Asset Sale vs Share Sale: Employee Termination Duties in Ontario

When you buy or sell a business in Ontario, the structure of the deal matters for your employees. In a share sale the buyer takes over the company. In an asset sale the buyer takes the business itself, or parts of it, and the company that employed the staff stays with the seller.

That difference changes who the employer is, whether employment is treated as continuous, and when notice, termination pay or severance pay become payable. This article walks through the general rules so you can ask better questions before the deal is signed.

Who is the employer under each structure?

A share sale works differently from an asset sale, because the buyer takes over the company rather than the business itself. How a share sale affects your employees depends on the details of the deal, so it is worth confirming with a lawyer. Later changes by the new owner can still raise questions: a significant unilateral change to a fundamental term can count as termination if the employee resigns within a reasonable time.

An asset sale is different. At common law, when a sale changes the employer's legal identity, the original employment contract ends, and if the employee accepts the new employer's offer, a new contract arises. That is why asset sales raise more employment questions than share sales.

How the Employment Standards Act treats an asset sale

Under section 9(1) of the Employment Standards Act, if an employer sells a business or part of a business and the purchaser employs one of the seller's employees, the employment is deemed not to be terminated or severed for the purposes of the Act. The seller's employment is treated as employment with the purchaser when length of employment is calculated later.

The word "sells" is broad. It includes leasing, transferring or disposing of a business in any other way. The Ministry looks at substance, so calling a deal an asset sale does not stop section 9 from applying if a business or part of one was in fact sold. Signs of a sale include a non-compete covenant, use of the trade name and transfer of customer lists.

Continuity is for the purposes of the Act only. It does not bind the purchaser to the old contract or require the same terms.

What carried-over service affects

The employee gets credit for past employment for every right based on length of employment. In practice that includes:

• Vacation: with five or more years of combined service, three weeks and 6% vacation pay; under five years, two weeks and 4%.
• Notice, termination pay and severance pay, based on total service with seller and purchaser combined.
• Leave eligibility, such as the 13 weeks needed for parental leave, where prior service with the seller may count.

Vacation pay accrued and due before the sale stays with the seller. Vacation pay accrued but only due after the sale passes to the purchaser.

Limits, exceptions and things that cannot be contracted around

• Thirteen-week gap: prior service does not carry over if the employee is rehired by the purchaser more than 13 weeks after the earlier of the last day with the seller or the day of the sale.
• No duty to hire: a purchaser does not have to hire the seller's employees, and an employee does not have to accept the purchaser's offer. Refusing does not reduce notice or severance entitlements.
• Employees not hired within 13 weeks are the seller's responsibility, including notice or pay in lieu and severance pay where it applies.
• Continuity cannot be avoided by offering new terms, running a selection process, or having the employee sign an acknowledgment that seniority is not carried forward.

Employment standards entitlements generally cannot be contracted out of, so a clause waiving past service will not do what it appears to do.

When termination and severance are triggered, and what to do next

If the purchaser later ends the employment, it owes notice or pay in lieu based on combined service and gets no credit for notice the seller gave at the time of sale. Where the seller already paid severance, the purchaser may offset that against its later obligations.

For an employee employed at least three months, notice runs from one week for under one year of service up to eight weeks for eight years or more. There are exceptions, such as wilful misconduct that is not trivial and not condoned, refusing reasonable alternative employment, or a temporary lay-off. Severance pay applies at five or more years of service where the employer has a global payroll of $2.5 million or more, or severed 50 or more employees in six months because of a permanent closure. Employment is severed for this purpose on dismissal, constructive dismissal followed by resignation within a reasonable time, a lay-off of 35 or more weeks in a 52-week period, or permanent closure.

The Act sets the employee's minimum rights. Who bears the cost between buyer and seller is mainly a matter for the purchase agreement, through indemnities or a price adjustment. Before signing:

• List every employee, start date and pay, and identify who will receive an offer.
• Decide whether the buyer will hire everyone, some people or no one, and when.
• Agree who pays for accrued vacation, notice and severance, and write it into the agreement.
• Have a lawyer review how the structure affects your employees before you sign.

Frequently asked questions