Considerations for Purchasers When Acquiring Existing Employees of a Business

This blog was prepared with the assistance of summer law student Ian Schatz.

Acquiring or purchasing a business can have many practical and legal implications for both vendors and purchasers. When acquiring a business, purchasers should be aware that not only are they exposing themselves to the business risk of the vendor, but to potential employment-related liability as well.

When a purchaser acquires a business, it will typically intend to continue the employment of the vendor’s employees. However, this is not always the case. If an employer terminates an employee following the close of a transaction, perhaps due to a lack of due diligence prior to the purchase, there may be issues regarding whether the purchaser or the vendor is liable for any employee entitlements.

According to section 2-10 of The Saskatchewan Employment Act, SS 2013, c S-15.1 (“the SEA”), for the purposes of the employment standards provisions of the SEA, an employee’s employment is deemed to be continuous after a business is sold, leased, transferred or otherwise disposed of.

In the unionized context, section 6-18 of the SEA provides that the purchaser of a business will be bound by the collective agreement of the vendor. The purchaser will also be bound by all Labour Relations Board orders or proceedings that were taken before the business was purchased.

Share Purchases and Asset Purchases

There are many strategic business considerations for structuring the purchase of a business a certain way. Employment considerations may also play a role in structuring a purchase, since the method for purchasing a business can determine the extent of a purchaser’s liability for existing employees.

Whether the purchase of a business is structured by way of share purchase or asset purchase affects the purchaser’s employment-related liabilities. Generally, when a purchaser purchases the shares of a business, the purchaser will inherit the vendor’s employees and employment-related liability. Essentially, the purchaser “steps into the shoes” of the vendor as the new employer of the pre-existing employees.

Throughout negotiations leading to a share purchase, the parties can negotiate the allocation of employment-related liability and the extent of continuing employment obligations will often be reflected in the share purchase price. A purchaser may negotiate for the vendor to terminate certain employees prior to the closing of the transaction, allocating the liabilities associated with employment entitlements to the vendor. Alternatively, a vendor may negotiate for the purchaser to retain the existing employees of the business, allocating the liabilities associated with continued employment obligations to the purchaser.

The purchaser will also be required to negotiate individually with employees if it wishes to change an employee’s terms of employment, and will likely need to provide “fresh” consideration for any such changes to make them legally binding.  Failure to do so may expose the purchaser or the vendor to a claim for constructive dismissal.

Alternatively, the purchaser and the vendor may agree to structure a transaction as an asset purchase. In an asset purchase, the vendor may remain liable for employment entitlements and the purchaser may not be required to retain the vendor’s employees.

However, liability for employment terminations will often remain the subject of negotiation during an asset purchase. To avoid employment-related liability a vendor will often want the purchaser to retain its employees, requesting that the purchaser extend offers of employment to its employees. The results of such negotiation can take many forms.  For example, a vendor may negotiate for the purchaser’s extension of offers of employment to all of its employees on substantially similar terms of employment. Alternatively, a purchaser may negotiate for the vendor’s termination of certain employees prior to the closing of the transaction.

A purchaser in an asset transaction is not required to extend offers of employment to all of the vendor’s employees. However, a purchaser should be aware of the potential for unintentional human rights risks associated with the exclusion of select employees from receiving offers of employment to continue employment with the vendor.

A purchaser in an asset purchase may offer existing employees continued employment on new terms. However, a purchaser should be aware of section 2-10 of the SEA, which deems an employee’s employment to be continuous for the purposes of the SEA. Accordingly, each employee’s service with the vendor must be recognized by the purchaser for the purpose of determining an employee’s length of service pursuant to the SEA.

In summary, negotiating an agreement for the purchase of shares or assets of a business can have unintended consequences with respect to the employees involved in the transaction. Purchasers and vendors should ensure they are aware of potential employment-related liabilities that may flow from the structure of a transaction.

If you are acquiring a business and require assistance with navigating employment liability, please contact a member of our labour and employment team.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.