- The core issue is simple to state and easy to get wrong in practice: whoever is the employee's legal employer at the moment a layoff or termination happens is generally the party…
- Ontario's employment standards legislation includes a specific continuity-of-employment rule: where a business (or part of one) is sold and the buyer hires an employee of the seller as…
A layoff that happens two weeks before closing and one that happens two weeks after can produce very different legal outcomes, even if the employee and the reason are identical. Layoff timing around a business sale closing is not a technicality — it can determine which party is actually on the hook for termination-related obligations, and whether an employee's length of service is treated as continuous or as starting fresh.
This article walks through why timing matters, what changes at each stage of the deal, and where sellers and buyers most often get this wrong.
Why Timing Drives Legal Responsibility
The core issue is simple to state and easy to get wrong in practice: whoever is the employee's legal employer at the moment a layoff or termination happens is generally the party responsible for the associated obligations — notice, termination pay, and potentially severance. In a straightforward sale, that means the seller is generally responsible for anything that happens strictly before closing, and the buyer for anything after — but a few wrinkles complicate that clean line.
Timing Scenarios at a Glance
| When it happens | Who is typically the employer of record | Key risk |
|---|---|---|
| Well before closing, unrelated to the sale | Seller | Ordinary termination obligations apply to the seller as usual |
| Shortly before closing, timed around the sale | Seller (at the moment of layoff) | Can look like an attempt to shift a workforce reduction onto the seller's books right before handover — buyers scrutinize this in due diligence |
| At closing, as part of an asset deal where the buyer doesn't hire everyone | Seller, for employees not offered a position | The seller may owe termination obligations to anyone the buyer declines to hire, unless the purchase agreement allocates this differently |
| Shortly after closing, in an asset deal | Buyer | If the buyer hired the employee as part of a going-concern purchase, Ontario's continuity-of-employment rule can carry the employee's prior service forward for statutory purposes |
| Any time in a share deal | The same corporation, before and after closing | The employer never changes, so there is no timing question about which entity is responsible — only about who owns the corporation when the cost is incurred |
The Asset-Deal Continuity Rule and Its Time Limit
Ontario's employment standards legislation includes a specific continuity-of-employment rule: where a business (or part of one) is sold and the buyer hires an employee of the seller as part of that going-concern sale, the employee's service is treated as continuous for statutory purposes rather than as a new start. That continuity does not apply, however, if the buyer hires the employee more than a defined window of weeks after the earlier of the employee's last day with the seller or the date of the sale.
This is exactly why layoff timing matters so much in an asset deal: a gap between a seller's layoff and a buyer's later re-hire that runs past that statutory window can mean the employee's service is treated as starting over with the buyer, rather than continuing — a materially different outcome for both the employee and whichever party might otherwise have been responsible for termination costs.
Watch for Layoffs Timed to Shift Liability
A pattern buyers specifically look for in due diligence is a seller laying off staff shortly before closing, in a way that looks designed to push a termination cost onto the seller's books (or avoid it altogether) rather than reflecting genuine, independent business need. This doesn't automatically mean the layoff is improper, but it is exactly the kind of fact pattern that deserves scrutiny — including confirming that any resulting termination obligations were actually satisfied by the responsible party, and that the purchase agreement's representations about employees and employment liabilities are accurate as of closing.
Severance Pay: A Threshold Worth Knowing About
Beyond ordinary notice or termination pay, Ontario law can require statutory severance pay in addition, but only where specific qualifying conditions are met — broadly, a combination of the employee's length of service and the size of the employer's payroll (or a large-scale permanent closure affecting many employees within a defined period). These are specific, defined thresholds set out in Ontario's employment standards regime — as of mid-2026, always confirm the current figures before relying on them, since eligibility depends on the exact facts and the numbers can be updated.
Layoff timing matters here too: which entity's payroll size is being measured — the seller's or the buyer's — depends on which one was the employer of record when the termination occurred, reinforcing why the timing question isn't just academic.
Practical Steps for Both Sides
- [ ] Sellers: avoid timing layoffs to coincide suspiciously with closing unless there's a genuine, well-documented business reason
- [ ] Sellers: confirm termination obligations are satisfied for any employee not being offered a position by the buyer, before or at closing
- [ ] Buyers: review the seller's recent termination and layoff history as part of employment due diligence, not just current headcount
- [ ] Buyers: if hiring the seller's staff as a going-concern purchase, keep the hiring timeline as close to closing as possible to preserve intended continuity
- [ ] Both sides: address who is responsible for termination-related costs for any employee affected by the transition, explicitly, in the purchase agreement
Frequently asked questions
If the seller lays someone off right before closing, is the seller always responsible?
Generally yes, since the seller was the employer at the time — but buyers should still confirm those obligations were actually met, and watch for layoffs that look timed to shift costs rather than reflecting genuine business need.
Does a gap between a seller's layoff and a buyer's re-hire always break continuity of service?
Not always, but there is a defined time limit under Ontario's employment standards rules — if the gap runs past it, continuity generally does not apply. Confirm the current limit before relying on any specific timeline.
Is there a timing risk in a share purchase the way there is in an asset purchase?
Less so — since the employer entity doesn't change in a share sale, there's no question of whose payroll or whose responsibility a termination falls under; the same corporation is responsible regardless of exactly when the termination happens.
Can a purchase agreement change who is responsible for termination costs around closing?
Yes — buyers and sellers can and often do allocate this risk explicitly through representations, indemnities, or specific closing provisions, rather than leaving it to the general default rules.
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