Liability after sale of business

Does new ownership have to provide identical compensation to employees?

Leah Schatz

Question: If a company sells a part of its business to another company (employees and all), does the new company have to provide the same compensation, benefits and pensions, or can it change any of these without risking liability?

Answer: This is something that the parties should consider at the front end of a transaction. Purchasers and vendors alike must turn their minds to labour and employment law issues when conducting a business purchase and sale.

A major consideration is whether the transaction takes the form of an asset purchase or a share transfer. Where the transaction is the latter, the corporation and employer remain the same, even if the corporation has new owners.

In the case of the sale of a business as a going concern, the employment with the former employer ends but is usually continued with the new employer. Each transaction brings about different consequences that each party will want to turn its mind to.

Another critical question is whether the vendor’s business has been certified by a trade union and whether the purchaser will be a “successor” under labour legislation. Where a vendor’s business is unionized, the purchaser of that business may well inherit the certification order, any collective bargaining agreements, labour relations board orders and proceedings, and any other obligations the vendor had under the applicable labour legislation.

In the context of a share transfer, any unilateral changes to the level of compensation, benefits or pension entitlement can open the employer up to potential liability in constructive dismissal, which arises when an employer unilaterally makes a change to a fundamental term of employment without obtaining consent from the employee. The same risk can arise if the employer wants to unilaterally and fundamentally change the nature of an employee’s duties from those set out in the contract.

It is also critical to bear in mind that most jurisdictions provide protection for employees in the context of a business sale.

Employment standards legislation in most jurisdictions provides for continuity of employment, for the purposes of minimum statutory benefits and entitlements under the legislation, where an employer sells all or part of a business and the purchaser employs the employees of the seller-employer.

These provisions aim to ensure that all of the benefits contingent on an employee’s length of service (such as vacation and parental leave entitlements as well as entitlements to notice of termination or pay in lieu of notice and severance pay) are carried over to the employee’s new employment with the purchaser of the business.

However, it is possible to mitigate any unintended consequences flowing from the purchase of a business by clearly setting out the obligations in the contract and obtaining legal advice.

Some questions that a purchaser will want to consider are:

• Is it an asset sale or a share sale? If it is an asset sale, is the intention for the purchaser to operate the business as a going concern?

• Is the workforce unionized?

• Will the vendor sever employment and will the purchaser hire the employees under new employment contracts? If so, will terms and conditions of employment change or stay the same?

• Conversely, will employment be continuous from the vendor to the purchaser? Who will be liable for pre-existing severance obligations to long-term employees? How will this affect the purchase price?

• If there is a union, how will this affect the purchaser’s other operations? Is there a risk of unionization spreading to non-unionized operations?

• How much statutory notice is owing to individual employees? If there is a union, what do the severance and technological change provisions of the collective agreement say?

• If there is no union, how much common law or contractual notice is owing to the employees? Are there written employment agreements in place?

In all instances, each party to the transaction will want to obtain legal advice.

The particular facts and circumstances of each transaction will need to be considered and explored well in advance of the transaction to ensure all labour and employment issues have been covered off in a manner that is agreeable to both parties.

Leah Schatz is a partner at MLT Aikins in Saskatoon. She can be reached at (306) 975-7144 or [email protected]

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