Parties to an asset transaction should carefully consider the implications of the proposed acquisition on existing employment arrangements, including, non-competition agreements, workers’ compensation programs, and pension plans. The provisions of the Employment Standards Act, 2000, S.O. 2000, c. 41 (ESA), the governing employment standards legislation in Ontario, should be considered when negotiating employment arrangements as the ESA can impact packages and offers made–or not made–to existing employees, and any liability that may arise for the vendor and/or purchaser.

ESA: relevant provisions

The ESA provides minimum terms and conditions of employment for the majority of employees in Ontario. The provisions of the ESA most relevant to the purchase or sale of businesses relate to giving notice to employees of their impending termination, providing severance pay to qualifying employees, and paying employees in lieu of service. “Notice of termination” provisions are generally triggered in mass terminations of 50 or more employees in a 4-week period, while “severance pay” provisions apply when 50 or more employees are terminated by an employer in a period of 6 months or less or when an employee is terminated by an employer who has a payroll of $2.5 million or more. Notice requirements can be relatively long (up to 16 weeks in Ontario), and severance payouts, where necessary, must be paid to each terminated employee who has been employed by the employer for five or more years. Furthermore, the ESA contains provisions relevant to determining the amount of severance pay an employee is entitled to and who is responsible for making these payments. The ESA also prescribes the information required to be given to the Minister to constitute effective notice. The aforementioned obligations further evidence the importance of prospective purchasers and vendors knowing and understanding their rights and responsibilities early on in negotiations.

Under the ESA, if an employee ceases employment with a vendor and accepts an offer to work for a purchaser within 13 weeks of their “termination,” his or her employment is deemed to have been continuous throughout. Otherwise, vendor employees are entitled to minimum notice of termination or pay in lieu of notice. These vendor obligations exist regardless of whether the employee who is terminated finds new employment.

If an employee refuses an offer of employment on the same, or substantially the same, terms and conditions as previously existed with the vendor company, the employee will likely be deemed to have failed to mitigate his/her damages and have no claim for wrongful dismissal. Accordingly, it is often advisable for purchasers to agree in asset purchase agreements to offer employment to a majority, if not all, of the employees of a vendor on similar terms and conditions as existed when they were employed by the vendor company.

Finally, purchasers of companies should pay close attention to the rights of employees as they relate to vacation pay, and maternity and paternity leave. If the relating provisions in the ESA are not carefully considered during the negotiation process and thereafter, they may be unexpectedly breached, and could result in an employer facing significant exposure.

The author would like to thank Brandon Burke, Summer Student, for his assistance in preparing this legal update.

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