What Happens to Employees When Purchasing or Selling Business in Ontario

Selling or purchasing a business is a complex transaction. There are many moving parts, including the company’s good name, customers or clients, physical assets and, of course, employees. The transfer of workers is almost always one of the most important considerations of any business sale and there are many factors to contemplate. Is the workforce unionized? Are new employment contracts necessary? Will all employees be retained and, if not, is severance owed? There could be common-law or Ontario Labour Relations Act, 1995 consequences to consider, while failing in your due diligence could be costly.

Much will depend on the sale itself. Will you be purchasing the assets of the vendor or the shares? This usually depends on a number of strategic business, tax and legal considerations.

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The Difference Between an Asset Sale and a Share Purchase

As mentioned, a business sale can be carried out in two ways. By share or asset purchase. It should be noted that according to the Employment Standards Act, 2000 (ESA) the term “purchase” can include the actual sale or the leasing of a business. Subcontracting can also be considered a sale under the ESA.

It goes without saying that regardless of the type of sale, both the vendor and purchaser will be seeking terms to limit their employment-related liabilities while ensuring an efficient and timely transaction.

An asset purchase is essentially what it sounds like but can come in different forms. The seller can sell some or all of its assets and liabilities, either tangible or intangible. The buyer may want to purchase the entire company. They may just want to purchase one manufacturing line. Assets can include intellectual property, goodwill, licences, equipment, inventory, buildings, customer lists or contracts.

In a share sale, the vendor sells their shares of a private corporation directly to a buyer. As the purchaser, you would not own the business or the assets directly but instead through the company, which would continue to have all of its liabilities and rights. That would include obligations to its employees.

How are Employees Affected in an Asset Sale?

If you are buying a company’s assets, it is in your best interest to enter into a new contract of employment with the workers you inherit. Otherwise, you risk future liability and could be responsible for the prior service of the employee.

This is illustrated in Manthadi v. ASCO Manufacturing, an Ontario Court of Appeal decision that clarified how a sale of a business affects the assessment of common law reasonable notice when work is terminated by a successor employer.

The ruling confirms that there is no fixed rule with asset purchase transactions regarding an employer’s obligations to long-serving employees. It also serves as a reminder that purchasers who assume they are not going to take on the service of those workers without a written employment agreement could find themselves facing litigation.

If you are hiring employees from the vendor, the ESA requires you to take on the prior service unless there is a 13-week gap between the relationships. A contract of employment nullifies common law concerns by informing workers you do not recognize that past service except with respect to your obligations under the Employment Standards Act.

Buyers Must Decide What to do with the Existing Workforce

When you take on employees with an asset purchase you have two choices: maintain the existing terms of employment or offer a new employment agreement. If you change the employment agreement, the worker can accept or refuse the terms. A rejection would signal that the employee is not interested in working for you which will trigger determination rights for that employee. Unless otherwise agreed, the vendor would then be responsible for paying all of the termination rights for that worker.

Under common law, an employee must mitigate their damages in a termination by accepting alternative employment. That essentially means if the terms and conditions of the new offer of employment are substantially the same as those that were already in place, it is unlikely the worker would be successful in a common law claim against either the buyer or seller. However, they would still be owed the minimum termination pay mandated by the ESA.

Typically, any liability that results from employee terminations are often the subject of extensive negotiations between vendor and buyer. If you are the seller, it is in your best interests to negotiate terms that require the purchaser to offer employment to all employees on substantially similar terms and conditions. That way you will not be on the hook for severance pay.

Some purchasers will not want to hire certain workers. If that’s the case the vendor will want to negotiate an indemnity or allocation for costs for termination.

Depending on the circumstance, the buyer could also agree to offer employment to all workers upon closing with the option to assess staffing needs within a certain period of time. After that time, the purchaser could decide to terminate employees. In that scenario, the purchaser may negotiate a term in the agreement of purchase and sale with the vendor requiring indemnification for certain costs associated with any terminations.

If the employee accepts the new terms of the agreement, it is important to remember that their service will be deemed to be continuous and uninterrupted. So, if that employee had worked with the vendor for five years when the transaction closed, that service will carry over to the buyer under the Employment Standards Act. This is important because many workers’ rights, such as vacation entitlement or parental leave, are dependent on years of service under the ESA. Length of employment will also come into play when determining severance if the worker is terminated.

It is worth noting that caution should be taken when deciding what employees to retain when purchasing the assets of a company. While it is the purchaser’s prerogative to choose their workforce, they are still bound by the Ontario Human Rights Code. Failing to hire someone because of a disability, for example, could result in a human rights claim.

As the purchaser, you should do your homework when it comes to staffing to avoid any bumps in the road. Compile an employee list that includes job title, length of service and compensation. Details are important. For instance, are there outstanding employment liabilities or do employees have unpaid vacation pay that is still owed by the seller? If so, who will be responsible for that compensation when the sale is completed? Are enforceable employment contracts in place? Due diligence can help you to avoid unexpected and unwanted expenses.

How Are Employees Effected in a Share Purchase?

As the term implies, a share purchase simply means, one person, company or entity buys the shares of another company. This could be all the shares or just a portion. However, in this scenario the company or corporation remains the same and there is no change for the workforce.

Of course, while an employment agreement may be in place, that doesn’t mean changes in the terms cannot be brought by the new owner. Such changes would be considered a fresh consideration, requiring compromise between employer and worker. If the new owner wanted to reduce an employee’s salary, for example, they could offer a shorter work week.

If a worker is terminated as part of the share purchase transaction, any severance would be paid by the new owner unless the agreement calls for the vendor to assume responsibility.

What Happens with a Unionized Workforce?

Purchasing a business with a unionized workforce can present unique challenges since there is a different set of rules that are contained with the Ontario Labour Relations Act, 1995. This Act dictates that the buyer is bound by the vendor’s collective agreement until the Ontario Labour Relations Board states otherwise.

A union has no legal obligation to deal with a prospective buyer. However, the purchaser can ask the seller to attempt to negotiate changes to the collective agreement that may be required to run the business.

Keep in mind that if you are purchasing a unionized workplace you will become the employer of all the members of that specific bargaining unit. It is up to you to decide if your plans for the company will be possible within the scope of the existing collective agreement.

Get the Advice you Need

The purchase or sale of a business is complex and you need legal advice that will ensure your future success. The corporate lawyers at GLG LLP have the skill and expertise to handle every aspect of business law, including the most important elements of building and evolving a business venture. We are responsive and will tailor our legal services to meet your needs. Whether in the boardroom or the courtroom, we are consummate advocates who consistently deliver the results you deserve. Contact us today.