Edited by Jennifer M. Fantini and Naomi E. Calla
The deal is done, a new company purchased. The first order of business is to provide the new employees with a contract of employment offering them their previous job on essentially the same terms and conditions. Often, however, important issues, such as whether an employee will receive credit for past years of service, are not explicitly addressed in the contract. A failure to do so may leave the purchaser company exposed to large severance payments if it wishes to terminate any employee down the road. Provincial Employment Standards Acts and the common law must both be considered to determine whether an employee's past years of service are carried forward.
Employment standards legislation protect the years of service accumulated by an employee when a business is sold. In Ontario, for example, the ESA states that employees will carry forward their past years of service if they are employed by the seller within 13 weeks of the sale. In practical terms, this means that an employee's vacation and termination entitlements under the ESA continue as if the sale had not occurred.
The common law principles, on the other hand, apply primarily in the context of calculating "reasonable notice" on termination of employment. The general rule is that when a business is acquired, there is an implied term that employees will receive credit for years of past service.
This general rule applies unless an employer explicitly advises employees to the contrary. For example, the new employment contract must expressly limit the credit for past years of service that employees will receive. While this will not have any effect on entitlements under the Employment Standards Act, it will limit an employer's exposure with respect to common law "reasonable notice". It is important to note, however, that employees can refuse to sign the new agreement and sue the vendor for wrongful dismissal if service is not credited. As an alternative to denying any past service, employers could include an alternative formula for calculating severance pay in the contract.
PRACTICE TIPS
1. Review the employee's previous contract for any limits on severance and any significant differences in benefits or entitlements under the proposed new contract;
2. Explicitly state the extent to which an employee's past years of service will be carried forward in the contract of employment; and
3. Bring any important terms, especially those limiting credit for an employee's past years of service, to the employee's attention and provide them with an opportunity to obtain legal advice.
When considering whether or not to limit an employee's entitlements, a company should also consider whether there are any indemnity provisions in the agreement of purchase and sale that relate to the payment of severance. In situations where the purchasing company is liable for severance, it could be an expensive proposition if employees refuse the new contract of employment and sue for wrongful dismissal.
The purchase of a company is also an excellent opportunity to review the standard employment contract to ensure it is up-to-date, reflects the priorities of the company, and takes into account any new developments in the law.
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