In a share purchase, does the new employer need to maintain employees’ contracts on the same terms?

Yes. In a share purchase, the identity of the employer does not change, so all employees' contracts, rights, and seniority remain fully intact.

In an asset purchase, does the purchaser have to hire existing employees on the same terms?

No, the purchaser may choose whom to hire and under what terms. However, statutory rights such as recognising past service must still be honoured.

Why is employment-related due diligence important in a share acquisition?

The purchaser inherits all employment liabilities, including lawsuits, complaints, payroll obligations, and OH&S issues. Due diligence identifies risks before the deal closes.

Who pays severance in an asset purchase?

Typically, the seller pays severance for terminations before closing, unless the asset purchase agreement reallocates liability.

Employment Considerations in Canadian Mergers & Acquisitions

Employment Considerations in Mergers and Acquisitions (Canada): What Employers Must Know

Introduction

When acquiring a Canadian business, employment and labour considerations play a crucial role in evaluating risk and ensuring a smooth transition. Without proper due diligence, a purchaser can unknowingly inherit significant liabilities, ranging from wrongful dismissal claims to unpaid payroll taxes.

Understanding the differences between share purchases and asset purchases is essential, as each structure creates different obligations for the buyer. Below, we break down the key employment-related issues that arise in mergers and acquisitions (M&A) and what you should review before closing the deal.

In a share acquisition, the purchaser acquires the target corporation as a whole. While ownership changes, the corporation itself and its identity as the employer remain unchanged.

What This Means for Employees

No interruption in employment
No loss of seniority
No termination or requirement for rehiring
All employment contracts and obligations remain binding

Because the new owner steps into the shoes of the former owner, all existing employment-related liabilities transfer to the purchaser. This makes thorough due diligence essential.

During due diligence, a purchaser should review all current and potential employment-related liabilities. This includes examining:

Potential Liabilities

Human rights complaints
Workplace Safety and Insurance Board (WSIB) penalties
Wrongful dismissal actions
Employment Standards Act (ESA) complaints
Occupational health and safety (OH&S) charges
Pending grievances under collective agreements

A buyer should also review:

Recent terminations and workforce reductions
Severance or termination claims without releases
All employment contracts, severance agreements, non-competes, and change-in-control clauses
Costs related to payroll, benefits, pension plans, and WSIB premiums

This is particularly important for unionised workplaces, where future wage and benefit increases may already be contractually committed.

Representations and Warranties

As part of the purchase agreement, buyers typically request employment-related representations and warranties to confirm that:

Payroll taxes and statutory remittances are up to date
Vacation pay has been correctly accrued
The employer complies with applicable labour, employment, and health and safety laws
No outstanding complaints, claims, or grievances exist
There are no pending OH&S charges or orders
Pay equity requirements have been satisfied

These provisions help the purchaser mitigate risk and identify potential liabilities before closing.

Asset Purchase: Employment Implications

In an asset purchase, employees are technically terminated when the business is sold, and the purchaser may elect to rehire them.

Key Considerations

Under “sale of business” legislation in Canada:

Employees’ service is deemed continuous when rehired
Severance is not required if substantially similar employment is offered
Employees who refuse comparable employment may receive severance or termination pay
Statutory employee rights (including past service) cannot be contracted out of

Unlike a share purchase, the purchaser in an asset acquisition is not automatically obligated to hire existing staff. The purchaser may:

Choose which employees to retain
Set new employment terms (within statutory limits)
Negotiate liability allocation in the purchase agreement

Who Pays Severance?

Unless otherwise outlined in the purchase agreement:

The seller is responsible for severance and termination costs arising before closing
The purchaser is responsible for employment costs arising after rehiring

This is why sellers often push for purchasers to hire all employees on substantially similar terms.

Conclusion

Employment and labour considerations can significantly impact the cost, risk profile, and overall success of a business acquisition. Whether purchasing shares or assets, obtaining experienced legal guidance ensures you understand your obligations, avoid unexpected liabilities, and structure the transaction in your favour.

If you are considering purchasing or selling a business, our experienced team at Kalfa Law Firm can help you navigate employment obligations, reduce risk, and negotiate terms that protect your interests.Contact Kalfa Law Firm today for strategic, business-focused legal guidance.

FAQ’s:

-Shira Kalfa, Founder & Partner

Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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