WHEN IT COMES TO THE SALE OF A BUSINESS, IT IS BUYER, SELLER, AND EMPLOYEE BEWARE.

Too many of the little things can go awry

Aclient owns a small, successful business with 25 employees, many of whom contributed to its steady growth since its inception 20 years ago. As she nears retirement, she is at a crossroads. She has struggled during many sleepless nights over the future of her business, her steadfastly loyal employees and her own retirement savings. She ultimately determined the best option was to sell her company. But what happens next?

Many would argue that sales and purchases of businesses routinely occur, so why the quandary? The reality is that a business sale can leave one, and perhaps all three parties — vendor, employees, and purchaser — vulnerable and open to potential losses and liability.

There are two types of purchases: a share or asset purchase. A share purchase does not affect the employees as the purchaser legally steps into the shoes of the vendor and inherits all employment-related liabilities, including union obligations.

With asset purchases, matters become more precarious, and all three parties risk legal difficulties. The purchaser may offer employment to all or only a few of the vendor's employees. There is no obligation for the purchaser to offer employment to any of the vendor's employees, regardless of seniority or skill, and offering jobs to some provides those freshly unemployed with no rights against the purchaser (unless the job was not offered because of a prohibited ground under human rights legislation).

So it is no surprise that courts frequently find hapless employees caught in the middle, often at the mercy of both the purchaser and the vendor. If the vendor, their current employer, terminates their employment, they can sue for wrongful dismissal. However, if an employee is offered employment by the purchaser on substantially similar terms, the vendor could argue that the employees ought to have accepted that offer to mitigate their damage, and the employee would have no claim for any damages beyond their minimal statutory entitlement. Even if the employee accepts an offer from the purchaser on lesser terms, they still cannot obtain their wrongful dismissal entitlement from the vendor.

There are instances though in which an employee need not accept new employment from the purchaser and can instead claim full wrongful dismissal damages from the vendor. For example, if the new offer of employment constitutes a material demotion from the employee's previous position or they are required to sign a usurious employment contract depriving them of their pre-existing rights, the employee will not be required to accept that position as part of their duty to mitigate.

Given the potential liability for termination payouts, vendors need to be cognizant of whether the purchaser will be retaining its employees. If not, vendors will be liable for termination pay to any employees terminated as a result of the sale. That is why most purchase agreements, at the vendor's insistence, require the purchaser to hire their employees on substantially the same terms.

Just because the purchaser retains the vendor's employees does not mean that the vendor's obligations end. What vendors usually do not consider is a situation in which the purchaser becomes insolvent, or for some reason is unable to continue employment after a short period. In those circumstances, the employee may still be able to pursue the vendor for wrongful dismissal. Specifically, where the employee is unable to completely mitigate their damages through employment with the purchaser, due to insolvency or because they were fired without cause by their new employer, the employee's claim for damages against the vendor survives.

The party that carries the heaviest burden is usually the purchaser. There are strong statutory protections in place to protect employees in the sale of a business, and which require the purchaser to recognize prior service for all purposes including vacation entitlements, termination pay, severance pay and parental leave. Unless the purchaser requires an employment contract with a clear, explicit and enforceable term limiting dismissal obligations (most termination provisions in Canadian employment contracts are unenforceable), and provides adequate consideration

in exchange for the contract, courts are likely to find an employee's prior service will be recognized for the purpose of calculating reasonable notice of termination at common law.

However, under employment standards legislation, whatever the contract states, previous service for employment standards purposes is recognized with the previous employer and attempting to contract out of that could void the entire contract pursuant to a decision of the Supreme Court of Canada, Marek Machtinger v. HOJ Industries Ltd, which I won many years ago. But this just means that the employee must be paid, upon termination, at least the minimum which employment standards would require based upon the combined service. The purchaser and employee can contract out of the much larger common law amounts that a court would provide.

Purchasers also need to note that, even in the context of a share transfer, any unilateral changes to the level of compensation, benefits or pension entitlement can open the purchasing employer up to potential liability for constructive dismissal.

Which brings us to a crucial consideration: The sale of a business — small or large — requires meticulous scrutiny and uncompromising attention. This translates to careful legal analysis, and protection for all three involved parties. Purchasers cannot claim buyer's remorse for not performing their due diligence to protect themselves, nor should vendors or employees claim ignorance.

You may have made the decision to sell your business, but in order to enjoy an equanimous retirement, you need to ensure that you are well protected. Employees need do the same. When it comes to the sale of a business, it is buyer, seller, and employee beware.

HAPLESS EMPLOYEES CAUGHT

IN THE MIDDLE.

Got a question about employment law during COVID-19?

Write to me at levitt@levittllp.com.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers. He practises employment law in eight provinces. He is the author of six books including the Law of

Dismissal in Canada.

NINA WESTERVELT / BLOOMBERG FILES The sale of a business — small or large — requires meticulous scrutiny and uncompromising attention. This translates to careful legal analysis, and protection for all three involved parties; the buyer, the seller and employees.