Employer Obligations on the Transfer of a Business

Employer Obligations on the Transfer of a Business

Posted September 10, 2014 Category: Businesses

On the transfer of a business by a purchase and sale of assets, there are two distinct sources of employer obligations:  (i) the “common law” (i.e. cases decided in the courts that deal with the employment relationships apart from statute); and (ii) statute law (e.g. the Employment Standards Act (“ESA”).  

In an asset purchase, the common law employment relationship is deemed to have terminated on the date of closing and the transferring employees become employees of the purchaser on the closing date.  The termination of the employment relationship does not trigger notice or severance obligations under the common law for employees who are offered and accept employment on similar terms and conditions.  However, employees who do not accept the new employment with the purchaser may look to the vendor for satisfaction of wrongful dismissal damages if they are not provided with reasonable notice.  Where a purchaser has offered employment on substantially similar terms and conditions of employment, an employee who does not accept that employment may have a difficult time proving his or her damages since terminated employees have a duty to mitigate their damages by searching for and accepting reasonable alternate employment.  The protection provided to vendors by the common law mitigation requirement leads to the covenant in most deals for the purchaser to make offers to all active employees on substantially similar terms and conditions of employment.  Once an employee accepts the offer of employment with the purchaser, the liability for their termination and severance usually passes to the purchaser.

The Employment Standards Act (“ESA”) provides for a continuation of the employment relationship in the event that an employer sells all or part of a business to a third party.  The concept of sale is defined quite broadly.  It is important to note that the ESA provides that where, on the sale of a business, the purchaser continues an employment relationship with an employee, the purchaser becomes a successor employer and inherits the vendor’s ESA liabilities with respect to that employee (period of notice in event of termination, for example).  The ESA also specifies that the sale of a business does not operate to terminate employment.  

As such, purchasers will usually try to negotiate an agreement with the vendor that deals with the liability to employees who will be hired by the purchaser, in an attempt to minimize successor employer liability (both at common law and under the ESA). For example, a purchaser and vendor may agree to share liability for those employees who are hired but are subsequently terminated within a stated period of time following closing or the vendor may agree to be responsible for liability attaching to the termination of a certain specified number of employees. If there is not specific agreement between the vendor and purchaser as to how the liability relating to employees is to be addressed, there can be unintended liability for the vendor or purchaser of the transfer of the business.

Posted September 10, 2014 Category: Businesses

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