This is blog is written by Meghan Ferguson.
Often in a sale of a business, questions arise about whether the purchaser is obligated to employ the sellers’ employees and whether an employee must accept employment with the purchaser.
The simple (but not so simple) answer is that it depends on how the transaction is structured. How the sale is structured can sometimes create complex and costly employment issues, which I discuss below.
Is the purchaser required to offer employment to the sellers’ employees?
The purchaser is not obligated to employ the sellers’ employees. In a non-unionized workplace, a purchaser can choose to purchase parts of a business or assets like property, leases, or equipment, but the purchaser does not have to take on the sellers’ employees. The purchaser may want to select its own employees or only hire key employees to transition the business. If the purchaser does not want to employ the sellers’ employees, then the purchase and sale agreement should address who will be responsible for terminating employees and who will be responsible for severance.
If the sale of a business is an asset only (i.e., property, equipment) purchase, then the seller will be directly liable to its employees for termination, severance, or other pay. If the sale of a business is a share purchase and the legal entity that employs the sellers’ employees does not change, then the purchaser would be liable for any termination on the date purchaser takes ownership.
Does an employee have to continue employment with the purchaser?
In an asset purchase or when the legal entity changes, a purchaser or new entity can offer the sellers’ employees a job, but the employee does not have to accept the offer of employment.
The doctrine of privity of contract applies in the employment law context with some exceptions (see London Drugs Ltd. v. Kuehne & Nagel International Ltd.,  3 S.C.R. 299). As an established principle of contract law, the common law doctrine of privity of contract stands for the proposition that “no one but the parties to a contract can be bound by it or entitled under it”: Brown v. Belleville (City), 2013 ONCA 148.
Therefore, an employee would not be obligated to accept employment with a purchaser and a new entity. Absent an agreement with the employee to assign or transfer their employment contract, an employee is not bound to accept employment with a new entity. Employees, however, should be cautious in turning down a reasonable offer of employment, as it may limit any notice or pay-in-lieu of notice from the seller.
For a share purchase, employees would continue on with the new owners because usually the legal entity (employer) under their employment contract has not changed. Employees who do not want to want to work for new management should consider a change of control clause in their employment contract.
Does a purchaser have to recognize a union?
The purchaser can choose to recognize the union. If the purchaser does not want to voluntarily recognize the union, then the union can bring an application to the provincial labour relations board.
In Ontario and most provinces, the union can apply to the labour board to have the purchaser declared a “successor employer.” What that means is if a business or part of a business continues on with the purchaser and the sellers’ workforce is unionized, the union that represents the affected employees can apply to the labour board for a declaration that the purchaser is the new employer. In determining whether there is a sale of all or part of a business, most labour boards consider whether there is a continuity of all or part of the business to a new entity.
In a recent case involving Zellers and the United Food and Commercial Workers International Union, Local 1518, 2012 CanLII 68305, the British Columbia Labour Relations Board found that a lease transfer and right to certain records and brands did not trigger a sale of business and the union’s application to declare Target a successor employer was dismissed.
What are the practical considerations in a sale of business?
In any sale of a business, the parties should consider the structure, the business needs, and the employment issues.
Here are a few practical employment considerations:
• Will the structure of the transaction meet business, employment and labour relations needs?
• Consider non-competition and non-solicitation clauses for employees that could significantly affect the business and/or influence customers.
• Will key employees be retained for transition and how?
• Consider what poaching or soliciting the purchaser may engage in to hire the sellers’ employees.
• Who will be responsible for notice and pay for severance if some or all employees are terminated?
• What, if any, representations will be made about unionization?
It is well worth getting a lawyer involved to discuss the employment and labour issues that arise in a sale of a business. Failing to properly consider the employment and labour issues could result in costly litigation and ultimately harm to the business. For all of your employment law inquiries, contact Meghan Ferguson or any of our Toronto employment lawyers.