Who Is Liable for Employee Claims From Before a Business Sale in Alberta

Employee claims from before a sale are a common worry for buyers and sellers, and how they are handled depends on the situation. Unpaid wages, overtime or a wrongful dismissal complaint can arise before closing and still be raised afterwards, and both buyers and sellers worry about who will be left to deal with them.

This article explains how that risk is usually thought about in an Alberta sale and where the purchase agreement fits in. The exact legal answer depends on the structure of the deal, the employment rules that apply and the facts of each claim, so treat this as a map for your conversation with a lawyer.

This article covers the law of Alberta.

Why pre-closing employee claims matter in a sale

A claim that arises before closing is tied to what happened while the seller was running the business. The buyer, however, is the one who will be operating the business afterwards and working with the same people. That gap is why the issue needs to be dealt with in writing rather than left to assumption.

Typical examples include unpaid wages, unpaid overtime, vacation pay that was never settled, and complaints from people who were let go shortly before the sale. Some may be known to the seller. Others may not surface until months after closing.

Structure of the deal affects who is exposed

A business can be bought by acquiring its assets or by acquiring the shares of the company that owns it. In a share purchase you take over the company itself, while in an asset purchase you take selected property and operations. Which approach is used changes how exposure to old liabilities is generally analysed, and the details should be confirmed with a lawyer.

Structure also affects other parts of the deal. For example, federal financing under the Canada Small Business Financing Program does not finance share purchases or assets acquired by a holding company. The GST business-assets rule applies where the buyer gets all or substantially all of the property that can reasonably be regarded as necessary to carry on the business. These points do not answer the employee question, but they show why the structure should be settled early and with advice.

Whether the law treats a buyer as continuing the seller's obligations to employees is a separate question that turns on the employment rules in Alberta and on the facts. It is worth asking your lawyer specifically how those rules apply to your sale before you finalize the price.

How the purchase agreement allocates the risk

Whatever the legal default is, the parties can usually address the risk by contract between themselves. Common tools include the following.

• Representations from the seller about employees, such as who works in the business, how they are paid, and whether any complaints or claims are known.
• An indemnity, which is a promise by one party to cover the other for specified losses, such as claims relating to the period before closing.
• A holdback or escrow, where part of the price is kept back for a set period in case claims appear.
• A price adjustment if known amounts are owing to employees at closing.
• Conditions to closing, such as the seller providing payroll records and employment agreements.

An indemnity is only as good as the person giving it. If the seller will be a shell company with no assets after closing, a promise to pay may be hard to collect on. Buyers often look for a personal guarantee, a holdback or other security, and sellers should be careful about how broad and how long the indemnity runs.

Checks you can run before closing

Due diligence helps you see what you are really buying. Alberta Corporate Registry searches are requested through a registry agent, and current or historical searches can show the registration date, owners, directors and legal addresses. A certificate of status confirms status as of a given date only.

Personal Property Registry searches can be requested on a Search Request form at any registry agent office in Alberta, by business debtor name, among other search types. A search returns one of four outcomes: exact match, inexact match, no match, or both exact and inexact matches. These searches show registered interests in property, not employee claims, so they are only one part of your review.

For employee matters, the checks are mostly document-based: payroll and time records, employment contracts, termination letters, and any correspondence about pay disputes.

What to do next

• Decide with your lawyer whether the deal is a share purchase or an asset purchase, and ask how that affects employee obligations.
• Ask the seller for a list of current and recent employees, pay records and any known complaints.
• Have the agreement include clear representations, an indemnity and, where suitable, a holdback or other security.
• Run Corporate Registry and Personal Property Registry searches through a registry agent.
• Ask a lawyer or accountant to confirm the tax treatment of the sale, including whether a GST election is available.

Because the answer depends on the structure and the facts, get legal advice before signing, and again if a claim is made after closing.

Frequently asked questions