PITFALLS OF PURCHASING EMPLOYEES

The sale of a business can have a substantial emotional and practical impact upon the employees. The related legal issues for purchaser and vendor, and for their lawyers, are no less significant.

Legally, the employment impacts of the sale of a business are numerous and they flow from both statutory sources and the common law. They can be problematic, particularly when the existing employees flow to the purchaser of the business.

Most commonly, these issues seem to arise within a year or two after the purchase of the business. Although the purchaser often has the intention of keeping all the existing employees, things don’t always work out that way.

This is partly because very little due diligence is typically done in relation to individual employees. When a termination inevitably happens soon after the business is purchased, there are questions as to which party (the vendor or the purchaser) will be liable to satisfy the employee’s entitlements and as to the extent of those entitlements.

These can be very expensive liabilities and the question of who holds them should be a significant concern to the parties at the time the business is sold – both the vendor and the purchaser surely are seeking certainty in the transaction – rather than after the fact.

In B.C., our Employment Standards Act deems employment to be continuous upon the sale of a business. So, for the purposes of the Act, employees who go to work for the purchaser do so with all their accumulated entitlements intact.

Their employment is deemed to have begun with their original date of hire, and their tenure remains unbroken for the purposes of entitlements such as vacation pay and severance pay. Any other claims which the employees had against the former employer (for instance, for unpaid wages and overtime, and statutory holiday pay) can also be directed against the purchaser.

The common law of employment applies consistently throughout Canada (with the exception of Quebec) and is enforced by the civil courts. Its effect, generally, is to impose a number of implied terms onto the employment relationship such as the entitlement to reasonable working notice in not-for-cause termination situations.

The common law of employment presumes the period of service to be continuous through the sale of a business so, as in the statutory context, an employee’s period of service can extend back beyond the purchase date. This will be a significant factor in determining entitlements at the time of termination.

The parties can structure a purchase agreement to curtail the period of service and to address responsibility for common law liabilities (whether they are to remain with the vendor or flow to the purchaser). But, there are uncertainties in all of this.

The civil courts have held, for instance, that in certain circumstances both the purchaser and the vendor may be liable to the employee. This will occur when the contractual status of the employee has not been adequately defined at the time of the sale.

And, it is not uncommon at all for a judge to decide that, notwithstanding the purchase of a business, an employee’s period of service – for legal purposes – goes back to his or her original date of hire.

For the vendor of a business to be certain that it does not retain liability for common law wrongful dismissal damages, it must establish a “novation” of contract. A novation has been described as a trilateral agreement by which an existing contract is extinguished and a new one with another party is brought into being.

The risk that a civil court will not agree that a proper job was done means that there is no guaranteed method of ensuring which of the parties to the transaction will hold liability. To address this uncertainty, the best the parties can do is build acceptable indemnifications and hold-backs into the purchase and sale agreement.

All of this suggests to me that parties to a business transaction should involve employment lawyers earlier rather than later. It also suggests to me that everyone involved should recognize the uncertainty of the situation and protect themselves from unwanted liabilities.

Robert Smithson is a labour and employment lawyer, operating Smithson Employment Law. For more information about his practice, or to subscribe to You Work Here, visit www.smithsonlaw.ca.