Terminating Employees Before Closing an Ontario Business Sale: Legal Risks

Sellers sometimes look at a pending sale and wonder whether now is the moment to deal with an underperforming employee, or trim a role the buyer has said they don’t need. It’s an understandable instinct — but terminating staff before closing carries real legal and deal risk that’s worth understanding before you act.

This article looks at why sellers consider pre-closing terminations, who actually bears the liability, and a safer way to handle staffing concerns during a sale.

Why Sellers Consider Pre-Closing Terminations

Common reasons include aligning staffing with what the buyer has indicated they want going forward, addressing a performance issue that’s been dragging on, or reducing costs before a working-capital calculation is finalized. Whatever the reason, the termination happens while the seller is still the legal employer — which means the seller, not the buyer, is on the hook for it.

The Legal Risk to the Seller

As the employer at the time of termination, the seller remains responsible for:

• Statutory entitlements under the Employment Standards Act, 2000 — including notice or pay in lieu, and, where the qualifying thresholds are met (broadly, five or more years of service combined with a sufficiently large employer payroll, or a mass permanent-closure scenario — as of mid-2026, verify the current thresholds before relying on them), statutory severance pay.
• Common-law reasonable notice, which for many employees can exceed the ESA minimums significantly, depending on factors like their role, length of service, and how easily they could find comparable work.
• Any employment-related claims the departing employee might raise, including a human rights complaint or litigation if the termination is connected, even indirectly, to a protected ground.

None of this liability transfers to the buyer just because a sale is pending — the seller made the decision and employed the person at the time, so the seller bears the cost.

How Buyers View Pre-Closing Terminations

A termination shortly before closing is rarely invisible to a buyer conducting due diligence, and it’s rarely welcomed:

• It can be read as a red flag about the business’s stability or the seller’s judgment.
• It can create a liability the buyer worries will follow the transaction, particularly if the terminated employee brings a claim while the deal is closing.
• It can affect the purchase price or the closing conditions if the buyer specifically wanted that employee retained.

Buyers frequently ask sellers to represent, in the purchase agreement, that no employees have been terminated outside the ordinary course since a specified date — making an unexplained pre-closing termination a disclosure issue as much as an employment one. Where a termination has already happened and can’t be undone, expect the buyer to ask for specific disclosure of it, and possibly an indemnity carved out specifically for any resulting claim, rather than relying on the general representations alone.

The Human Rights Angle

A termination that coincides with, or appears connected to, a protected characteristic — illness, disability, pregnancy, age, and similar grounds under Ontario’s Human Rights Code — carries elevated risk regardless of the pending sale. Timing a termination around a deal doesn’t change the underlying human rights analysis.

A Safer Path: Address Staffing in the Purchase Agreement Instead

• [ ] Flag staffing concerns to your lawyer and the buyer’s side early, rather than acting unilaterally.
• [ ] Let the purchase agreement’s employee provisions — who the buyer will and won’t hire — do the work of right-sizing the workforce, rather than the seller terminating people pre-closing.
• [ ] If a termination genuinely can’t wait, get legal advice on the entitlement calculation and documentation before acting, not after.
• [ ] Keep clean, contemporaneous records of the business reasons for any staffing decision made during the sale process.

Frequently asked questions