length of service, calculating notice

Does the Sale of Business Interrupt the Length of Service When Calculating Notice Periods?

In the current economic climate, employers face the difficult decision of restructuring their companies and selling their businesses. One of the common issues with such transactions is what happens to the employees.

If employees are terminated without cause, they must either be provided a reasonable notice period they have to either work or receive pay-in-lieu for such work.  Many employees are concerned about what a sale of business means for their notice period entitlements.

What happens to employees on the sale of a business? Are all the employees fired when a company is sold? How does the sale of a corporation affect an employee’s length of service for calculating their severance? This article will answer all these questions and explain how an employment lawyer can help.

 

Share vs Asset Sale

There are, generally, two options to sell a business. The entity selling the corporation, otherwise known as the “vendor”, can sell either:

  • The shares of the corporation that owns the assets and operates the business; or
  • The assets of the business itself.

A share sale involves the sale of a corporation’s controlling shares to a purchaser. This type of sale usually does not change the legal identity of the corporation. Unless the purchaser expressly communicates changes to the employment relationships of the vendor’s employees, their employment is presumed to continue under Ontario law.

In contrast, the status of employees in an asset sale can be more complicated.

Historically, the sale of the business results in the automatic termination of the vendor’s employees at the time of sale. This is because you cannot assign employment contracts in Ontario, and they must consequently terminate in most cases. In some cases, purchasers in an asset sale will offer the vendor’s employees new employment as part of the transaction’s terms.

A share sale does not usually result in mass terminations unless there are exceptional circumstances or it is a term of the share purchase. The corporation is still the employer, and with rare exceptions, the employee would continue with their employment as if nothing happened. There are exceptional scenarios based on the unique terms of the share sale between the vendor and purchaser.

An asset sale is where it is more likely that an employee will face termination from their employment by the vendor and be owed severance. However, many purchasers will offer to hire the vendor’s old employees on new terms of employment upon the sale of the business.

In Ontario, one of the main factors in calculating how much severance someone is owed is how many years of service they have accrued with their employer. Whether your employer was just sold in a share or asset purchase, it can potentially impact the length of service for calculating your severance entitlement.

 

How the Sale of a Business Affects Employees’ Length of Service

As mentioned above, a share sale does not change the legal identity of the employer. Therefore, a share sale does not usually affect an employee’s length of service. If one of the continuing employees is later terminated by the purchaser, their entire service can be counted towards calculating their severance entitlements.

In contrast, a business purchaser becomes the new owner when a business is sold through an asset sale. The legal identity of the employer changes, and the employees commence their employment anew if the business purchaser re-hires them. However, the employee can negotiate for the purchaser to recognize their previous years of service with the vendor in such an agreement.

Under section 9 of the Ontario Employment Standards Act, 2000(“ESA”), the sale of a business, or part thereof, does not terminate the employment of the vendor’s employees if the purchaser agrees to hire them. The applicability of this section will depend on the facts of each specific case.

If section 9 of the ESA applies, the employee’s benefits that are dependent on an employee’s length of service under the ESA are transferred to the purchaser. These include statutory notice of termination or pay in lieu thereof, vacation pay and time, severance pay, and parental and pregnancy leave entitlements.

Under the ESA, the business purchaser should consider the employees’ service with the vendor as continued employment when a business is sold through an asset sale. A business purchaser may also expressly recognize an employee’s past service in consideration of their valuable skills and experience within a new contract.

 

Calculating Notice Period After the Sale of a Business

When an employer terminates an employee’s employment without cause, the employee is entitled to reasonable notice of termination. The notice of termination could be in the form of working notice, pay-in-lieu of notice, or a combination of both.

The ESA specifies the minimum notice or pay in lieu thereof that an employee must receive on termination: one week per year of service up to a maximum of eight weeks. An employee may also be entitled to statutory severance pay up to one week per year of service up to a maximum of twenty-six weeks and other ESA entitlements.

An enforceable employment contract can limit an employee’s notice entitlements to the ESA minimums. Failure to do so with an enforceable termination provision entitles the employee to common law reasonable notice. This common law notice pay includes the employee’s ESA minimums but generally can reach notice periods of twenty-four months.

When a business is sold, section 9 of the ESA deems the vendor’s employees to be continuously employed for the purpose of calculating their ESA notice period. The business purchaser must count the employees’ entire service over the years while calculating their notice period or other ESA entitlements.

In contrast, the broader court-made law considers the vendor’s employees to be terminated when the vendor sells the business’ assets. Such employees are deemed to have technically started a new job if they continue working with the purchaser or sign a new agreement. This may give the impression that a sale of assets results in less severance for employees after the sale of a business but this is not always the case.

In Ontario, the courts may consider an employee’s prior years of service for the vendor while calculating the notice period owed by a purchaser following an asset sale. This is because the business purchaser benefitted from that employee’s years and experience. A court is more likely to do so if the new agreement with an employee after an asset purchase explicitly recognizes the employee’s years of service with the vendor.

 

How an Employment Lawyer Can Help

Both employers and employees can benefit from legal representation on the sale of a business. If you are an employer, an employment lawyer can examine all the factors to determine your obligations after selling or purchasing a business.

An employment lawyer has the experience and expertise to protect the business purchaser and seller from assuming unwanted liabilities. They can also draft or review the purchase agreement to ensure it specifies which company is liable for what.

As mentioned above, the sale of a business may reduce an employee’s notice period entitlements despite their long years of service. Therefore, employees should consider reviewing their case with an employment lawyer before signing anything an employer provides them in a sale of a business to ensure they do not give up their legal rights.

Further, an employment lawyer can advise employees on their legal obligations. For instance, terminated employees have a duty to mitigate – meaning they must reasonably minimize their damages. This is done by looking for another job and documenting those efforts, or accepting a comparable job offer from the business purchaser. Failure to do so may disentitle an employee from damages they might have otherwise received.

 

Conclusion

The sale of a business through a share sale does not change the employer’s identity. Therefore, the purchaser inherits the vendor’s employees on the sale of the company. On the other hand, when the business is sold by way of an asset sale, the employer’s identity changes. In such cases, the employees begin new employment upon accepting employment with the business purchaser.

How the sale of a business impacts an employee’s years of service for the purposes of calculating notice and severance entitlements will depend on the unique facts of each case. While most shares of sale transactions continue accruing an employee’s years of service, an asset sale could potentially disrupt an employee’s length of service for determining their legal entitlements.

An employment lawyer can use their knowledge and skills to help ascertain the entitlements of employees on the sale of a business. They can advise you on your legal rights and obligations and protect your interests while negotiating with the other side.

 

Contact Us

If you are an employer needing assistance with calculating an employee’s notice period or an employee who wants help determining your legal entitlements, our team of experienced workplace lawyers at Achkar Law can help. Contact us by phone toll-free at +1 (800) 771-7882 or email us at [email protected], and we would be happy to assist.

If you are a small or medium-sized company looking for full-service support with a same-day response, visit our CLO Program page for our strategic solutions.

 

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