Notice Period and Selling a Business: ExplainedIan
In the current economic climate, employers face the challenging task of restructuring their companies and selling their businesses. One common concern arising from such transactions is the impact on employees.
When employees face termination without cause, they are entitled to a reasonable notice period or pay-in-lieu for such notice. With a sale of business on the horizon, many employees wonder what this means for their notice period entitlements.
What are the implications for employees when a business is sold? Do all employees lose their jobs in such transactions? How does the sale of a corporation affect an employee’s length of service, especially when calculating severance pay? This article will address these crucial questions and explain how an employment lawyer can provide guidance in these scenarios.
Understanding the Sales of Share vs. Asset Sales
When selling a business in Ontario, there are typically two approaches: shares or assets.
Share Sale: This involves selling the controlling shares of the corporation that owns the business. Importantly, this type of sale often does not alter the legal identity of the corporation. Unless the buyer explicitly indicates changes to the employment relationships of the seller’s employees, these employees are generally expected to continue under Ontario law.
Asset Sale: On the other hand, selling the assets of the business itself can be more complex. Historically, in an asset sale, the vendor’s employees are usually automatically terminated at the time of sale. This occurs because employment contracts cannot be directly assigned in Ontario, resulting in termination in most cases. In some instances, buyers in an asset sale may provide the vendor’s employees with new job offers as part of the deal.
In a share sale, mass terminations are uncommon unless there are specific circumstances or it is a condition of the share purchase. The corporation remains the employer, and, with rare exceptions, employees continue their employment without significant disruptions. These exceptions depend on the unique terms negotiated between the vendor and purchaser.
In an asset sale, it is more likely that employees will face termination by the vendor and become eligible for severance pay. However, many buyers will extend offers to hire the vendor’s former employees under new employment terms after the business sale.
In Ontario, the length of service plays a crucial role in calculating severance pay entitlement. Whether the sale is a share or asset purchase, it can potentially affect how an employee’s length of service is calculated for severance purposes.
Selling a Business and the Impact Employees’ Length of Service
In the context of selling a business, whether it is a share sale or an asset sale, the way it affects employees’ length of service and severance entitlements varies.
In a share sale, the legal identity of the employer remains unchanged, and as a result, the employee’s length of service typically remains unaffected. If, at a later time, the purchaser terminates one of these continuing employees, their entire service can be counted when calculating severance entitlements.
On the other hand, in an asset sale, the legal identity of the employer changes. When employees are re-hired by the new business purchaser, they effectively start their employment anew. However, employees can negotiate with the purchaser to recognize their previous years of service with the vendor in their employment agreement.
Under section 9 of the Ontario Employment Standards Act, 2000 (“ESA“), when a business or part of it is sold, the employment of the vendor’s employees is not automatically terminated if the purchaser agrees to hire them. The application of this section will depend on the specific circumstances of each case.
When section 9 of the ESA applies, the employee’s benefits that are dependent on length of service under the ESA are transferred to the purchaser. These benefits include statutory notice of termination (or pay in lieu of notice), vacation pay and time, severance pay, and entitlements related to parental and pregnancy leave.
In an asset sale, the business purchaser should consider the employee’s service with the vendor as continued employment under the ESA. They may also explicitly recognize an employee’s past service, taking into account their valuable skills and experience, in the new employment contract.
The Notice Period After Selling a Business
When an employer terminates an employee’s job without cause, it triggers the entitlement to reasonable notice of termination, which can come in the form of working notice, pay-in-lieu of notice, or a combination of both.
The Ontario Employment Standards Act sets the minimum notice or pay in lieu of notice that an employee must receive upon termination: one week per year of service, up to a maximum of eight weeks. Additionally, an employee might be entitled to statutory severance pay, reaching up to one week per year of service, with a maximum of twenty-six weeks, along with other ESA entitlements.
Employment contracts with enforceable termination provisions can restrict an employee’s notice entitlement to these ESA minimums. Failure to include such a provision makes the employee eligible for common law reasonable notice, which typically extends up to twenty-four months, encompassing the ESA minimums.
In the context of a business sale, section 9 of the ESA deems the vendor’s employees to be continuously employed when calculating their ESA notice period. This means that the business purchaser must account for the employees’ entire service history while determining their notice period or other ESA entitlements.
However, according to broader court-made law, employees of the vendor are seen as terminated when the vendor sells the business assets. Technically, these employees start a new job if they continue working with the purchaser or sign a new employment agreement. This might give the impression that an asset sale results in reduced severance for employees. Nonetheless, this is not always the case.
In Ontario, the courts may take into consideration an employee’s prior years of service with the vendor when calculating the notice period owed by a purchaser following an asset sale. This recognition occurs because the business purchaser benefits from the employee’s years of experience. The likelihood of this happening increases when the new employment agreement explicitly acknowledges the employee’s years of service with the vendor.
How an Employment Lawyer Can Help
Both employers and employees can benefit from legal representation on the sale of a business. If you are an employer, an employment lawyer can examine all the factors to determine your obligations after selling or purchasing a business.
An employment lawyer has the experience and knowledge to protect the business purchaser and seller from assuming unwanted liabilities. They can also draft or review the purchase agreement to ensure it specifies which company is liable for what.
As mentioned above, selling a business may reduce an employee’s notice period entitlements despite their long years of service. Therefore, employees should consider reviewing their case with an employment lawyer before signing anything an employer provides them in a sale of a business to ensure they do not give up their legal rights.
Further, an employment lawyer can advise employees on their legal obligations. For instance, terminated employees have a duty to mitigate – meaning they must reasonably minimize their damages. This is done by looking for another job and documenting those efforts, or accepting a comparable job offer from the business purchaser. Failure to do so may disentitle an employee from damages they might have otherwise received.
Selling a business through a share sale does not change the employer’s identity. Therefore, the purchaser inherits the vendor’s employees on the sale of the company. On the other hand, when the business is sold by way of an asset sale, the employer’s identity changes. In such cases, the employees begin new employment upon accepting employment with the business purchaser.
How the sale of a business impacts an employee’s years of service for the purposes of calculating notice and severance entitlements will depend on the unique facts of each case. While most shares of sale transactions continue accruing an employee’s years of service, an asset sale could potentially disrupt an employee’s length of service for determining their legal entitlements.
An employment lawyer can use their knowledge and skills to help ascertain the entitlements of employees on the sale of a business. They can advise you on your legal rights and obligations and protect your interests while negotiating with the other side.
Contact Achkar Law
If you are an employer needing assistance with calculating an employee’s notice period or an employee who wants help determining your legal entitlements, our team of experienced workplace lawyers at Achkar Law can help.
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