Employees are a valuable asset of any successful business. However, in the context of the purchase and sale of a business, buyers and sellers often do not turn their minds to key labour and employment law considerations relating to these employees until a very late stage in the transaction. The parties to a transaction should not underestimate the impact that the transition of the workforce of a target business can have on both buyers and sellers. The purpose of this article is to highlight a few key labour and employment issues that arise in virtually all business acquisition and sale transactions in BC.
BC Employers Cannot Terminate an Employee’s Employment “At Will”
If you are selling your business to a purchaser who is not Canadian or has limited experience conducting business in Canada, the purchaser may not be aware that in BC an employee is entitled to notice of termination (or payment in lieu) when his or her employment is terminated without just cause. This means the seller and buyer of a business cannot simply decide to terminate the employment of the business’ employees “at will” (a doctrine that is prevalent in the U.S.), should the buyer of the business not wish to keep all or some of the employees of the target business, without: (i) first giving the subject employees proper working notice or payment in lieu of this notice, or (ii) being exposed to potential liability resulting from a dismissal claim by the employee if such notice (or pay in lieu) is not provided.
The Employment Standards Act (the “ESA”) sets out the minimum notice of termination periods (or pay in lieu) that an employer must offer to its employees upon termination of their employment. Employers cannot contract out of the minimum notice of termination (or pay in lieu) requirements set out in the ESA, which are triggered in every case where a non-union employee’s employment is terminated without just cause.
In addition to the minimums set out in the ESA, if there is no enforceable termination clause in an employment agreement, which at a minimum meets the ESA termination provisions, the employer must provide the employee with “reasonable notice of termination” under the common law (based on judge-made case law). What constitutes “reasonable” notice varies depending on a number of factors, including the employee’s age, length of service, position and his or her salary, but in some cases the reasonable notice period can be as long as two years.
Since common law “reasonable notice” requirements often exceed the ESA minimums, vendors and buyers of businesses should seek proper advice to identify any potential exposure.
Structuring the Deal
Depending on the structure of the transaction, there may or may not be a termination of employment “triggering event”, giving rise to potential exposure for severance obligations for buyers and sellers.
If the transaction is structured as a share purchase, whereby the buyer acquires the shares of a target company, the buyer, in the place of the vendor, becomes the new owner of the company that carries on the business and inherits with the company all of the company’s assets and liabilities, including its employees (unless specifically agreed otherwise). Since only the ownership of the company changes, but the identity of the company as the uninterrupted “employer” remains intact, the company the buyer purchases comes with the company’s ongoing obligations to the employees under oral and written employment agreements, including obligations for past service of the employees, their salaries, bonuses, benefits and severance obligations if the employees are terminated after the buyer acquires the business. Since these obligations can be significant, buyers are well advised to turn their minds to their potential exposure at an early stage of the transaction and to conduct proper due diligence with respect to potential obligations the buyer will inherit. Proper due diligence and advice can assist in buyers avoiding the shock that often results when buyers need to cause the company to terminate an employee’s employment post-closing and they realize the company they now own owes much more severance than they had originally thought.
On the other hand, if the business is sold as a going concern and the transaction is structured as a purchase and sale of the assets of a target company, the identity of the “employer” changes. This is because the vendor company ceases carrying on business and the employees are no longer required by their former employer following the closing of the transaction. The sale of substantially all of the assets of the target company triggers a constructive termination of the employment of the vendor’s employees, unless the buyer offers employment to these employees on substantially similar terms of employment. If such an offer is made and the employees accept it, then the employees’ employment is deemed to be continuous and uninterrupted for the purposes of the ESA.
Upon receipt of an offer of employment from the buyer on substantially the same terms, an employee is expected to mitigate his or her losses by accepting the buyer’s offer of employment. As such, vendors can reduce or obviate their obligation to pay severance to their employees by requiring the buyer, as part of the asset purchase agreement, to offer them employment on the same or better terms. In this scenario, buyers should be aware that unless there is an express agreement to the contrary, this means that the buyer inherits all of the obligations for the past service of the employees as well and should the buyer terminate the employment of any such employee in the future, the buyer’s severance obligations will be based on the employee’s full length of service with the business, and not from the day when the buyer acquired the business. To limit their future liability, buyers should seek advice about how to address these issues in the purchase agreement and employment offers, including negotiating an indemnity from the vendor if the deal is that the buyer will not inherit liability with respect to the past service of the employees with the vendor.
The buyer in an asset purchase transaction has some flexibility to be selective about the workforce the buyer retains. If the buyer does not make an offer of employment to one or more of the vendor’s employees on substantially the same terms, then the employee’s employment is considered terminated and the vendor is exposed to a wrongful dismissal claim by the employee. In some cases, to limit the obligations they assume, buyers will require the vendors to terminate the employment of certain employees and take full responsibility for the severance payable to such employees. Vendors should also seek advice with respect to properly documenting in the asset purchase agreement who will be responsible for termination costs associated with any pre- and post-closing termination of employment, and for including appropriate indemnities in the agreement to cover future costs that may be incurred in this regard.
Changing Employment Terms
Should the buyer of a business wish to make changes to existing fundamental terms of employment of an employee, they should be aware that such changes cannot be made without the consent of the employee. If such a unilateral change is made without consent, the employee can sue the employer for constructive dismissal.
It is important for buyers of businesses to turn their minds to this issue if they intend to make changes to the employment terms of the employees they inherit post-closing. Buyers should raise this issue with their legal advisor so they can be advised on how to structure the change of employment terms by offering proper “consideration” to the employee in connection with the change to the employment contract.
In a share purchase transaction where the business has unionized employees, the employer does not change. Therefore, the provisions of the collective agreement continue to apply to the unionized employees the buyer inherits.
On the other hand, in an asset purchase transaction where the purchaser buys assets of the business and the business has unionized employees, under BC labour relations legislation the purchaser will be bound by, and be required to adopt, the collective agreement as a successor employer. While the buyer may have some ability to assemble the workforce selectively, the choices that the buyer makes in terms of the employees the buyer will employ post-closing must be made in accordance with the provisions of the collective agreement. A unionized employee who receives an offer of employment from the buyer of a business in which the employee is employed may choose to accept such an offer or may exercise his or her rights under the collective agreement against the vendor. Vendors and buyers should seek advice with respect to their obligations if the target business employs unionized personnel.
Protection of the Personal Information of Employees
The BC Personal Information Protection Act (“PIPA”) governs the collection, use and disclosure of personal information of employees, as well as others. During the course of negotiating a purchase and sale transaction, and for the purposes of the buyer’s due diligence with respect to the target business, a significant amount of the information typically disclosed by sellers and collected by buyers constitutes “personal information” within the meaning of PIPA. Sellers and buyers should seek advice with respect to how they can disclose, collect and use such personal information about employees while still remaining in compliance with the provisions of PIPA that apply to purchase and sale transactions. Other privacy legislation may also apply to a purchase and sale transaction if the target business is federally regulated.
These issues are best addressed by way of a confidentiality/non-disclosure agreement prepared and signed by the parties at the commencement of their negotiations. Advice should also be sought with respect to including provisions to address these concerns in the purchase and sale agreement.
Post-Closing Competition and Protecting the Goodwill of the Acquired Business
Most buyers of a business naturally want the seller, post-closing, to refrain from starting or being involved in a business that competes with the business that the buyer has acquired and to refrain from soliciting the business’ employees, customers and suppliers. As such, buyers often require post-closing restrictive covenants (non-competition and non-solicitation) from the sellers as part of the closing of the transaction.
In BC, as is the case throughout Canada, courts have historically been more likely to enforce restrictive covenants agreed to in the context of a purchase and sale of a business as opposed to restrictive covenants contained in employment agreements. However, whether the restrictive covenant is enforceable depends on the facts of a given case, having regard to: (i) the legitimate business interest of the buyer receiving the benefit of the covenant to protect the goodwill of the purchased business; and (ii) whether the restrictive covenant is “reasonable” with respect to the geographic scope it covers, the length of time for which it applies and the scope of the activity it seeks to prohibit.
Buyers who require a restrictive covenant to protect their business interests and sellers who are asked to provide restrictive covenants as part of the purchase and sale transaction should seek advice with respect to the appropriateness and potential enforceability of such covenants.
Seeking Advice Early on in the Transaction can Help you Avoid Surprises and Save Money Later
The purchase and sale of a business is a complex process. This article only addresses a few considerations to which buyers and sellers should turn their minds from a labour and employment perspective. While the high level discussion in this article is meant to raise some issues for parties to consider, each transaction is different and the facts of each case must be considered in properly addressing these issues. In summary, here are a few take-away tips for parties considering selling or buying a business:
- In all transactions, thorough and proper due diligence with respect to the employees of the target business can help buyers avoid surprises after they have taken over the business. Buyers should seek full disclosure from sellers about the workforce, including the number of employees the business employs; the nature of the workforce (employees/contractors, union/non-union); information about salaries, benefits and bonuses; the length of service of the employees; whether any employees are on short or long-term disability; and if there are any written employment or contractor agreements in place. Proper representations and warranties about the employees should also form part of any purchase and sale agreement.
- There are ways for both buyers and vendors to structure the transaction so that the other party is responsible for severance costs that may be associated with employee terminations arising because of the purchase/sale of a business. Qualified advisors can help buyers and sellers address these issues in the purchase and sale agreement and through offers to, and agreements with, employees of a target business.
- Remember, while employers cannot contract out of the minimum requirements set out in the ESA, they can cap their liability so they are only exposed to the minimums set out in the ESA and are not required to pay the common law severance, which can be significantly higher. Buyers and sellers should seek advice on how this can be properly achieved.
- Changing existing employment terms can be tricky and can result in potential liability for vendors and buyers. However, there are ways in which this can be managed with relatively little upfront cost compared to the potential liability that may result if this is not handled properly.
- If agreeing to provide a restrictive covenant in favour of the buyer in the context of a purchase and sale of a business, sellers should fully inform themselves, and seek advice where required, about the scope of activity these covenants cover. On the other hand, buyers obtaining such covenants in their favour should be aware that such covenants will only be helpful to them if they are likely to be legally enforceable.