Successor Employer (Employees in a Business Sale)

A successor employer is the new owner of a business who is treated, for some employment law purposes, as if it had been the employer all along. The policy: workers should not lose the service, union rights and minimum standards they built up just because the business changed hands.

How much a buyer inherits depends first on the deal structure. In a share purchase, the buyer acquires the corporation that employs the staff. The employer is the same legal entity before and after closing, so employment contracts, service, accrued vacation and any liabilities simply continue. Ontario's Ministry of Labour, Immigration, Training and Skills Development (the Ministry) says in its ESA Policy and Interpretation Manual that section 9 of the Employment Standards Act, 2000 (ESA) has no application to a sale of shares for that reason, although a later wind-up or amalgamation of the purchased company can itself be treated as a sale.

In an asset purchase, the buyer acquires the business but not the corporation, so the employees' contracts with the seller do not transfer automatically and the buyer chooses whom to hire. Statute then fills the gap: if the buyer hires the seller's people, it takes on their service history. The tax and liability trade-offs between the two structures are covered in asset purchase vs. share purchase.

These rules govern provincially regulated employers; a federally regulated business, such as a bank or airline, follows parallel provisions in sections 44 and 189 of the Canada Labour Code.

Under section 9 of the ESA, if an employer sells a business or part of one and the purchaser employs an employee of the seller, the employment is deemed not to have been terminated or severed. Service with the seller counts as service with the purchaser for every later calculation of length of employment. "Sells" includes leasing, transferring or disposing of the business in any other manner.

Two limits matter:

• The 13-week rule. Continuity does not apply if the buyer hires the employee more than 13 weeks after the earlier of the employee's last day with the seller and the day of the sale.
• A business, not just assets. The section applies to the sale of a business. The Ministry looks at substance, not labels: a seller's non-compete, use of the seller's name, transfer of client lists or contracts, and the buyer selling the same products or services all point to a sale of a business, even if the agreement calls it an asset sale.

Continuity cannot be waived, because the ESA voids any agreement to contract out of its standards. For the buyer, this means:

• ESA notice of termination is later calculated on combined service, up to eight weeks, and severance pay (one week per year of service, capped at 26 weeks) applies to employees with five or more years of combined service where the employer's payroll is $2.5 million or more, or in certain mass terminations.
• Vacation steps up from two weeks and 4% vacation pay to three weeks and 6% once combined service reaches five years.
• If the seller paid termination pay at closing and the buyer then hires the employee, the buyer gets no credit for it. The Ministry's view is that later termination obligations based on combined service lie solely with the purchaser; only severance pay the seller already paid may be offset.
• Vacation pay that accrued before the sale but falls due afterward is the buyer's to pay; vacation pay that was both accrued and due before the sale stays with the seller.

Section 9 does not oblige a buyer to hire anyone. Employees who are not offered jobs have been terminated by the seller, which owes ESA notice or pay in lieu, severance pay where it applies, and any contractual or common-law notice. The Ministry also takes the position that an employee may refuse the buyer's offer and treat the sale as a termination by the seller, without losing ESA termination or severance pay, even if the buyer offers the same terms.

Common-law reasonable notice works differently. In Manthadi v. ASCO Manufacturing, 2020 ONCA 485, the Court of Appeal for Ontario confirmed that the common law does not automatically stitch together service with the seller and the buyer. Unless there is an express understanding to the contrary, a court instead gives appropriate weight to the employee's experience with the predecessor when setting the notice period. Buyers should expect long-serving staff to receive meaningful credit for that history.

If the selling owner will work for the buyer after closing, the ESA's ban on employee non-competes has an exception for a non-compete given as part of the sale; see our guide on non-compete and non-solicit enforceability in Ontario.

Section 69 of the Labour Relations Act, 1995 gives unions successor rights. When an employer bound by a collective agreement sells its business, the buyer is bound by that agreement as if it had been a party, until the Ontario Labour Relations Board declares otherwise. A union that is certified, or entitled to give notice to bargain, continues as bargaining agent for the like bargaining unit in the buyer's business. If a certification or termination application is before the Board at the time of sale, the buyer steps into the seller's place in it.

As under the ESA, "business" includes part of a business and "sells" includes leases and other transfers. The Board decides whether a sale occurred, and its decision is final for the purposes of the Act. The Board can also redefine bargaining units where a buyer intermingles employees from different businesses, and on an application made within 60 days it may end the union's bargaining rights if the buyer has changed the character of the business so that it is substantially different from the predecessor's.

The practical point: a buyer cannot leave a union behind by buying assets instead of shares. Collective agreements, grievances, pending Board applications and organizing activity belong on the first diligence request list.

A buyer's due diligence on the workforce typically covers:

1. An employee census showing each person's original hire date with the seller and any predecessor, wages, accrued vacation, leaves and written contract terms, including whether any termination clause is likely to be enforceable.
2. Union status: collective agreements, certificates, pending Board applications and grievances.
3. Workers the seller treats as contractors, since a misclassified worker can arrive with employee rights; see employee vs. independent contractor.
4. The seller's WSIB account and, in an asset deal, a purchase certificate; see WSIB clearance and purchase certificates.
5. Terms in the asset purchase agreement that allocate these costs: a schedule of employees who will receive offers, offers on substantially similar terms that recognize prior service, a price adjustment for accrued vacation pay, and the seller's responsibility for everyone not hired, backed by an indemnification clause.

Lamba Law's free due diligence checklist builds a request list covering employees and other areas, and the buying a business in Ontario checklist walks through the full transaction.

Daniel Okafor's corporation buys the assets of Credit Valley Climate Ltd., a Mississauga HVAC contractor owned by Rosa Ferreira, for $2.4 million. The business has 14 non-union employees. The asset purchase agreement lists 12 who will receive offers on their current terms with prior service recognized; Rosa's company will terminate the other two and pay their entitlements. Accrued vacation pay of $31,000 comes off the price because Daniel's company will honour it.

One of the 12, a dispatcher, declines Daniel's offer. Under the Ministry's approach she can treat the sale as a termination by the seller, so Rosa's company pays her ESA termination pay, a cost the agreement already assigns to the seller.

Eighteen months after closing, Daniel restructures and eliminates the job of Marco Silva, a technician Rosa's company hired 11 years before the sale. Because Marco was hired within 13 weeks of closing, his ESA service runs from his original hire date: about 12 and a half years, so he is owed eight weeks' notice or pay in lieu. Daniel's company is under the $2.5 million payroll threshold and is not making a mass termination, so no ESA severance pay is owed, but Marco's common-law notice claim will also weigh his years with the seller. Daniel resolves it with a negotiated package and a release.