Employee Liabilities When Buying a Distressed Business in Ontario

A distressed business often comes with distressed payroll — unpaid vacation pay, missed remittances, or staff who haven't been paid on time. If you're buying the business, the natural question is whether those problems become your problem the moment you close.

The answer depends heavily on how the deal is structured and on Ontario's continuity-of-employment rules. This article walks through the general framework so you know what to check before you sign.

The Starting Point: An Asset Purchase Doesn't Automatically Assume Debts

In an ordinary asset purchase, the buyer and seller identify which specific liabilities the buyer is taking on. Liabilities that aren't expressly assumed generally stay behind with the selling corporation — including, in principle, unpaid wages and vacation pay the seller already owes for work done before closing.

That's the general rule. In practice, employee-related liabilities are one of the areas where the general rule gets complicated fastest, for two reasons: continuity-of-employment law, and the practical reality that most buyers want to keep at least some of the existing staff.

Where It Gets Complicated: ESA Continuity of Employment

Section 9 of Ontario's Employment Standards Act, 2000 provides that where a business (or part of one) is sold as a going concern and the buyer hires the seller's employee, that employee's employment is deemed not to have been terminated — their prior service with the seller counts toward their entitlements (vacation, leaves, notice, severance) with the buyer, as if it were one continuous period of employment.

A few important limits:

• This continuity rule generally doesn't apply if the buyer hires the employee more than 13 weeks after the earlier of the employee's last day with the seller or the date of the sale.
• A buyer has no statutory obligation to hire any of the seller's employees at all in an asset purchase.
• Continuity under the ESA sets statutory minimums — it doesn't automatically transfer a common-law reasonable-notice exposure the seller may have built up, which is a separate question.
• None of this applies to a share purchase in the first place, because the employer (the corporation) never changes hands — employment simply continues without a break.

A Federal Safety Net for Unpaid Wages

Separately from anything in the sale agreement, Canada has a federal wage-protection program that can provide employees with some compensation for certain unpaid wages, vacation pay, and related amounts when their employer becomes bankrupt or is placed in receivership. This exists to help workers directly — it doesn't change a buyer's obligations under the purchase agreement, and specific eligibility rules and coverage limits are something to verify directly if this is relevant to your deal, rather than assume.

What Buyers Should Check Before Closing

Structuring the Deal to Manage This Risk

• Have the seller represent and warrant, in the purchase agreement, that payroll obligations are current and disclosed as of closing
• Use an indemnity so the seller (not you) bears responsibility for pre-closing employee claims that surface later
• Consider a holdback tied specifically to payroll and employment-related representations
• Decide deliberately — and document — whether you're offering employment to existing staff, on what terms, and how their prior service will be treated
• Get legal advice before making any statement to employees about their status; premature or inconsistent messaging creates its own risk

Frequently asked questions