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:
To discuss this or any other legal issue, contact any member of McInnes Cooper’s Labour and Employment Team. Read more McInnes Cooper Legal Publications and subscribe to receive those relevant to your business.
McInnes Cooper prepared this article for information; it is not legal advice. Consult McInnes Cooper before acting on it. McInnes Cooper excludes all liability for anything contained in or any use of this article. © McInnes Cooper, 2016. All rights reserved.
About the author:
Dominique Fontaine is a fully bilingual Labour & Employment lawyer. She regularly provides employers with strategic advice on legal questions including the employment terminations and employment contract review and drafting, and representation in wrongful dismissal cases. You can reach Dominique at email@example.com.