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Employment Considerations in Mergers and Acquisitions

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    Employment Considerations in Mergers and Acquisitions

    When considering an acquisition of a Canadian business, due diligence related to employment and labour matters is critical as there are various issues that can lead to considerable liability for the purchaser. The scope of liability depends on a variety of factors, not least of which is whether the prospective acquisition is a share acquisition vs an asset acquisition. Let’s look at each in turn.

    Acquisition of shares

    When a purchaser acquires the shares of a target corporation, the change in ownership of share equity does not change the identity of the employer. Despite change in ownership, the acquired corporation continues to be the employer without any break in service or seniority of the employees. In other words, there is no termination of employment and no rehiring of employees. All previous agreements entered into by the previous owner remain in place. That is why it is important that due diligence to ascertain all previous agreements are disclosed as the new owner acquires all of the liabilities of the target corporation in a share acquisition.

    Due Diligence

    In a share acquisition in which all liabilities are acquired along with the target corporation, the potential buyer should assess all outstanding issues related to employment and labour matters. For example, there may be human rights complaints, workers compensation penalties, wrongful dismissal lawsuits, complaints under employment standards legislation, or occupational health and safety charges. To expose any of these matters, it is prudent to obtain a history of any recent workforce reductions or individual terminations.

    Employment Considerations in Mergers and Acquisitions

    Similarly, a potential purchaser to make the effort to discover whether there are any outstanding severance claims where a release has not yet been obtained where the dismissal occurred within the last two years. Additionally, a potential buyer should review employment agreements, severance agreements and change in control agreements, particularly if the purchaser plans to downsize the workforce in the future. It is also wise to ascertain how payroll, benefits, pension plans, and workers’ compensation premiums affect costs now and in the future. This is true especially in collective agreements where future costs are embedded in scheduled pay and benefit increases.

    Representations and Warranties

    As part of the due diligence process, the buyer of shares would require certain representations and warranties from the target corporation. Typically these include statements declaring that all payroll taxes and premiums are current; vacation pay has been accrued; there is compliance with applicable employment, labour and health and safety laws; there are no outstanding grievances, arbitrations, complaints or employee claims; there are no outstanding occupational health and safety charges or orders; and that there is compliance with pay equity laws.

    Asset Purchase

    In an asset purchase, all employees are technically terminated at the moment of sale and the purchaser assumes the position of employer who then rehires the employees. According to “sale of business” legislation, employees’ service is deemed “unbroken” for purposes of the legislation, thus obviating the requirement to pay any severance. If the employee accepts the position on similar or equivalent terms, he or she mitigates any wrongful dismissal charges. If he chooses to file a wrongful dismissal claim, it is unlikely that his claim would result in an award of any substance. However, an employee can choose to refuse the offer of employment and receive termination or severance pay instead.

    While the purchaser as new employer may seek to contract out the new hires’ past service, statutory rights of the employees must be honoured according to employment standards legislation, which protects employees’ past service.

    Severance costs fall upon seller unless the asset purchase agreement allocates liabilities otherwise. That is why it is in the best interest of the seller to require the purchaser to rehire all of the employees on terms and conditions that are substantially similar to those that were in effect before the sale. However, there is some flexibility as typically the purchaser can choose to rehire as many or as few employees he or she wishes and on what terms, all of which become a part of the negotiating process.  The asset purchase agreement normally should provide that all employee costs and claims that arose before the closing date are to the account of the seller, and all costs arising after the closing date are the responsibility of the purchaser.

    Employment and labour issues can be of key significance in the acquisition of a business. Specialized legal advice should be obtained in each case to assess the risk in opportunities that are being explored and to minimize liabilities to the greatest extent permissible by law in the circumstances.

    FAQ’s:

    In a share purchase, what is the new employer’s duty regarding maintaining employees’ contracts on the same terms as before the sale?
    When a purchaser acquires the shares of a target corporation, the change in ownership of share equity does not change the identity of the employer. Despite change in ownership, the acquired corporation continues to be the employer without any break in service or seniority of the employees. Therefore the new employer assumes existing payroll, benefits, pension plans, and workers’ compensation premiums.
    In an asset purchase, what is the new employers’ duty regarding maintaining employees’ contracts on the same terms as before the sale?
    In an asset purchase, all employees are technically terminated at the moment of sale and the purchaser assumes the position of employer who then rehires the employees. While the purchaser as new employer may seek to contract out the new hires past service, statutory rights of the employees must be honoured according to employment standards legislation, which protects employees’ past service.
    In what way is due diligence important prior to a share acquisition with respect to employment and labour matters?
    The potential buyer should assess all outstanding issues related to employment and labour matters when conducting due diligence. Some areas to look at are human rights complaints, workers compensation penalties, wrongful dismissal lawsuits, complaints under employment standards legislation, or occupational health and safety charges. A potential buyer should review employment agreements, severance agreements and change in control agreements, particularly if the purchaser plans to downsize the workforce in the future. It is also wise to ascertain how payroll, benefits, pension plans, and workers’ compensation premiums.
    Do severance cost fall upon the purchaser or the seller in an asset acquisition?
    Severance costs fall upon seller unless the asset purchase agreement allocates liabilities otherwise. That is why it is in the best interest of the seller to require the purchaser to rehire all of the employees on terms and conditions that are substantially similar to those that were in effect before the sale. The asset purchase agreement normally should provide that all employee costs and claims that arose before the closing date are to the account of the seller, and all costs arising after the closing date are the responsibility of the purchaser.


    -Shira Kalfa, Founder & Partner

    Shira Kalfa is the founding partner of Kalfa Law. 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 FoundationWomen’s Law Association of Ontario, and the Toronto Jewish Law Society. 

    © Kalfa Law 2021

    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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