Do Employees Have to Be Terminated in an Asset Sale in Ontario?

If you are selling the assets of your business, you may assume that your employees' jobs end at closing and that you must terminate each of them. In Ontario, it is not that simple. The Employment Standards Act (ESA) has special rules for what happens to employees when a business is sold.

Whether you owe termination pay or severance pay often turns on one practical question: does the buyer hire your people, and when. This article explains the general rules so you can plan the sale and ask better questions of your lawyer.

Does an asset sale automatically end employment?

Under the ESA, if an employer sells a business or part of a business and the purchaser employs one of the seller's employees, the employment is deemed not terminated or severed for the purposes of the Act. The seller's employment is treated as employment with the purchaser for any later calculation of length of employment.

The word "sells" is read broadly. It includes leasing, transferring or disposing of a business in any other way. The Ministry looks at the substance of the deal, so labelling it an "asset sale" does not keep the rules from applying if a business or part of one was in fact sold. Signs of a business sale include a non-compete covenant, use of the trade name and transfer of customer lists.

There is a separate common law picture. When a sale changes the employer's legal identity, the employee's original contract ends, and if the employee accepts the new employer's offer a new contract arises. The ESA continuity rule applies only for the purposes of the Act, does not bind the purchaser to the old contract and does not require the same terms.

What carries over to the buyer

Prior service flows through to the new owner when the employee keeps working in the business, and the employee gets credit for past employment for every right based on length of employment. In practice that affects several entitlements.

Vacation pay accrued and due before the sale stays with the seller, while vacation pay accrued but only due after the sale passes to the purchaser.

The 13-week gap and when you owe pay

Service does not carry over if the employee is rehired by the purchaser more than 13 weeks after the earlier of the last day with the seller or the day of the sale. Employees not hired by the purchaser within 13 weeks are the seller's responsibility, and the seller must give ESA notice or pay in lieu, and severance pay where applicable.

• Notice or termination pay: for an employee employed at least three months, notice runs from one week for under one year up to eight weeks for eight years or more, and may be given in writing, as pay, or as a combination.
• Severance pay: it applies with five or more years of service and either a global payroll of $2.5 million or more, or 50 or more employees severed in six months because of a permanent closure.
• Severance amount: one week of regular wages per completed year (plus months/12), to a maximum of 26 weeks.
• Timing: termination pay is due on the later of seven days after termination or the next regular pay date.

If 50 or more employees at one establishment are terminated within four weeks, longer mass termination notice periods apply.

Offers, refusals and attempts to avoid continuity

A purchaser is not required under the ESA to hire the seller's employees, and an employee is under no obligation to accept employment with the purchaser. Refusing does not reduce notice or severance entitlements. Separately, there is no ESA notice or termination pay where an employee refuses reasonable alternative employment, so how an offer is made and what it contains can matter and is worth reviewing with a lawyer.

Continuity cannot be avoided by offering new terms, running a selection process, or having the employee sign an acknowledgment that seniority is not carried forward. If the purchaser knowingly lets employees keep working after the sale, that can amount to employment by the purchaser.

Who pays later, and what to do next

A purchaser who later ends the employment owes notice or pay in lieu based on combined service, and gets no credit for notice the seller gave at the time of sale. Where the seller already paid severance, the purchaser may offset that against its later obligations under ESA s. 65(8), paragraph 3. Beyond these rules, who ultimately bears the cost is mainly a matter for the purchase agreement, such as indemnities or a price adjustment.

• List each employee with their start date, wages and any leave currently running.
• Find out early whether the buyer plans to hire your staff, and on what timeline.
• Ask how the purchase agreement allocates termination and severance costs.
• Do not rely on a signed waiver of past service; ESA entitlements cannot be contracted out of.
• Speak with an employment or business lawyer before any notices or offers go out.

Frequently asked questions