Selling a Business in Ontario: Obligations to Employees

When a business is sold, it is usually more than just money that is exchanging hands. Depending on the type of sale, the new employer may carry certain obligations to employees during a sale of business in Ontario. When two parties, usually the vendor and purchaser, enter into an agreement to sell, the type of sale of the business will determine whether the vendor or purchaser carries the obligations to the business’s employees.

This article goes over where obligations to employees lie during the purchase of a business, and what steps should typically be taken.

Obligations to Employees During a Sale of Business In Ontario

In a share purchase, the business is typically not affected and as a result, does not change the relationship between the current employer (vendor) and the employees. Meaning that the purchaser is responsible for any entitlements that the employees are owed upon termination.

In a share sale, the purchaser must maintain the employees’ seniority, thus if they refuse to do so, the employees can refuse to work or can negotiate for a new contract. It is essential that the new contracts drafted must provide the employees with new consideration or else it may lead to a constructive dismissal claim, which may result in a lengthy and costly legal battle.

The case of Krishnamoorthy v. Olympus Canada Inc, 2017 ONCA 873 confirmed that if the sale of a business results in a change of the legal identity of the employer, this would typically constitute a constructive dismissal. However, if the employee is offered and accepts employment from the new employer, then a new employment agreement is entered into between the employee and the purchaser, and the purchaser now is now liable for any entitlements that the employees are owed upon termination.

On the other hand, in an asset purchase, the employer–employee relationship changes since the purchaser to the sale is not obligated to hire the vendor’s employees. As a result, in an asset purchase, the vendor is obligated to provide the employees with notice or pay in lieu, as well as any required severance or related compensation should they not hire the current employees back.

Due Diligence During a Sale of Business in Ontario

Before buying or selling a business, parties to the sale should always review each other’s financial conditions, among other areas. Both the purchaser and vendor can request the necessary documents which would aid in the determination of the financial health of the business. It is helpful for both employers to create a checklist of the various documents needed for review, (i.e. tax reports or evaluation, sales, IP issues, legal issues, etc.). The vendor and the purchaser are authorized to select a team of individuals to help them with respect to viewing the documents.

Having thoroughly reviewed the current state of both businesses, the vendor and purchaser are in a better position to negotiate the sale agreement and be aware of what they are getting to. It is essential for both the vendor and purchaser to review the agreement to sell with a legal professional to ensure that the appropriate protections are in place.

Related Topics

Asset Sale and Reasonable Notice of Termination

Notice Period and Selling a Business: Explained

What Happens to Employees When a Company Goes Bankrupt

How Can an Employment Lawyer Help Your Small Business?

Contact Achkar Law

If you are an employer and are part of a sale of business transaction, or an employee and want to know your entitlements during a sale of business, our team of experienced workplace lawyers at Achkar Law can help. Contact us by phone toll-free at 1 (800) 771-7882 or email us at [email protected] and we would be happy to assist.