Who Pays Accrued Vacation Pay When a Business Is Sold in Ontario

When you sell or buy a business, employees usually have vacation they have earned but not yet taken or been paid for. It is easy to overlook until the closing statements are being prepared, and then someone has to decide who carries that cost.

This article explains how Ontario's Employment Standards Act treats accrued vacation pay on a sale, who is generally responsible in different deal structures, and how buyers and sellers commonly deal with it in the price. Your own facts matter, so treat this as a general guide.

What accrued vacation looks like at closing

Ontario employees get a minimum of 2 weeks of vacation time per vacation entitlement year if they have under 5 years of employment, and 3 weeks once they have 5 or more years. Minimum vacation pay is 4% of gross wages (excluding vacation pay) for employees with under 5 years, and 6% for those with 5 or more years.

Vacation pay accrues on every hour worked, even if the employee has not completed the full vacation entitlement year. Vacation time must be taken within 10 months after the entitlement year ends, so unused vacation can easily be outstanding on the closing date. Vacation pay is generally payable as a lump sum before the vacation is taken, unless the employee agrees to receive it on each pay cheque or at another time.

A contract or collective agreement can give more than the ESA minimum, and that higher entitlement is what the parties need to price into a deal. Check employment contracts, handbooks and any union agreement rather than assuming the minimums apply.

Asset sale: who is responsible for what

Under ESA s. 9, when a business is sold and the purchaser employs a seller's employee, the employee's length of employment with the seller is treated as employment with the purchaser. The employee is not a new hire for ESA purposes. That is why an employee with 5 or more years of combined seller and buyer service gets the 3-week and 6% tier right away.

For vacation pay, the Ministry's manual splits responsibility by timing. Only vacation pay that was both accrued and due before the sale stays with the seller, while vacation pay that accrued before the sale but became due afterward passes to the purchaser who hires the employee. This is the Ministry's interpretation, so it is a guide rather than a guarantee of how every dispute would end.

Share sales and what counts as a sale

A share sale is not a sale of a business under s. 9, because the corporation remains the same employer and employment simply continues. In practice, accrued vacation stays inside the company, and the buyer takes that liability indirectly by owning the shares. Buyers usually deal with it through the price or the contract protections.

The word sells is defined broadly and includes leases, transfers or disposing of the business in any other manner. The Ministry looks at substance. It asks whether the buyer received a going concern it could run without interruption, and indicators include a seller non-compete, giving up the trade name, transferring client lists or records, taking over contracts, and assigning goodwill. Calling a deal an asset sale is not decisive.

Adjusting the price for accrued vacation

How accrued vacation is reflected in the price is a matter for the sale agreement. The ESA sets who the employee can look to, but buyer and seller can agree between themselves to adjust the purchase price, hold back funds, or have the seller pay out vacation before closing. A buyer who takes on vacation that accrued under the seller will often want a credit for it.

• Ask for a list of every employee with start date, vacation entitlement, vacation taken, and vacation pay accrued and unpaid.
• Separate what is due before closing from what accrues before closing but falls due afterward.
• Use each employee's real contractual entitlement where it is higher than the ESA minimum.
• Decide whether the seller pays out vacation before closing or the buyer takes a price credit.
• Write the allocation and the calculation date clearly into the agreement.

If employment ends instead of continuing

When employment ends, earned but unpaid vacation pay is owed, at 4% for under 5 years or 6% for 5 or more years, and it is due within 7 days of the end of employment or the next regular payday, whichever is later. Vacation pay is owed on termination pay but not on severance pay.

If a buyer does not hire an employee, section 9 does not apply and the seller must meet its Part XV obligations to that person. Vacation pay owed at that point is a seller cost, so factor it into the seller's closing numbers.

What to do next

• Confirm whether the deal is an asset sale or a share sale, and whether it looks like a going concern transfer in substance.
• Gather payroll records and employment contracts so accrued vacation can be calculated accurately.
• Note which employees the buyer plans to hire and when, since a gap of more than 13 weeks changes who is liable.
• Raise vacation adjustments early in negotiations rather than at closing.
• Have a lawyer and your accountant review the purchase agreement wording and the calculation.

Frequently asked questions