Canada: Tips For Preparing Your Plant For Closing

Last Updated: July 4 2019
Article by Houser Henry & Syron LLP

Closing a plant is often a difficult but necessary decision for any business. The consequences can be personally painful for employees, and expensive and disruptive for your business. To minimize negative consequences, consider these five essential factors.

1. Assemble a team

Closing a plant can be a demanding and complex project. Once a decision is made and communicated, events can quickly outpace planning. To manage the process effectively, you should start by assembling a team of internal managers and external advisors.

2. Assess employee entitlements

A key priority will be to ensure the effective termination of employees by reviewing each employee's entitlement to notice of termination or payment instead of notice and the possibility of severance pay.

All employees who are terminated due to the closing of a plant are entitled to notice of termination or pay instead of notice. This must meet the minimum requirements in the Employment Standards Act (ESA). After the first 3 months of service, the ESA requires a minimum of one week per year of service, up to eight weeks.

In addition to the statutory minimum, an employee may be entitled to significantly longer notice according to common law. At common law, the amount of notice or payment in lieu of notice depends on factors such as the employee's years of service, age, salary and the availability of comparable work. Common law notice can be increased if the employer persuaded the employee to leave secure employment. However, common law notice can be limited or excluded by an effective contract.

In some cases, employees will also receive severance pay. This will depend on the seniority of the employees, the nature of their termination, the size of the company's payroll and the number of employees being terminated within a 6-month period.

If you need to continue operations of the plant after giving notice of termination to employees, you should consider working notice. Working notice requires an employee to continue doing his or her job throughout the notice period instead of receiving a payment for termination.

Working notice can be difficult to manage. Some employees may be resentful and difficult to oversee, while other employees may resign for another opportunity. To motivate and ensure retention, employers often offer employees a lump-sum bonus for continuing to work until the end of the notice period.

3. Communicate sensitively and broadly

Closing a plant will affect more than the relevant employees. It will affect its wider community including employees' families, suppliers and related businesses. The consequences are especially pronounced in smaller towns and where the plant has been established for some time. The potential disruption can be relieved somewhat by a sound plan for communications.

Firstly, you need to tell employees in a sensitive and open way. You should prepare for the questions that will be raised in the moment and then later when the shock subsides and employees adjust to a new reality. You should also consider engaging outplacement counsellors. They can assist with vocational advice and coaching in job-hunting skills.

4. Managing the environmental exposure

Usually, the closing of a plant leads to the sale of the land and building on which the plant was operated. Any buyer will want to know it is not purchasing contaminated property. The buyer's lender will share that concern. The best confirmation is usually found in an environmental audit, which can consist of two phases. A "phase one environmental site assessment" includes action items such as a review of historical uses and search records. If phase one indicates the possibility of contamination, a "phase two environmental site assessment" is recommended. Unlike a phase one, a phase two involves intrusive physical testing such as drilling boreholes and taking samples of soil and groundwater. Conducting environmental due diligence prior to selling the land and building housing or a plant is advantageous in order to disclose environmental risks associated with civil and regulatory liability in a purchase agreement.

5. Ensure the plant is prepared for sale

If you decide to sell the plant, then you should review the ownership to identify and to remedy potential issues (like old mortgages or leases) well before the pressure of an impending closing date. Your review should include the parcel register, obtaining an up-to-date survey, as well as commissioning building condition and environmental reports. You should ask the local municipality for a building/zoning compliance letter to ensure there are no active work orders or open permits. If there is a development agreement or site plan agreement with the municipality registered on title, you should ask the municipality to confirm that the agreement is in good standing.

If your property is mortgaged, you should review the terms of your mortgage to confirm whether it is open or closed. A closed mortgage usually will not permit prepayment before the end of its term. If you cannot obtain a discharge of the mortgage, you cannot complete a sale. If you fail to close, you would be in breach of the purchase agreement and could face an expensive lawsuit.

If the property is leased, it is essential to review the terms of the lease to determine the following:

  • When does the term of the lease expire?
  • Can you assign the lease? If so, with or without consent of the landlord?
  • Will you remain liable under the lease post-assignment?

If the lease is to be assigned as part of a broader asset sale, the purchase agreement should specify whether the lease will be assigned and whether the consent of the landlord is required in such an assignment.

6. Ensure confidential information is properly protected

When a plant closes, you have to plan on storing confidential information relating to your employees and your businesses. Employers must notify employees if transferring their personal information outside of Canada. Protected personal information includes: income, age, name, ID numbers, ethnic origin, blood type, opinions, evaluations, comments, social status, disciplinary actions, employee files, credit records, loan records and medical records.

Generally, companies should keep tax-related documents (including CRA non-resident tax, GST/HST, corporate taxes, and receipts for charitable donations, etc.) in Canada for 6 years from the end of the last fiscal period to which they relate. You can submit a request to the CRA to store these records outside of Canada. However, most companies do not request this permission because it can sometimes lead to an audit. Even when records are stored outside of Canada, companies must ensure that their records are readily available to the CRA.

Records regarding insurance, legal matters, assets, budgets, internal financial reports, bank statements, or audits can be transferred outside of Canada if those records do not contain personal employee information, corporate records or tax information.

* * * *

Closing a plant can be a difficult decision with consequences beyond your business and your workforce. To navigate these issues, you need to assemble a team to assess and address employee entitlements, mitigate environmental exposure, prepare for retention of confidential information and to manage public relations.

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.

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