Purchasing or Selling a business in Ontario? Don’t forget about the employees!

Employment issues are almost always a core consideration in the sale or purchase of a business. Both the Vendor and Purchaser are faced with a range of considerations arising from both statute and at common law.

The question we are frequently asked in this regard is:

“If I buy or sell a business, what happens to the employee(s) and what are my legal obligations?”

As it often is, the answer is that “It depends”.

Perhaps the first question to ask is:

Will it be a share purchase, or an asset purchase?

Share Purchase

In a share purchase, the common law employment relationship between the share corporation and its employee(s) is not deemed to be terminated because the share corporation, or employer, remains unchanged. Accordingly, there is unlikely to be any substantive change in the obligations and liabilities attaching to the share corporation, including its ongoing obligations to its employee(s). As per the Employment Standards Act (Ontario)^[1] (“ESA”), an employee’s length of service continues and is not interrupted as a result of a share purchase transaction. 

Where an employee is terminated as part of the share purchase transaction, the termination obligations remain attached to the share corporation, except to the extent these obligations are addressed or assumed pursuant to the Agreement of Purchase and Sale.^[2] What this means is that, where the share corporation terminates employee(s) as part of the share purchase, but before the closing date, any liabilities which may arise in connection with those terminations should rest with the Vendor. Purchasers should negotiate an indemnity from the Vendor specifically related to employment terminations, in addition to any terms already provided for in the Agreement of Purchase and Sale.

Asset Purchase

Generally speaking, the common law employment relationship between the Vendor and its employee(s) terminates on the date of closing in an asset purchase transaction. This termination would not trigger common law notice or severance obligations of the Vendor so long as the Purchaser offers employment to the Vendor’s employee(s) on similar terms and conditions as the Vendor’s employee(s) enjoyed immediately prior to closing—and the employee(s) accept. When a Purchaser assumes the employment of the Vendor’s employee(s), the Purchaser is also assuming all the employee(s)’ prior years of service with the Vendor in determining the length of employment for the employee. This is relevant, among other things, for the determination of all the benefits to which the employee(s) would be entitled under the ESA and at common law.

The next key question to consider is:

“Do employee(s) need to sign new employment contracts?”

Share Purchase

In a share transaction, the employee(s) will usually continue under the same employment contracts unless the Purchaser decides to propose new employment contracts for employee(s) to enter into. It’s important to note that a Purchaser would need to provide fresh consideration to an employee in order for a new employment contract, or any material changes to an existing contract, to be enforceable. For greater clarity, ongoing employment, or the promise not to be terminated, does not constitute fresh consideration.

Asset Purchase

It is recommended that the Vendor terminate the employment of their employee(s) and that the Purchaser enter into new employment contracts with the employee(s) they assume from the Vendor –effective on or after the closing date. In the new employment contracts, it is important for the Purchaser to ensure it recognizes the employee(s) prior years of service with the Vendor as required by the ESA. Where this does not occur, and the Purchaser assumes the employment of the employee, they also assume the implicit and explicit terms of their employment, including the length of their service with the Vendor. Where a Purchaser agrees to hire some employee(s) and not others, the Purchaser should ensure its decisions are not contrary to the Ontario Human Rights Code.^[3] In addition, it is recommended that the Purchaser and Vendor agree as to liability attached to the termination of an employee on closing or post-closing within a fixed period of time as between the parties.

General Employment Considerations:

Before the signatures are affixed to the Agreement of Purchase and Sale, Purchasers should ensure they are conducting the proper level of due diligence to determine, among other things:

1. Who are the Vendor’s current employee(s)?
2. Are there enforceable contracts of employment in place?
3. When were the employee(s) hired and what are the current terms of their employment?
4. What employee(s), if any, will the Purchaser wish to retain?

When considering selling or purchasing a business in Ontario, we highly recommend engaging legal counsel early in the process. This will help you navigate the employment issues as well as the myriad of other considerations which arise over the course of the transaction.

At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, family law, real estate law, estate law, employment law, health law, and tax law. For over 130 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125.

[1] 2000, S.O. 2000, c. 41.

[2] In Ontario, termination pay cannot be less than the amount specified in the Employment Standards Act. If termination pay is not limited by the language in an existing employment contract, a court may, in the event of a wrongful termination or constructive dismissal claim by an employee, determine that the termination pay owing to an employee should be based on the common law requirement of reasonable notice of termination or pay in lieu of reasonable notice. This is an issue courts typically award far higher amounts of termination pay than the minimum amount set out in the Employment Standards Act (Ontario).

[3] Human Rights Code, R.S.O. 1990, c. H.19. A person who is not hired by the Purchaser as a result of discrimination or the consideration of discriminatory factors, is entitled to file human rights claim against the Purchaser and/or Vendor and seek remedies, including damages.