Business owners wear many hats – including employer. Your employees may be your business’s greatest asset, but they could also be your greatest liability when you sell it. Here’s the legal effect of a sale on employees, the resulting employment liabilities on termination and three key steps to take now to make your business more attractive to sell later.

LEGAL EFFECT OF BUSINESS SALE ON EMPLOYEES

When a business is sold, there are employment law consequences.

Share Sale. This doesn’t trigger termination of the employees’ employment because the purchaser steps into the vendor’s shoes as if it had been the same employer all along. Neither the vendor nor the purchaser has an automatic obligation to give employees severance. The parties often negotiate the transfer of employees in the purchase and sale contract, imposing both termination and employment obligations on one or both, but these are contractual obligations between the vendor and purchaser – and don’t affect employees’ rights.

Asset Sale. An asset sale does trigger termination of the employee’s employment and the vendor’s obligation to give the employee severance. The vendor can minimize the impact by obligating the purchaser, in the purchase & sale contract, to continue the employment on the same terms and conditions as before.

Statutory Obligations. Whether the sale is of assets or shares, most employment standards legislation has a provision that deems a purchaser to be the vendor’s “successor employer” and the period of employment to be continuous for the purposes of the obligations and benefits of that legislation (see, for example, section 89 of the NB Employment Standards Act).

LIABILITIES ON EMPLOYMENT TERMINATION

Employment termination by the sale of a business is a “without cause” termination. Generally, an employer can terminate an employee’s employment without cause by giving the employee termination notice or pay in lieu of it. The notice entitlement (and thus the terminating employer’s liability) is based on:

Contractual Notice. The notice period in the event of without cause termination that’s set out in the (enforceable) termination clause in a written employment contract.

Statutory Notice & Obligations. Employment standards legislation sets out minimum employment terms to which employees are entitled, including minimum notice (possibly subsumed by any contractual notice) and other termination benefits (e.g. payment of accrued vacation pay, unpaid salary and a Record of Employment within a specified time), if their employment is terminated without cause. An non-compliant employer risks an employment standards complaint and/or a legal action for wrongful dismissal.

“Reasonable Notice”. If there’s no contractual notice (or it’s not enforceable), the employee is entitled to “reasonable notice”, a notice period that’s often significantly higher than the minimum notice under employment standards legislation. Reasonable notice is individually assessed at the time of termination considering a number of factors, including the nature of the position, length of service, age, ability to find comparable employment and circumstances surrounding the hiring – making it uncertain.

3 KEY EMPLOYMENT LAW STEPS TO TAKE NOW TO HELP YOU SELL LATER

There are steps that business owners can take that will make its business more attractive to purchasers and manage its liability exposure to employees if and when it decides to sell the business. Here are three key employment law steps to take now:

1. Hire Well. A critical step a vendor can take happens when the future vendor hires its employee: using a well drafted and properly implemented written employment contract. And a key term for that purpose is a termination clause: a clause specifically setting out the employee’s notice entitlement upon termination without cause intended to displace an employee’s entitlement to “reasonable notice”. This gives everyone certainty to the notice entitlement and allows the employer the opportunity to negotiate a notice period that’s less than what “reasonable notice” might be. But courts scrutinize these terms closely: to be enforceable it must be clear, unambiguous and comply with employment standards legislation.
2. Employ Well. Here’s another benefit to being a “good” employer: potential purchasers of the business will conduct due diligence – and that can make or break the deal. Keeping employment records is a requirement of employment standards legislation; going beyond the minimum requirements is good practice. Policies aren’t required, but creating and consistently enforcing them is another important aspect of employing well. Deal with – don’t ignore – problem employees and terminate their employment if it’s appropriate; they won’t make your business more attractive. That due diligence will include a look at actual and potential liabilities the business faces, including statutory complaints (human rights, employment standards, occupational health and safety, and so on) and employment-related lawsuits, so know and comply with all legal obligations (and keep records of that compliance).
3. “Fire” Well. Legal obligations include those to employees if and when the employer terminates an employee’s employment as the result of the sale of the business or otherwise. Courts consider employees at their most vulnerable at this time and protect them – so mistakes during the termination process can be expensive. Meet all legal obligations on termination to avoid having liabilities hanging over your head: if terminating for cause and thus without notice, ensure you can meet the high bar to prove it; if terminating without cause, provide the required notice and comply with any contractual terms. Either way: comply with the employment standards legislation in all respects, including providing reasons for termination, timely payment of accrued wages and accumulated vacation pay, delivery of a Record of Employment, and provision of the minimum termination notice (or prompt payment in lieu) even if the employee doesn’t accept any offer and/or sign a release; terminate with dignity, always be respectful and professional throughout, and don’t engage in unfair, dishonest or insensitive conduct. It’s also good practice to consider other separation terms that are required, appropriate or welcome (often at minimal expense), like outplacement counselling, relocation expenses and/or a letter of reference.

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Please contact your McInnes Cooper lawyer or any member of the Labour and Employment Team @ McInnes Cooper to discuss this topic or any other legal issue.

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McInnes Cooper has prepared this document for information only; it is not intended to be legal advice.  You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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