The most significant hidden liability on a balance sheet isn’t found in the ledgers, it’s in the employment contracts.
With the Employment Rights Act 2025 now in full swing and the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) more robust than ever, failing to account for employment law can turn an acquisition into a post-deal nightmare.
What is TUPE?
TUPE’s core purpose remains the same: to protect employees when a business (or part of one) changes hands. In essence, the employees step into the shoes of the new employer on their existing terms and conditions.
However, 2026 has introduced new complexities. Under the latest reforms, the distinction between "employees" and "workers" has blurred, meaning your TUPE liability may now extend to a wider pool of contractors than in previous years.
From an accounting and tax perspective, the choice between an asset and share sale is usually driven by Business Asset Disposal Relief (BADR) and capital allowances. From an employment perspective, the difference is just as stark:
Share Sale: The legal entity remains the same; only the shareholders change. TUPE technically doesn’t apply because the employer hasn't changed. You inherit the entire history of the company—including any potential tribunal claims for unfair dismissal or discrimination.
Asset Sale: This is a "Relevant Transfer." TUPE kicks in automatically. You don't get to "cherry-pick" the best talent; the staff associated with those assets transfer to you by law, along with their years of service and any outstanding holiday pay or bonuses.
The ETO Trap: Can you change contracts?
A common mistake we see is the "harmonisation" of contracts post-deal—trying to put everyone on the same holiday or pension scheme to simplify payroll.
Warning: In the UK, you cannot change an employee's terms if the sole reason is the transfer itself. Changes are only valid if there is an Economic, Technical, or Organisational (ETO) reason entailing a change in the workforce (e.g., a genuine redundancy or a change in job functions).
If you are advising a client on a merger, ensure they factor in the cost of maintaining multiple legacy benefit schemes. These "ghost costs" often erode the projected synergies of a deal.
Due Diligence
When reviewing a target’s books, your employment due diligence should now include:
Employee Liability Information (ELI): By law, the seller must provide this at least 28 days before completion. Ensure it includes recent disciplinary records and any "Section 1" statements.
Holiday Pay Calculations: Following recent case law, ensure the target has correctly calculated "normal remuneration" (including overtime and commission) into their holiday pay accruals.
Pension Equalisation: Check for any "Beckmann" liabilities—certain early retirement benefits that might transfer under TUPE, which are notoriously difficult to value.
Day-1 Rights: Under the ERA 2025, employees now have rights to paternity and parental leave from day one. Check the target’s compliance to avoid immediate post-deal litigation.
The Cost of Getting it Wrong
The penalties for failing to inform and consult staff during a TUPE process are eye-watering: up to 13 weeks’ actual gross pay per affected employee. For a mid-sized firm with 50 staff, that’s a potential liability of hundreds of thousands of pounds that won’t show up on a standard P&L.