Long service leave payments can be a hidden cost when buying a business.

Small business owners and their accountants need to be aware that when someone purchases a business or part of a business in Western Australia, in most circumstances the new owner will take on the long service leave obligations for existing employees, for the whole period of their employment. This applies regardless of anything written in the sale contract.

In 2016 a small manufacturing business owner in Perth learnt this the hard way when required to pay more than $9,000 in long service leave entitlements - some of which was for time the employees worked for a former owner of the business.

The business had been sold in 2008 and the buyer employed two existing employees. When the employees left the business years later both were eligible for long service leave based on time worked for the business, rather than time worked for the new employer. The Industrial Magistrates Court ordered the business owner to pay the two employees more than $9,000 in long service leave entitlements, in accordance with the state Long Service Leave Act.

Under the Long Service Leave Act the length of employment for an employee's long service leave entitlements is based on the total time with the business, rather than any one specific employer.

At the time of the purchase of the business in 2008, the business owner was not aware he was taking on the long service leave obligations for the staff and this genuine mistake was a costly one. This cost could have been avoided if money had been put in trust for potential long service leave entitlements for employees, which is a common arrangement when a business is bought or sold.

Anyone involved in buying a business should check the obligations under the Long Service Leave Act.

Wageline answers hundreds of calls a week about long service leave. Call Wageline on 1300 655 266 or visit the Long service leave page for more information.