Employment Liabilities in Due Diligence: What Ontario Business Buyers Must Review

Employees are usually a business’s biggest asset and, if diligence is skipped, one of its biggest hidden liabilities. Unpaid entitlements, undisclosed complaints, and misclassified workers don’t always show up on a balance sheet — but they can become the buyer’s problem the moment the deal closes. This article walks through what a thorough employment-focused due diligence review should cover in an Ontario business purchase.

Why Employment Diligence Matters in Every Deal

Whether the deal is structured as a share purchase or an asset purchase changes exactly what liability you take on, but employment issues deserve close attention either way. In a share purchase, you inherit the corporation’s full employment history, including anything not yet discovered. In an asset purchase, your exposure is narrower but not zero — statutory continuity rules and common-law risk can still follow the business, not just the corporate wrapper.

Core Documents to Request

• [ ] Full employee list with start dates, roles, and current compensation
• [ ] Employment agreements, or written confirmation none exist
• [ ] Records of accrued but unpaid vacation pay and other entitlements
• [ ] Any outstanding termination, severance, or human rights complaints
• [ ] Employment Standards Act compliance history, including any Ministry of Labour orders or complaints
• [ ] Independent contractor agreements, to check for misclassification risk
• [ ] Benefits plan documents and confirmation of current contribution status
• [ ] Any existing non-compete, non-solicitation, or confidentiality agreements with employees

Statutory Continuity: ESA Section 9

Section 9 of the Employment Standards Act, 2000 is central to employment risk in an asset sale. Where a business, or part of one, is sold as a going concern and the buyer hires the seller’s employees, those employees’ employment is generally deemed not to have been terminated — their prior service with the seller counts toward their entitlements, such as vacation, leaves, notice, and severance, with the buyer.

Two points are easy to miss:

1. This continuity 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 day of the sale — as of mid-2026, confirm the current rule before relying on it.
2. It doesn’t apply to a share sale at all, since the employer doesn’t change in a share sale — continuity is automatic rather than a question the ESA needs to answer.

A buyer in an asset deal has no statutory obligation to hire any of the seller’s employees at all, but if it does, ESA continuity is likely to attach to those hires.

Common-Law Exposure Beyond the ESA

ESA minimums are only part of the picture. At common law, longer-serving employees can be entitled to reasonable notice well beyond the ESA’s statutory floor. A purchaser doesn’t automatically inherit the seller’s common-law notice exposure just because ESA minimums carried over — but if the buyer later terminates an employee whose service is being credited back to their original start date, that history can factor into what reasonable notice looks like going forward. This is a nuanced area that benefits from specific legal advice on the facts of your deal.

Comparing Liability by Structure

Severance and Termination Red Flags

Ontario’s statutory severance pay obligations generally apply where an employee has five or more years of service and the employer meets a size threshold — as of mid-2026, that threshold is a combined global payroll of $2.5 million or more, or a permanent closure that severs 50 or more employees within a six-month period. Verify the current thresholds before relying on them, since government figures can change. A workforce with many long-service employees at a business with a sizeable payroll can carry meaningful severance exposure that diligence should specifically flag and quantify where possible.

Allocating Employment Risk in the Agreement

Once diligence surfaces issues, they typically get addressed through:

• Specific representations and warranties about compliance with employment law and accuracy of employee records.
• Indemnities for known or reasonably anticipated employment claims.
• Purchase price adjustments where undisclosed accrued liabilities, like vacation pay, come to light.
• Clear allocation, in an asset deal, of which employees the buyer will offer to hire and on what terms.

Frequently asked questions