Canada: Top 10 Issues For Employers, Issue #8: Employment Considerations In Business Transactions

This is the eighth instalment in our Top 10 Issues for Employers series, focusing on employment considerations in business transactions. Specifically, this instalment discusses key employment and labour issues that a prospective buyer (Buyer) of a business (Target) should be alert to before and after entering into a deal.

OVERVIEW

It is essential to a successful transaction that a Buyer learn all it can about its Target. This includes an understanding of the employment and labour aspects of the Target's business. Such information is key not only to completing the due diligence process (for the purpose of identifying potential employment and labour-related liabilities), but, if the deal is consummated, to prepare for the integration of the Buyer and the Target.

PRELIMINARY CONSIDERATIONS

Share Deal vs. Asset Deal

One of the very first considerations for a Buyer is whether a proposed transaction will be structured as a share deal or an asset deal. Many factors may play a role in this decision, including tax and corporate considerations. As the names suggest, in a share deal, the Buyer is purchasing the shares of the Target, while in an asset deal, the Buyer is purchasing particular Target assets. From an employment and labour perspective, the distinction is critical.

In a completed share deal, for employment purposes, the Buyer steps into the shoes of the Target. The result is that the Buyer will automatically inherit all of the Target's employment-related liabilities, unless specific carve-outs are agreed to in the share purchase agreement. It also means that while new employment agreements will not be necessary to retain current employees (their employment will transfer automatically), the Buyer will inherit the terms of the existing employment contracts.

On the other hand, in an asset deal, a Buyer is better able to pick and choose — through negotiation with the Target — which assets it is prepared to purchase and which liabilities it will leave behind. Because employment of non-union employees will not transfer automatically (outside of Quebec), it will be necessary as part of the transaction to extend offers of employment to those non-union Target employees whose services the Buyer wishes to retain.

Scope of Due Diligence

A Buyer will also need to consider what employment-related material of the Target it wishes to review. The depth of due diligence a Buyer will wish to conduct varies, but in essence, a Buyer will want to identify any material employment-related liabilities.

General areas of interest typically include, but are not limited to: (1) an employee census; (2) collective bargaining agreements; (3) employment agreements; (4) independent contractor agreements; (5) severance, retention or change of control agreements; (6) employee compensation plans; (7) employment policies; (8) status of ongoing negotiations with unions and any recent labour organizing activity, strikes or lockouts; (9) any pending or anticipated claims or actions regarding employment and labour matters; and (10) information regarding workers' compensation and occupational health and safety.

RED FLAGS

A "red flag," as the term is used here, refers to an issue which may or may not ultimately harm a deal, but should be identified, flagged and its potential implications considered. Some typical red flags include:

Collective Bargaining Agreements

Whether a share deal or an asset deal, a Buyer will generally become bound by any collective bargaining agreement belonging to the Target pursuant to the successor employer provisions of labour relations legislation. This means the Buyer will inherit the underlying terms and conditions of such collective bargaining agreement. These terms and conditions may significantly restrict how the Buyer is able to run the Target's business post-closing. The substantive terms of the collective bargaining agreement, and when it expires, will therefore be of the utmost importance to a Buyer.

Misclassification Issues

Workers whom the Target has classified (and been treating as) independent contractors, may in fact be employees at law. Misclassification can give rise to potential employment and tax liabilities; and the greater the number of misclassified individuals, the more significant the liability.

Classification of workers as employees or independent contractors can be tricky and how the contract between the parties defines their relationship is not necessarily determinative. Therefore, a Buyer should not only review the independent contractor agreements themselves, but also investigate the day-to-day interactions between the parties.

Termination Provisions

Canadian employees can have significant entitlements to termination pay and in some instances severance pay as well, if their employment is terminated without cause. These entitlements arise both under employment standards legislation and the common law (or, in the case of Quebec, civil law).

It is therefore critical that a Buyer review any termination provisions carefully (or note the absence of them) in order to have a more accurate sense of what it may be required to pay out if it decides to terminate the employment of certain Target employees post-closing.

Change-of-Control Provisions

In some cases, an employee of the Target (typically an executive) will have negotiated a special entitlement — as a provision in his or her employment agreement or a standalone agreement — in the event of a "change of control," which is typically defined to include (1) the acquisition of control over the majority of the issued and outstanding voting shares of a business or (2) the sale, transfer or other disposition of all or substantially all of the assets of a business to a third party.

Depending on how the provision is structured, a transaction (and what occurs post-closing) may very well trigger a potentially substantial payout to that employee. With a "single trigger" change-of-control provision, the employee will typically receive a payout simply because a change of control occurred. With a "double trigger" change-of-control provision, the employee will typically receive a payment over and above what he or she would normally receive following a without-cause dismissal if such dismissal occurs within a defined period of time following a change of control.

If such liabilities exist, it is important to identify and quantify them so that they can be allocated or otherwise addressed during negotiations between Buyer and Target.

Restrictive Covenants

Employees are the heart of a business and often a significant part of the Target's value that a Buyer is paying for in a transaction. A Buyer will want to ensure that certain key employees will be bound by post-termination restrictive covenants (i.e., non-solicitation and/or non-competition covenants). These covenants, however, are often difficult to enforce. A Buyer will therefore want to know if such covenants exist and understand how likely they are to be enforceable.

Pending Litigation

Individual employment claims, particularly involving senior employees, may be a source of considerable liability, as are occupational health and safety prosecutions, which carry significant fines. Even lower-value claims — if there are enough of them — can add up significantly and be evidence of recurring non-compliance with the law. A Buyer will want to be aware of all pending and anticipated employment-related claims and/or grievances against the Target.

Click here for all issues in the Top 10 Issues for Employers series.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
23 Nov 2018, Other, Toronto, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

28 Nov 2018, Speaking Engagement, Toronto, Canada

Arbitration has a number of advantages and some disadvantages for the resolution of domestic and international commercial disputes.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions