Buyer Beware: Employee Liabilities from a Business Purchase

A purchaser of a new business often keeps on existing employees who have the knowledge to help the buyer operate the business efficiently.  Purchasers are happy to pay and award these employees for their services since the purchase of the business; however, buyers often fail to realize that their obligations to employees may extend to periods prior to the acquisition.  This, unfortunately, can lead to headaches and financial liability, especially in cases where employees have been with the business for many years.  As a purchaser, you should be aware of Section 97 of the Employment Standards Act (the “ESA”) and its effects on the purchase transaction.   In particular, Section 97 of the ESA provides that:

[i]f all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.

So, what exactly does continuous mean?  An employee who was working for the vendor at the time of acquisition will be deemed to be continuously employed and the buyer will assume the liabilities associated with that employee.  In contrast, if the employee is terminated by the vendor just prior to the closing date of the acquisition, then the employee will not be continuously employed and the vendor will assume the liabilities associated with that employee.

What liabilities are we talking about?  A prospective purchaser of a business should be aware of the consequences of Section 97 of the ESA listed below, which are not exhaustive.  Of course, if the employees of the business are terminated prior to the purchaser acquiring the business, the consequences do not materialize.

  1. Wages. The purchaser is responsible for all outstanding wages owed to an employee.
  2. Statutory Holidays. Employees are entitled to statutory holidays based on employment with both the vendor and the purchaser.
  3. Vacation Pay. Employees are entitled to vacation time and vacation pay as of their employment start date when the business was owned by the vendor. The purchaser assumes the liability for any accrued vacation pay owing to an employee if such pay has not been paid by the vendor.
  4. Benefit Plans. The benefit plans become a condition of employment with the purchaser and must be continued as a condition of employment.
  5. Employees on Leave. Employees on leave, whether paid or unpaid, are still considered employees of the business.
  6. Purchased Assets Subject to Lien. If any wages are owing to employees, the purchaser buys the assets with a lien attached to them.
  7. Severance and Notice.  The purchaser is responsible for ESA severance and notice obligations for employees to their original start date with the business and, in the absence of an enforceable employment agreement limiting severance and notice to the ESA minimums, for common law severance, which could be significant for long term employees.  Keep in mind that severance obligations only arise if an employee is terminated without cause.  Accordingly, a purchaser should factor in the cost of severance for any employees that it anticipates letting go of following the closing of the transaction.

The purchase and sale of a business is a complex process.  Purchasers should seek the help of qualified advisors who can help purchasers avoid surprises after they have taken over the business. Qualified advisors can assist in structuring the transaction so that the vendor is responsible for severance costs associated with the purchase of a business.

The Purchase and Sale Agreement

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This is the first in a series of planned posts in which I will discuss in some detail the structure and components of the “typical” purchase and sale agreement for shares or assets of a private company.

The importance of the purchase and sale agreement cannot be overstated as it governs the entirety of the transaction and at the end of the day specifies, among other things, who is paying how much to whom for what and when and in which circumstances the price can be adjusted or “clawed back”. For this reason, it is critical for purchasers and sellers, whether it’s their first time or their hundredth time, to be thoroughly familiar with this document.

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