Undisclosed Termination and Severance Liabilities: A Buyer's Checklist for Ontario

A seller rarely sets out to hide anything. More often, undisclosed severance exposure in an Ontario business purchase comes from something more mundane: nobody on the seller's side thought to flag it, because to them it was just an employee who quietly left, or a termination that happened years ago and was never fully resolved. For the buyer, though, that same history can surface as a real bill after closing.

This article sets out a practical checklist for finding undisclosed severance liabilities before you sign, and for protecting yourself contractually against the ones you can't fully rule out.

Why This Type of Liability Is Easy to Miss

Termination and severance obligations rarely show up as a clean line item on financial statements. A dismissed employee who hasn't yet sued, a verbal promise of a retirement package, or an unresolved human rights complaint can all sit quietly in the background of a business that otherwise looks financially healthy. Standard financial due diligence — reviewing tax filings, bank statements, and accounting records — will not reliably catch these. You need a targeted employment review.

Document Checklist: What to Request

Before you rely on the seller's representations alone, ask for and review:

• [ ] A complete list of current employees, including start dates, roles, and compensation
• [ ] A list of everyone terminated or who resigned in the past several years, with the circumstances
• [ ] Any signed releases obtained from departed employees
• [ ] Any outstanding demand letters, Ministry of Labour complaints, or Human Rights Tribunal filings
• [ ] Any litigation, arbitration, or settlement history related to employment
• [ ] Payroll records showing vacation pay, unpaid wages, and bonus accruals
• [ ] Copies of all written employment contracts, including any severance or change-of-control clauses
• [ ] Board or shareholder minutes referencing employee terminations or restructuring

Red Flags to Watch For

Certain patterns in the seller's HR records should prompt closer questions rather than a quick sign-off:

• A pattern of short-tenured senior hires, which can suggest past termination issues.
• Terminated employees with no signed release on file — meaning their claim may still be open.
• Payroll figures that don't reconcile cleanly with reported employee counts or job titles.
• A seller who is vague or evasive about why a particular employee left.
• Any mention of a restructuring, layoff, or closure that hasn't been fully documented and resolved.

None of these are automatically disqualifying, but each one is a reason to ask more questions before you rely on a clean bill of health.

Protecting Yourself Contractually

Even thorough due diligence cannot catch everything — some claims simply have not surfaced yet by the time you close. That is exactly why Ontario purchase agreements build in contractual protection on top of due diligence:

1. Representations and warranties. The seller confirms, in the purchase agreement itself, specific statements about employment matters — for example, that all employees have been paid what they're owed and that there are no outstanding employment claims the seller is aware of.
2. A disclosure schedule. Any known exceptions to those representations are listed specifically, so nothing is hidden by a broad, unqualified promise.
3. Indemnities. If a representation turns out to be false, the seller agrees to compensate the buyer for the resulting loss — this is often the buyer's main practical remedy after closing.
4. A holdback or escrow. A portion of the purchase price is withheld or placed with a third party for a defined period after closing, giving the buyer a fund to draw against if an employment claim surfaces.

If Something Surfaces After Closing

Buyers who discover an undisclosed liability after closing typically start by checking what the purchase agreement actually says — specifically, what representations were made, whether a disclosure schedule carved out the issue, and whether a holdback period is still open. Post-closing indemnity claims for a breached representation are a routine, contemplated part of how these agreements work; the outcome depends entirely on the specific wording the parties negotiated, which is why a lawyer should review the agreement's actual terms rather than relying on how the deal "felt" going in.

Frequently asked questions