Employment Concerns in the
Purchase and Sale of a Business
BC Seniors Living Association Conference
September 29, 2014
Najeeb Hassan
604.806.3820
nhassan@ropergreyell.com
The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Roper Greyell LLP or any
member of the Firm on the points of law discussed. © Roper Greyell LLP 2014
Introduction
▪ The importance of human capital
▪ Human capital is a highly valuable asset
▪ Compared to land and equipment, human
assets are more difficult to manage and to
obtain
Introduction
▪ Only two ways of obtaining human
assets
▪ hiring them
▪ buying someone else’s employees
▪ Purchasing a business is a potentially
effective way to acquire necessary
human capital
Introduction
▪ Mergers and Acquisitions:
▪ risk and reward in obtaining employees
▪ A successful acquisition:
▪ Acquiring business inherits talented, happy
employee group
▪ A poorly executed acquisition:
▪ loses the value of the human capital
▪ serious consequences for the acquiring
business
Examples
▪ Credit Suisse First Boston acquires
California investment bank DLJ for
$12.8 billion
▪ Est. $1.2 billion retention bonus pool
▪ Immediately following the deal, key
market players for DLJ walked.
Examples
▪ Result was the value of the transaction
was effectively lost
▪ “Why are we signing the deal without
having key players locked up?”
▪ Risks are not limited to an asset deal,
or the financial sector
Legal Landscape
▪ Asset vs. share transaction
▪ Landscape at common law
▪ Employment Standards Issues
▪ Successorship
▪ Group termination
▪ Labour Relations Code
▪ Successorship
▪ Common Employer
▪ Section 54
Constructive Dismissal
▪ Indemnities
Legal Landscape
▪
▪
▪
▪
▪
▪
Hidden liabilities
Employees on disability
Benefits integration issues
Post-employment obligations
Privacy Issues
Employee retention and
communication strategies
Share Deal v. Asset Deal
▪ Share Deal
▪ no “transfer” of employees or
employment results at the date of
purchase
▪ executives may have change of control
arrangements triggered by sale of the
shares to third party
Share Deal
▪ There must be a change in the identity of
the employer to terminate the
employment relationship
▪ Mere change in ownership of a company by
another entity does not automatically amount
to a termination of that company’s
employment contracts
▪ Mere transfer of employee from subsidiary to
parent does not sever the employment
contract or automatically constitute
constructive dismissal
Asset Deal
▪ Can result in significant changes in
employee circumstances
▪ Often the vendor employer ceases to
do business or exist
▪ Consequences divided into:
▪ common law
▪ statutory (Employment Standards and Labour
Relations Code)
Asset Deal
▪ When the assets of a business are
sold as a going concern, the business
“transfers” from one legal entity to
another
▪ At common law, employees cannot be
“transferred” against their will
▪ At common law, change of legal
employer equals “constructive
dismissal”
Common Law Landscape
▪ An employee has a technical legal
right to consider employment at
an end when vendor sells
▪ But subject to the duty to mitigate
▪ If purchaser offers employee
same job on same terms, no loss
by employee
Common Law Landscape
▪ Cases turn on the legal consequences
when the new employment with
purchaser does not work out
▪ Sorel v. Tomensen Saunders
▪ Implied term of continued service from
vendor to purchaser
▪ Can be negated by express contract
▪ Silence results in imposition of implied term
▪ 37 years of service followed the purchaser
Common Law Landscape
▪ Major v. Philips Electronics
▪ Employee engineer accepted employment
from the purchaser on substantially similar
terms as with the vendor
▪ Purchaser terminated employee
▪ Does the vendor continue to be liable to its
employee for severance pay when the
employee continues in the same job with the
purchaser and the purchaser agrees to
recognize past service and benefits with the
vendor?
Common Law Landscape
▪ Major v. Philips Electronics (cont’d)
▪ in the absence of express agreement to the
contrary, an employee would have a claim
against vendor or purchaser or both
▪ requires an express provision to inoculate
against an employee claim during the notice
period
Common Law Landscape
▪ Vendor and purchaser should arrange
proper indemnities in the agreement if
the purchaser terminates any
employee during the notice period
▪ i.e., determine in advance who will
bear the risk
▪ Understand severance liability risks
Common Law Landscape
▪ Get a proper indemnity
▪ Perkins v. Shuen & Ling
▪ indemnity language was not adequate to
protect the purchaser [only covered
terminations within 90 days of closing]
▪ the vendor failed to unequivocally terminate
Perkins’ employment, “things would carry on
the same” with the purchaser
▪ six months later purchaser terminated
Perkins
Common Law Landscape
▪ Perkins v. Shuen & Ling (cont’d)
▪ Vendor insolvent
▪ Outside the indemnity period, the
employee sued the purchaser alone
and purchaser was liable for full loss
▪ Past service recognized – 12 months
severance
Employment Standards
▪ Two areas where Employment
Standards legislation modify common
law
▪ successorship
▪ group termination
▪ ESA, Section 97 - Successorship
▪ Preserves employee’s rights as against
the purchaser
Employment Standards
▪
▪
▪
ESA, Section 97 - If substantial part
of the entire assets of a business is
disposed of, employment deemed
continuous and uninterrupted
Purchaser is required to credit a
continuing employee with past service
and to assume all of the vendor’s
liabilities and obligations under the Act
Does not apply where vendor
terminates employment of employees
prior to disposition
Employment Standards –
Successorship
▪ Re: Mitchell (1998) – a case that adds
a wrinkle in British Columbia
▪ If vendor failed to clearly terminate
employees, and the purchaser offered
employment on different terms and
conditions, then purchaser may be
liable for Employment Standards
severance even though not actually
employing them – constructive
dismissal
Employment Standards –
Group Termination
▪ ESA, Section 64
▪ 50 or more employees are terminated
at a simple location then severance
and group notice obligations may
apply
▪ Notice: depending on the number of
employees affected, a maximum of 16
weeks
Employment Standards –
Practical Tips
1. Ensure that vendor gives appropriate
“notices” in advance
2. If the purchaser intends to acquire
the employees, the employment will
be deemed continuous if made on
the same terms and conditions
▪
communicate to employees, prior to
closing, the practical impact of the sale
Employment Standards –
Practical Tips
3. Know who is assuming any liabilities
under Employment Standards
legislation, and write it into the Sale
Agreement
4. Co-ordinate vendor and purchaser
communications to maximize
employee comfort and certainty
Constructive Dismissal
▪ An employer may unilaterally change
terms and conditions of employment,
with notice
▪ If a fundamental term is changed
without notice, then risk of constructive
dismissal
▪ Employee may choose to accept, wait
and see, or leave (and sue)
Constructive Dismissal
▪ This area of law is notoriously fact
specific
▪
▪
▪
▪
▪
reporting structure
pay
fringe benefits
bonus and stock options
work environment
▪ On a sale, new circumstances have to
be introduced with care
Constructive Dismissal
▪ Examine written contracts of
employment for express reporting
structure
▪ Consider how organizational changes
may impact work life, and introduce
with caution
Hidden Liabilities –
Due Diligence
▪ Overtime banks/overtime claims
▪ Vacation accruals
▪ Outstanding/pending complaints
▪
▪
▪
▪
▪
▪
Dismissal claims
Human rights violations
Employment Standards complaints
Canada Labour Code complaints
Labour Board proceedings
Union certification applications/drives
Hidden Liabilities –
Due Diligence
▪ Employment contracts – special
features include golden parachutes?
▪ Employees on disability
▪ Review of personnel policies
▪ Review of benefits plans
▪ Restrictive covenants (non-competition
and non-solicitation)
▪ Change of control arrangements
Hidden Liabilities –
Due Diligence
▪ To avoid surprises and determine the
scope of indemnities necessary, attach
schedule to Letter of Intent showing
common law employment relationships,
including length of services, but subject
to privacy considerations
▪ Purchaser must determine, in advance,
what employees it wants, and under
what terms
Special Employment Issues
▪ Employment contracts should be
negotiated in advance between the
purchaser and particular key
employees
▪ Does the purchaser really know what
human assets they are buying?
▪ Key “knowledge value” within the
target business – who has it?
Post-Employment Obligations
▪ Non-Competitions and NonSolicitation balance between
public interest - free marketplace
activity vs. the right to contract
▪ True non-competes considered
unenforceable, unless reasonable
in duration, scope and certainty
Post-Employment Obligations
▪ Courts have always distinguished
covenants given as part of the sale of
a business vs. employment (owners)
▪ But non-compete could result in larger
notice period if employee later
terminated
The Disabled Employee and
Leaves
▪ Treatment of disabled employees
on the sale will depend on the
circumstances, but there are
pitfalls
▪ Ex. If the purchaser chooses to employ
certain employees, but not those on
disability, maternity, parental or
involuntary leaves
The Disabled Employee and
Leaves
▪ Part of due diligence should
include consideration and
agreement as to how employees
on leave are dealt with, and who
will deal with them
The Disabled Employee and
Leaves
▪ Status of the employee and terms
of the plan are key practical
questions
▪ ESA, Section 54
▪ an employer must return an
employee on a statutory leave to the
same or a comparable position
The Disabled Employee and
Leaves
▪ A disabled employee may not be
protected by Employment Standards
legislation, but may have a human rights
claim, depending on the circumstances
▪ Fenton v. Rona (2004) – failure to
enquire as to status of an employee on
disability prior to dismissal resulted in
human rights liability when her
employment was terminated
The Disabled Employee
▪ Fenton v. Rona (2004)
▪ 15 year employee on LTD
▪ Purchaser did not offer her employment because
of her disability and terminated her
▪ Awarded two years of wages and the loss of
benefits; and $10,000 for injury to dignity
▪ There can be potential for human rights
liability based on a blanket decision not to
hire or enquire on a vendor employee on
LTD
The Disabled Employee
▪ Common law doctrine of frustration still
applies
▪ Wightman Estate v. 2774046 Canada
Inc.
▪ Employee was on sick leave when assets of
business sold
▪ No prospect of employee returning to work
given his sickness
▪ Purchaser terminated employee without
cause, but the obligation to give reasonable
notice was discharged due to frustration
Benefits Integration Issues
▪ Will the purchase/sale affect
entitlements to benefits?
▪ Are pension plans registered with any
regulator? Are formal notices
required?
▪ Integration, if necessary, will require a
careful assessment of the relative
quality and cost of the schemes
Benefits Integration Issues
▪ Can the benefit plans be
“transferred” to the purchaser?
▪ “Constructive dismissal” if the
benefits are critical, or if an
employee is reaching a key
benchmark that is cut-off by the
sale, then could be a fundamental
term
Labour Relations Code Issues
▪ Successorship
▪ Common Employer
▪ Section 54 – Labour Adjustment
Labour Relations Code Issues
Successorship
▪ Similar to ESA successorship except applies
to union and unionized employees
▪ Certification, collective agreement and
Labour Code proceedings follow the
business or part of them
▪ Grievances and arbitrations become
problem of purchaser
▪ Past practices may impact how collective
agreement administered
Labour Relations Code Issues
Common Employer
▪ Intermingling of employee
groups could lead to common
employer declaration
Labour Relations Code Issues
Section 54 – Labour Adjustment
 60 days notice of change that affects
significant number of bargaining unit
employees
 Must try to develop labour
adjustment plan – (meet and discuss
in good faith various issues)
 Could slow down planned changes
post-sale
Conclusion
▪ Know what you are buying
▪
▪
▪
▪
▪
Salaries
Length of service
Disabilities
Leaves
Union relationships, collective
agreements, LRB proceedings,
grievances & arbitrations, practices
QUESTIONS?
49