Law protects staff when a business changes hands: Employees may have more options than they think in a takeover or sale. Ian Hunter looks at the legal position

On a takeover bid, control of the company passes to a new shareholder but its legal status remains the same and the employees' contractual relationship is unaltered. The position differs when a company's business, as opposed to its shares, is sold - and during this recession, business sales have replaced acquisitions as the preferred route for expanding or consolidating operations.

Andrew Blackman of Acquisitions Monthly says: 'Despite the steady decline in UK takeover activity, the growing number of insolvency sales has meant that more buyers are walking away with only the assets and goodwill of the target company. There is little to suggest that this is likely to change in the short term.'

Tarquin Desoutter of the corporate finance section of Arthur Andersen says: 'The main advantage for those purchasing a company's business, as opposed to its shares, is that the purchaser is not saddled with all of that company's known and hidden liabilities. There is less need to extract from the seller a long list of warranties and indemnities in respect of those aspects about which the buyer is unsure.'

In a business sale, an employee's rights are governed by the Transfer of Undertakings Regulations 1981, the inspiration for which came from an EC directive. These regulations in essence state that if a business is sold as a going concern (as opposed to a mere sale of assets) the contracts of those employed immediately before the sale are automatically transferred on the completion of the sale to the purchaser.

The practical effect is that the employees transferred should be retained on the same terms and conditions after the sale as were enjoyed before, regardless of the basis on which other employees are retained.

It has been the established view for 20 years that this obligation does not apply to pension arrangements, but a recent industrial tribunal has challenged this view.

Unilaterally changing the contracts of new employees may make business sense but it involves a degree of legal risk.

Imposition by the employer of new contracts without employee consent may allow affected employees to treat themselves as having been dismissed, which may leave the employer exposed to statutory and contractual claims. Each statutory award alone can exceed pounds 16,000, depending on an employee's age and length of service. Contractual claims may be far in excess of this.

Case law from a 1989 House of Lords decision states that any employee dismissed by the seller prior to the sale of the business, for a reason connected with the sale (for example, at the request of the purchaser), shall be treated as still being employed at the time the business is sold.

The practical legal effect is that the liability for the dismissal of employees is passed to the purchaser.

Dismissals made as a result of such a request will be treated automatically as being unfair. However, as one City employment law specialist points out: 'The reality is that, on the sale of a business, the employee's legal position is quite strong.

'Notwithstanding this, many employees, particularly in the present market, are more anxious to keep their jobs than sue for a pay-off.'