Employment considerations when buying or selling a business

Employment obligations are one of the key considerations when buying or selling your business. Related obligations will vary depending on whether the transaction is structured as an asset or a share purchase and on the language of the agreement. Current and prospective business owners should not overlook these obligations when negotiating and entering into contracts. This blog will outline some of the key differences in employment obligations between a share and asset purchase transaction concerning a non-unionized workforce.

In the context of a share purchase, the general rule provides that the buyer will inherit the employees and related obligations following the closing of the transaction. In these cases, it is common for share purchase agreements to be silent on the question of obligations of the buyer towards the employees. However, prospective buyers should never overlook this point. The transferred obligations can be onerous and may lead to financial hardship in the future, as the transfer of the business will result in the buyer essentially inheriting the employment history and potential related liabilities. If the buyer does not wish to inherit the employees and the related obligations, for example, where the seller is to terminate the employees and pay out all obligations due prior to the transfer of the shares, this must be specifically set out in the agreement.

In the case of an asset purchase, careful consideration must be given to the language of the agreement. In this scenario, the buyer is only acquiring assets (not shares of the corporation), which means that if not specified in the agreement, the buyer is not obligated to keep the employees onboard, and the sale would result in the termination of the employees. As such, depending on the circumstances, the seller may be liable for severance pay and reasonable notice.  On the other hand, if the buyer wants to keep the employees, careful planning must occur to outline respective obligations on and after the closing of the transaction.

In any case, upon termination without cause, employees can be entitled to various sums under the Employment Standards Act (“ESA”). Under the ESA, if certain criteria are met (depending on length of service and size of the employer), employees can be entitled to severance pay, up to a maximum of 26 weeks. In addition to this, employees can also be entitled to reasonable notice, which can take the form of working notice, pay in lieu of notice or a combination of both. At a minimum, the ESA provides for a 1 week of notice per year of employment, up to a maximum of 8 weeks. These minimum standards do not include other potential entitlements under Common Law, which can provide for much more relief therefore be more costly, depending on the circumstances.

Whether buying or selling a business, employment obligations, which can represent a significant cost to either party in a commercial transaction, should not be ignored in the context of negotiations as they may affect the value of a business. The Sicotte Guilbault team can assist you with navigating the various obstacles related to the purchase or sale of a business while advising you efficiently on employment law considerations.