This post was contributed by Jean Allard, Partner, Norton Rose Canada
From an employment and labour perspective, buying the assets of a business may be preferable to acquiring its shares, as buying assets enables the buyer to clean house and hire new staff.
When considering the merits of an asset transaction, however, a buyer should consider the points raised below regarding the seller’s workforce, as these can significantly affect valuation.
Unlike with unionized employees, generally speaking there are no rules protecting non-unionized employees after a business is sold—a buyer can keep the seller’s employees or let them go, even if it continues the same business.
Obviously, the seller will be stuck with the often high cost of dismissing its employees unless it negotiates the transfer of its employees to the buyer. While this may push up the purchase price, it need not be an obstacle, as the buyer can pay the seller a premium on top of the sale price to clean house.
If the buyer chooses to keep the seller’s employees, most provincial legislation specifies that their employment will be considered continuous and not interrupted by the sale.
This means that should the buyer later dismiss the seller’s employee, the employee’s termination and severance entitlements would be calculated based on his or her total period of service with both the seller and the buyer. These provisions may also affect other employee entitlements that are based on length of service, such as vacation pay in Ontario.
Quebec is the notable exception to the buyer’s right to dismiss the seller’s employees. In Quebec, provisions exist similar to those requiring the transfer of collective agreements to the buyer to protect the employment contracts of non-unionized workers.
The test in Quebec is therefore, more or less the same as for a unionized workforce. Is there a transfer and a continuation of the same business? If the answer is yes, then the buyer, if it continues to operate the business without any significant interruption, can’t require the seller to dismiss its employees.
There is no such protection, however, for employees whose positions disappear after the acquisition.
What’s more, the employees must agree to the continuation of their employment contracts. If they refuse, they will be considered to have resigned and won’t be entitled to compensation from the seller or the buyer due to the termination of their employment.
Section 189 of the Canadian Labour Code provides employees not covered by a collective agreement with protection that in some respects resembles the protection given to unionized employees.
In fact, certain employment conditions protected by the Code must not be affected by an asset sale when it is determined that there is a continuation of the same business. This section does not, however, have the effect of requiring the buyer to be bound by the employment contracts of the seller’s employees.