When purchasing or selling a company, there are many factors that impact the purchase price and the terms of the purchase and sale agreement. One of the primary areas of consideration is in regards to the workforce. As a seller, you want to avoid unnecessarily triggering termination entitlements. As a purchaser, you want to avoid taking on excessive unpaid compensation (e.g. a years’ worth of unpaid overtime pay), assuming overly generous employment terms (e.g. 15 weeks’ vacation each year), and becoming liable for possibly significant termination entitlements (e.g. 2 years’ termination pay for anyone dismissed). In fact, the potential termination liability is normally an area of key focus during a purchase and sale. As a purchaser and as a seller, with proper strategic steps, termination entitlement concerns can be avoided or addressed.
So why are termination entitlements rightfully such a concern?
If an employee is dismissed, they are normally entitled to statutory termination entitlements under the Employment Standards Act and termination entitlements at common law (i.e. judge-made law). The Employment Standards Act entitlements are termination pay (capped out at 8 weeks), severance pay (applying only after 5 years of service and only where the employer’s worldwide payroll is over $2.5m per annum, capped out at 26 weeks), benefits continuance during the termination pay period, and vacation pay on the termination pay. Common law termination entitlements are normally more substantial than statutory termination entitlements and are based on a consideration of various factors. For example, an employee with 20 years of service may be entitled to only 8 weeks’ statutory termination pay, but entitled to 22 – 24 months’ termination compensation at common law. As such, for a company with numerous long-standing employees, the potential termination liability can be very substantial.
As the purchaser, isn’t it best if the employees are all fired by the seller and rehired by the purchaser? No.
First, this will cost the seller a fair amount of money, which will undoubtedly impact the purchase price. Second, it does not put you, the purchaser, in a better position. When you rehire the employees, their termination entitlements will likely still be calculated by including their previous period employment, even though they have already received a termination payout. In particular, under the Employment Standards Act, unless there is a 13 week gap between periods of employment, their future termination pay entitlement will be calculated by including the previous period of employment. Further, no matter how long of a gap there is, the severance pay entitlement will always be calculated by including the previous period of employment. In regard to the common law termination entitlements, a judge is also incredibly likely to include the previous period of employment in determining future termination entitlements. As such, if several years after the purchase, the purchaser goes to dismiss a rehired employee, the original period of employment will still have an impact on termination liability. So having the seller payout termination entitlements will not get the purchaser any further ahead, in regard to employees to be employed by the purchaser.
As the purchaser, can’t I avoid these termination entitlement concerns by doing an asset purchase (instead of a share purchase) and then hiring the employees? No.
The Employment Standards Act has provisions regarding related and successor employers, to ensure that even where there is an asset purchase, the continuation of an operation is recognized. Similarly, despite it being an asset purchase, a judge is also incredibly likely to include the previous period of employment in determining future termination entitlements, where operations are essentially continued. As such, the issue of termination entitlements is a live issue, whether the sale is an asset sale or a share sale.
So seriously, what can be done, as a purchaser or seller to address termination liability? Plenty.
If the purchaser is going to be taking on any of the seller’s employees, the purchaser may use a new employment agreement to restrict the employees’ termination entitlements to only their statutory entitlements or some other greater entitlement. As such, an employee with a termination entitlement of 24 months, can see their entitlement reduced to only 8 weeks. However, in order for the agreement to be enforceable, it will need to come with some new sufficient consideration (e.g. a signing bonus, a promotion, a new pension plan, etc.). The agreement should be carefully drafted to ensure enforceability, including explicitly confirming the new consideration, properly recognizing the past period of employment (where legally required), and containing a clear limiting termination provision.
If the purchaser is not going to be taking some of the seller’s employees, the termination liability will need to be properly understood and strategically addressed. By strategically handling the matter, the liability may be substantially reduced or eliminated. For example, a discounted termination package may be accepted by an employee if it recognizes their desire to retire and will be paid as a lump sum payment. In addition, termination liability can be more cost-effectively addressed if the seller is able to provide some termination working notice to the employees, instead of it all being a termination pay out. Further, the purchaser or seller may be able to get an employee to agree to resign (instead of being dismissed), in order to accept employment with a different operation of the purchaser, seller, or otherwise. There are a wide variety of ways to strategically address termination concerns where the purchaser is not going to be taking some on of the seller’s employees.
For more information or for assistance with handling the workforce concerns further to a purchase and sale, please contact our firm.
