Sale of a business: Don't forget to address HR issues

HR issues often left to the very last minute — meaning buyers could be getting more than they bargained for

Stuart Rudner

By Stuart Rudner

As an employment lawyer practising in a large law firm, I am often called upon by my partners to advise our clients in relation to the purchase or sale of a business. However, and this will probably not be a surprise to most readers, HR issues are often left until the very last minute — or ignored entirely — as the parties focus on other aspects of the transaction. However, both buyers and sellers need to understand the HR/employment law obligations they may be taking on and the potential liabilities they face.

It’s no surprise other issues dominate the discussions and negotiations. However, what does surprise me is that, particularly in situations where there are significant numbers of employees involved, little thought is given to how they will be dealt with, who will be responsible for any required payments and who will communicate the changes to the staff.

At law, there is an important distinction between an asset sale and a share sale. Generally speaking, if the shares of a corporation are sold, then that corporation continues to exist and be the employer of any existing employees. As a result, in the absence of other factors, any existing employment relationships would simply continue. The corporate employer would be responsible for any obligations and liabilities, as it was in the past.

However, the owner of the shares of that corporation has changed. As a result, the purchaser should be aware of the liabilities. Among other things, this includes potential liability for all notice of dismissal, pay in lieu thereof and severance pay in the event some or all of the employees are dismissed. What this can mean, for example, is that if an employee worked for the company for 17 years prior to the sale of the business, and then the decision is made six months after the sale to dismiss the employee, then the new owner of the company will be liable for all notice of dismissal, pay in lieu and severance pay the employee is entitled to.

In the event of an asset purchase, the law will treat the transaction differently depending upon certain factors. It’s possible there will be a break in employment, so the individual’s employment relationship with the selling company will end and, assuming they start working for the new company, they will effectively commence a new employment relationship. It’s impossible to go through all the different scenarios and permutations here but, in certain circumstances, employment with the previous company will be counted toward length of service for purposes of, among other things, entitlement to notice of dismissal and related payments.

Regardless of the type of sale, it’s incumbent upon the parties to consider the HR issues that will arise. The buyer should conduct a detailed review and assessment of the current staffing and determine their needs going forward. The parties should specifically address and allocate obligations and liabilities in relation to the existing employees. In many cases, it will be advisable to incorporate a “holdback” into the agreement, whereby a portion of the purchase price is either held back by the purchaser, or held in trust by counsel, for a specified period of time while the purchaser assesses the workforce and makes any HR‑related decisions. The holdback can then be applied toward the costs of those decisions, such as obligations arising in the event of the dismissal of certain employees.

For relatively sophisticated organizations, this will not come as a surprise. They may continue to ignore these issues until the very last minute, but they will at least be aware of them. However, for smaller or less sophisticated companies, including family‑run businesses and the like, they may not have given any real thought as to how the employees of an organization will be affected by the sale, and what their obligations and liabilities, as owner/employer, may be. They often assume, incorrectly, they have no obligation to existing employees. I have seen situations where small businesses were sold without any thought or discussion as to how the existing employees will be dealt with, and without any wording in the agreement to address those issues. In one case, the purchaser decided to hire all new staff and the parties ended up in protracted litigation.

As set out above, purchasers and sellers of a business should consider the HR issues that will arise upon completion of the sale. The purchaser should consider their HR needs and assess the existing staff, and the parties should negotiate specific terms regarding who will be responsible for any obligations and liabilities to the existing employees and how those responsibilities will be factored into the agreement between the parties. Otherwise, purchasers may be getting more than they bargained for.

Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.

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