Monday, 25 August 2014

Continuity of Employment Following the Sale of a Business

(c) istock/Highwaystarz-Photography

”What are we doing about the employees?” That is the all-too-familiar question asked in the purchase and sale of a business. Are all the employees fired on closing? What happens if they continue working for the purchaser? Who is responsible for paying them severance?

In fact, there are a lot of questions concerning employees in the context of a purchase and sale of a business; presuming that the business has employees.

The purpose of this post is to look at some of the issues and legal implications involved in selling or buying a business, which is also an employer.

The Historical Approach

Under the common law, the sale of a business results in the termination of employment of the employees of the selling employer, even if they are employed by the purchaser following the sale. Historically, the common law also held that, when such a situation arose, employees were not entitled to count their length of employment with the vendor as part of the length of service with the purchaser. More recently, the courts have changed their position on this point; while a sale is still considered to result in termination of employment, the law presumes that an employee of the vendor who is hired by the purchaser is entitled to have his or her time spent in employment with the vendor taken into account for reasonable notice purposes, absent express agreement to the contrary.

Employing the historical approach, an employee who had worked for the vendor for twenty years and then for the purchaser for only eleven months would only be entitled to one week of notice of termination pay, pursuant to the provisions of the Ontario Employment Standards Act, 2000.

Section 9 of the Ontario Employment Standards Act, 2000

Section 9 of the Ontario Employment Standards Act, 2000 effectively reverses the common law presumptions; both that the sale of a business terminates employment and that employment with the seller is not to be taken into account when calculating an employee’s entitlements to notice of termination from the purchaser. Section 9(1) reads as follows:

9(1) If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

As is explained by the interpretation manual to the Ontario Employment Standards Act, 2000 used by the Ontario Employment Standards Branch of the Ontario Ministry of Labour:

Section 9 provides that where a business is sold and the purchaser employs an employee of the seller, the sale does not result in termination of employment and the employee’s time in employment with the seller will count as employment with the purchaser for the purposes of determining future entitlements under the Act that depend on length of employment (i.e. entitlements to notice of termination or pay in lieu thereof, severance pay, vacation pay and vacation time, and parental, pregnancy, organ donor and reservist leave.)

The only exemptions to the application of section 9 of the ESA are:

  1. If the legislation does not apply to the employer, for example if the employer is an embassy or consulate of foreign nation, or a federally regulated workplace, such as a bank, airline, or telecommunications company;
  2. If the day on which the purchaser hires the employee is more than 13 weeks after the earlier of his or her last day of employment with the seller and the day of the sale (ESA, s. 9(2));
  3. If the employee’s employment is terminated prior to the close of the sale and for reasons wholly unrelated to the sale;
  4. If the sale is from a workplace that falls under federal jurisdiction to one that falls under provincial jurisdiction, or vice versa.

Finally, it is important to note that pursuant to subsection 5(1) of the ESA:

No employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.

What Constitutes a “Sale”

Section 9(1) of the ESA applies to a “sale” of all or part of a “business”. Both terms are broadly defined by the act:

9(3) “sells” includes leases, transfers or disposes of in any other manner, and “sale” has a corresponding meaning.
1(1) “business” includes an activity, trade or undertaking

As was previously considered in the post The Law can be an Asset Sale, in the case of Abbott v. Bombardier Inc., 2007 ONCA 233, the Court of Appeal for Ontario held that the sale of a business arises:

… where there was the transfer of a specific bundle of tasks and functions performed by an identifiable group of employees

Notwithstanding the guidance from the Court of Appeal, the issue of whether a sale has actually occurred remains a frequent source of discussion and litigation. From the perspective of the Employment Standards Branch, as was stated by Referee Gorsky in the case of Re McLaughlin Chevrolet-Oldsmobile Ltd.

In deciding whether a transaction amounted to the transfer of a business, regard must be had to its substance rather than its form, and consideration must be given to the whole of the circumstances, weighing the factors which point in one direction against those which point in another. In the end, the vital consideration is whether the effect of the transaction was to put the transferee in possession of a going concern, the activities of which he could carry on without interruption.

Sale of Shares versus Sale of a Business

In law, a corporation is separate legal entity from the person or persons who own it. Therefore, where employees are employed by a corporation, and the shares of the corporation change hands, the corporation and hence the employer remain unchanged, notwithstanding that the corporation now has new owners.

Accordingly, the sale of a company’s shares will not in itself give rise to a new employment relationship, given that the corporation, a legal entity, is not changed by the transfer of its share capital to a new owner. Section 9 is therefore of no application in the context of a share sale.

Purported Termination by Vendor

In Ontario (Employment Standards Officer) v. Equitable Management Ltd., (1990), 1990 CanLII 6973, 75 O.R. (2d) 506, 33 CCEL 114 (Ont. Div. Ct.) , the Ontario Divisional Court held that the provisions of section 9 applied even if the vendor gave notice of termination to its employees.

Practically, what that means is that even if the vendor gives notice or a payment in lieu of notice to its staff, the purchaser must still provide the terminated employee with his or her full notice entitlements for the whole of the employee’s length service, including time spent with the vendor. There is no pro rata division of liability for termination pay between vendor and purchaser; the purchaser is responsible for the whole of the obligation if it employs the vendor’s employee following the sale.

Liabilities if Purchaser Employs Vendor’s Employees

As mentioned in the immediately preceding paragraph, the purchaser is not entitled to set-off the value of the notice or payment in lieu of notice provided by the vendor to its employees. However, with respect to statutory “severance”, which is different from common law reasonable notice although the two concepts are often conceptually thought of as being the same, credit is to be given to the purchaser. Paragraph 3 of subsection 65(8) of the ESA provides:

65(8) Only the following set-offs and deductions may be made in calculating severance pay under this section:
Severance pay that was previously paid to the employee under this Act, a predecessor of this Act or a contractual provision described in paragraph 2.

Commentary and Takeaways for Employers with Labour Pains

The purpose of this post is to attempt to explain how the Ontario Ministry of Labour and the common law approach continuity of employment in the context of a sale of a business. As one can see from the above, the issue can be complicated and it often catches those involved in the sale of a business by surprise.

There are ways to address the implications of section 9 of the ESA. For example, purchasers may wish to consider insisting on an indemnity provision from the vendor, to mitigate the amount of exposure they may have following closing. By the same token, vendors would be prudent to refrain from providing their staff with any form of notice or termination pay if the express intention of the purchaser is to make offers of employment to the staff following closing.

If you are considering selling your business, the the professional, experienced and cost-effective business lawyers at Ottawa's Kelly Santini LLP would be happy to be of service to you.

Commentary and Takeaways for Employees with Labour Pains

If you are an employee and find yourself in the middle of a sale, it may be important to speak with an employee lawyer about your rights. As the case of Drake v. Blach, 2012 ONSC 1855 summarized by this blog in the post The Law can be an Asset Sale demonstrates, just because the law is on your side, does not necessarily mean that the judge hearing your case will be aware of it.

If you are a worker and your have been let go by your new employer, speak with an experienced employment lawyer before making any final decisions concerning your case. It could really be worth your time and effort.

The professional, experienced and cost-effective employment lawyers for employees at Ottawa's Kelly Santini LLP would be happy to be of service to you.

Contact Me

To reach the author of this blog, Sean Bawden, email or call 613.238.6321 x260.

Sean P. Bawden is a partner with Kelly Santini LLP, located in Ottawa, Ontario, Canada. He practices in the areas of employment law and civil litigation. He has also taught Trial Advocacy for Paralegals and Small Claims Court Practice at Algonquin College in Ottawa.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

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