- Under ESA s. 9(1), when a business or part of one is sold and the purchaser employs the seller's employee, the employment is deemed not terminated and past service carries over.
- Offering new terms, running a selection process or asking employees to sign a seniority waiver does not avoid continuity.
- Service does not carry over if the employee is rehired more than 13 weeks after the earlier of the last day with the seller or the day of the sale.
If you are buying a business in Ontario, you may want a clean slate with the seller's employees. That can mean new offer letters, a clause in the purchase agreement, or a signed note saying past service will not count.
Under the Employment Standards Act (ESA), that approach generally does not work. This article explains how service carries over, what it affects, where the limits are, and who ends up paying when employment later ends.
How the ESA treats service when a business is sold
Under ESA s. 9(1), if an employer sells a business or part of a business and the purchaser employs an employee of the seller, the employment is deemed not terminated or severed for the purposes of the Act. The seller's employment is treated as employment with the purchaser for any later calculation of length of employment.
In Ontario's guidance, prior service flows through to the new owner when the business is sold or transferred and the employee keeps working in it. The employee gets credit for past employment for every right based on length of employment.
Section 9 'sells' includes leasing, transferring or disposing of a business in any other way. The Ministry looks at the substance of the deal. Calling it an 'asset sale' does not stop s. 9 from applying if a business or part of one was in fact sold. Indicators include non-compete covenants, use of the trade name and customer lists.
What carried-over service affects
- Vacation: an employee with five or more years of combined service gets three weeks' vacation and 6% vacation pay, compared with two weeks and 4% under five years. The employee does not need to work another five years for the new owner.
- Notice, termination pay and severance pay: these are based on total service with the seller and purchaser combined.
- Leave eligibility: parental leave needs at least 13 weeks of employment, and several child-related leaves need six consecutive months. Prior service with the seller may be included.
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.
Why new terms, selection processes and waivers do not reset service
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. If the purchaser knowingly lets employees keep working after the sale, that can amount to employment by the purchaser.
How a particular waiver or purchase agreement clause applies depends on your situation, so it is worth confirming with a lawyer before you rely on it or sign it.
Keep in mind that section 9(1) deems continuity only for the purposes of the Act, does not bind the purchaser to the old contract, and does not require the same terms. At common law, when a sale changes the employer's legal identity, your original contract ends, and if you accept the new employer's offer a new contract arises. The Court of Appeal for Ontario made these points in Krishnamoorthy v. Olympus Canada Inc..
The limits and exceptions
| Situation | What generally happens |
|---|---|
| Purchaser does not hire an employee | A purchaser is not required under the ESA to hire the seller's employees. |
| Employee refuses the purchaser's offer | The employee is under no ESA obligation to accept, and refusing does not reduce notice or severance entitlements. |
| Rehired more than 13 weeks after the earlier of the last day with the seller or the sale | Prior service does not carry over (ESA s. 9(2)). |
| Not hired within 13 weeks | The seller must give ESA notice or pay in lieu, and severance pay where applicable. |
Whether a particular deal fits these exceptions depends on the facts, so it is worth confirming with a lawyer.
Who pays when employment later ends, and what to do next
If the purchaser later ends the employment, it owes notice or pay in lieu based on combined service. It 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 under ESA s. 65(8), para. 3.
No official default splits these costs between seller and buyer. They are mainly allocated by the purchase agreement, through indemnities and price adjustments.
- List each employee and their years of service with the seller.
- Check whether the deal is a sale, lease or transfer of a business or part of one, whatever it is called.
- Plan around the 13-week rehire window.
- Settle vacation pay accrued before and after closing.
- Address severance and notice costs through indemnities or price adjustments.
- Have a lawyer review the purchase agreement and any offer letters before closing.
Frequently asked questions
Can employees sign away their past service?
Generally no. Continuity cannot be avoided by having the employee sign an acknowledgment that seniority is not carried forward. ESA entitlements also cannot be contracted out of.
Does the buyer have to hire all the seller's employees?
No. A purchaser is not required under the ESA to hire the seller's employees, and an employee need not accept employment with the purchaser. An employee who refuses does not lose notice or severance entitlements.
What if someone is rehired after a 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. Employees not hired within that time are the seller's responsibility for notice or pay in lieu, and severance where applicable.
Who pays severance after a sale?
The purchaser who later ends the employment owes notice or pay on combined service. How the cost is shared with the seller is mainly set by the purchase agreement, such as indemnities and price adjustments.
Sources
- Court of Appeal for Ontario, Krishnamoorthy v. Olympus Canada Inc., 2017 ONCA 873 (quoting ESA s. 9(1)) — ontariocourts.ca
- Your guide to the Employment Standards Act – Continuity of employment — ontario.ca
- ESA Policy and Interpretation Manual – Part IV Continuity of employment — ontario.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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