new role is comparable?

Comparability is usually assessed by reference to substance rather than form. Relevant factors may include:

• whether the role is the same or substantially similar in function;
• whether fixed remuneration is matched;
• whether the employee’s experience and capability are appropriately reflected;
• whether the level, grade, or seniority is equivalent; and
• whether the employee is being placed into a role with responsibilities appropriate to his or her existing profile.

Variable pay, bonus schemes, insurance, employee banking products, and other benefits may be governed by the buyer’s own policies, provided they are appropriate to the employee’s role and level.

Can a buyer require interviews or probation before placing transferred employees?

In some transactions, if the buyer has committed to taking over the workforce in the business, it is unlikely that employees will be required to go through a robust interview process. But employees may still be required to undergo standard onboarding procedures as per the internal requirements of the buyer.

It is not common for employees to be subject to a new probationary period by the buyer, particularly where continuity of service is being recognised. If an employee is already serving a probationary period at the time of transfer, the probation may continue in stride with the buyer.

What happens if an employee does not want to move to the buyer?

This is one of the most important legal questions in a business transfer. If an employee refuses to accept the offer of transfer of employment from the buyer, the options are generally limited. The employee may choose to resign voluntarily. Or else The seller may have no option but to seek the approval of the Commissioner of Labour to terminate employment under the Termination of Employment of Workmen (Special Provisions) Act, No. 45 of 1971 (“TEWA”)

Where such approval is granted, compensation would ordinarily be payable in accordance with the applicable statutory framework,

Can an employee choose redundancy or severance if he or she does not want to join the buyer?

There is no right to a voluntary separation package or an enhanced mutual separation arrangement with the seller, for an employee who does not wish to be transferred, unless they are offered as part of the transaction structure.

If a mutual separation package is not part of the transaction structure, and an employee does not wish to transfer, the outcome is typically either voluntary resignation or a termination with the approval of the Commissioner of Labour under TEWA

Can a transferred employee be made redundant at a later date by buyer? Is this permitted?

Yes, an employee can be made redundant by a buyer subsequent to the transfer and in accordance with the applicable law. It is also possible for transaction documents to include commitments that transferred employees will not be treated less favourably for a defined period after completion, or that enhanced separation terms will apply if redundancy arises within a specified period. These protections, however, are transaction-specific and should not be assumed unless expressly agreed.

In some cases, the parties may agree that prior service with the seller will be recognised by the buyer for the purpose of future severance or redundancy calculations. This is an important aspect in protecting employees who are transferred as part of the sale.

What happens to salaries, incentives and bonuses at the time of the transfer of employment?

The seller remains responsible for salary and incentive arrangements up to the completion date, while the buyer becomes responsible thereafter, unless otherwise agreed between the parties.

It is common for annual bonuses and variable compensation, to be prorated – ie. amounts attributable to the period before completion may be paid by the seller, while the employee may become eligible for the buyer’s incentive arrangements for the balance period following completion. Eligibility for discretionary bonuses is usually subject to the relevant policy terms and does not necessarily guarantee payment.

Will transferred employees be eligible for benefits from day one with the buyer?

If the transaction structure is such that the buyer recognizes prior service, the transferred employees become eligible from day one for employee benefits under the buyer’s own schemes, including insurance, leave entitlements, staff loan eligibility, and other programmes, subject to its internal policies.

What happens to annual leave and other leave entitlements?

These aspects would have to be included in the transaction structure and addressed in the transition process. It is common for accrued annual leave to be transferred to the buyer. Alternatively, depending on the transaction structure, accrued leave can be encashed by the seller as part of final settlement prior to the employees’ transfer.

Entitlements such as casual leave, maternity-related leave, medical leave, etc. may become subject to the buyer’s own policies after transfer of the employees. But it should be noted that, the statutory minimum entitlements under applicable law must be complied with.

What happens to insurance and other workplace benefits?

After the transfer of employment, the employee will usually move into the buyer’s insurance and employee benefit schemes.

Certain facilities that existed under the seller may not be available under the buyer. This is why early communication and careful explanation of benefits are important in any employee transition process.

What happens to employees’ gratuity entitlements?

Recognition of service under the seller is a key consideration to get employees onboard with the transfer of employment as it will affect the computation of Gratuity. The Accruing gratuity liability may be transferred to the buyer – ie the buyer will assume responsibility to pay gratuity from the point the employee ultimately leaves the buyer’s service

Can an employer offer an ex-gratia payment to encourage continuity and support the transfer?

Yes, the seller may offer an ex-gratia payment as a gesture of goodwill and in recognition of service. This is common in cases where employees remain in service until the transfer is completed. These payments are regularly structured as conditional payments linked to continued employment with the buyer, as it can ensure employee retention. But the tax treatment of such payments should be assessed.

Key Takeaways

A business sale involving employee transfer is not simply a commercial issue. It requires careful management of employment law risk, employee communication, regulatory obligations, compensation planning, and post-completion integration. Particular attention should be given to:

• whether employees are being offered genuinely comparable roles;
• continuity of service arrangements with the new terms of engagement being not less favorable;
• recognition of prior service with the seller company
• treatment of leave, bonuses, benefits, loans, and retiral entitlements;
• legal implications if employees refuse transfer; and
• the need for engagement with the Commissioner of Labour where termination becomes necessary.