Vacation Pay and Accrued Entitlements on a Business Sale in Ontario: Who Owes What

Vacation pay rarely makes headlines in a business sale negotiation, but it’s exactly the kind of detail that causes friction after closing if nobody addressed it clearly. Employees accrue entitlements — vacation pay, and sometimes other benefits — continuously, which means on any given closing date, someone owes something to somebody. Who that "somebody" is depends on how the deal is structured and what the purchase agreement actually says.

What Counts as an "Accrued Entitlement"

At closing, employees typically have unpaid, earned entitlements sitting on the books — most commonly vacation pay that has accrued but not yet been paid out or taken as time off. Depending on the business, there may also be accrued but unused sick days, banked overtime, or bonus amounts tied to a period that straddles the closing date. None of these are unusual; they exist in almost every ongoing business at any given moment. The question a business sale forces is simply: who pays them?

Share Sale: The Corporation Keeps Owing It

In a share purchase, the corporation itself doesn’t change, so the obligation to pay accrued vacation and other entitlements simply stays where it always was, with the corporation, now under new ownership. Nothing needs to be reassigned, because the employer never changed. That said, this is exactly the kind of liability a buyer should want reflected in the purchase price or working-capital adjustment, since the buyer’s own corporation, now owned by the buyer, will be the one paying it out eventually.

Asset Sale: Who Picks Up the Tab

In an asset sale, the seller’s corporation and the buyer’s entity are different legal persons, so accrued entitlements don’t automatically transfer just because the business does. Generally:

• Liabilities the buyer doesn’t expressly agree to assume stay with the seller’s corporation.
• If the buyer hires the seller’s employees as part of a going-concern sale, statutory continuity under the Employment Standards Act, 2000 means the buyer inherits responsibility for vacation and other entitlements calculated back to the employee’s original start date with the seller — even though the buyer didn’t originally owe that amount.
• This creates a mismatch worth negotiating: the buyer may end up on the hook for entitlements the seller’s business actually accrued.

How the Purchase Agreement Usually Resolves This

Purchase agreements typically deal with accrued entitlements through one or more of:

1. A pre-closing payout — the seller pays out accrued vacation and similar amounts to employees before or at closing, so the buyer starts with a clean slate.
2. A purchase price or working-capital adjustment — the estimated value of accrued entitlements is deducted from the price, or trued up against a final closing statement, so the buyer is compensated for what it’s taking on.
3. An express assumption clause — the agreement states clearly which entitlements, if any, the buyer is assuming, avoiding ambiguity about who owes what.
4. A holdback — a portion of the purchase price is held back until accrued liabilities are confirmed and settled, protecting the buyer against underestimated amounts.

Practical Steps at Closing

• [ ] Get an accurate, dated schedule of accrued vacation and other entitlements as close to the closing date as possible.
• [ ] Confirm, in writing, whether the seller is paying these out before closing or the buyer is assuming them.
• [ ] If the buyer is assuming them, make sure the purchase price reflects that, whether through an adjustment, a deduction, or a holdback.
• [ ] For any employees being hired in an asset deal, confirm how their service date and entitlements will be tracked going forward.
• [ ] Keep the schedule as part of the closing deliverables — it’s a common source of post-closing disputes if it isn’t nailed down.

Frequently asked questions