Who Owes Severance If the Buyer Doesn't Keep Employees

You have found a buyer, but the buyer wants the business and not all of the people. Maybe it will hire a few key staff, or none at all. You now need to know who is on the hook for termination and severance pay, and whether that cost should affect the price.

In Ontario, the starting point is the province's employment standards rules, known as the ESA. This article explains what the seller generally owes when employees are not taken on, what changes if the buyer does hire them, and how deals commonly deal with the cost. It is general information, not advice on your particular facts.

The short answer: the seller owes it

The ESA does not force a purchaser to hire the seller's employees. If the purchaser does not hire them, the rule that carries employees over to the buyer does not apply, and the seller must meet its ESA obligations for notice or pay in lieu of notice, and severance where it applies.

A clause in the sale agreement that requires the buyer to offer jobs to your employees does not change this. If the buyer does not make the offers, the buyer is not liable under the ESA because of that clause. Where you terminated the employees before the sale and the buyer does not hire them, you remain responsible.

An employee may also turn down the buyer's offer and treat the sale as a termination by you. Refusing the offer does not remove the employee's termination entitlements, according to the Ministry's interpretation. Whether a particular offer counts as reasonable alternative employment, which can remove entitlement to notice and termination pay, depends on the facts. That is worth confirming with a lawyer before you rely on it.

What the seller may owe each employee

There are up to three pieces: notice (or termination pay instead), vacation pay, and statutory severance. The first applies to employees who have worked at least three months. The amount of notice rises with length of service.

If notice is not given, termination pay replaces it. It is a lump sum equal to regular wages for a regular work week for the notice period. The employee earns vacation pay on it, and the employer must keep making benefit contributions for the notice period. It is due on the later of seven days after employment ends or the employee's next regular pay date.

Separately, earned but unpaid vacation pay is owed when employment ends. It is due within 7 days of the end of employment or the next regular payday, whichever is later. Vacation pay is owed on termination pay but not on severance pay.

When statutory severance pay applies

Severance pay is a separate entitlement and many small businesses will not owe it. It requires at least five years of service, which need not be continuous, and either a global payroll of at least $2.5 million or 50 or more jobs cut within six months because all or part of the business permanently closed.

Where it applies, severance equals regular weekly wages multiplied by completed years of service plus completed months in an incomplete year divided by 12, capped at 26 weeks. For example, $1,000 a week with 7 years 9 months of service comes to $7,750. It is due by the later of seven days after employment is severed or the next regular payday. Instalments of up to three years are allowed only with the employee's written or electronic agreement or the Director's approval.

• Count the employee's full service with you, not just recent years.
• Check your payroll against the $2.5 million threshold, since that test is about the employer's global payroll.
• If you are closing all or part of the business as part of the deal, ask whether the 50-job test could also apply.
• If 50 or more employees at one establishment are let go within four weeks, longer mass termination notice rules apply.

When the buyer does hire: why the answer changes

If the buyer employs your people, the picture is very different. Under section 9 of the ESA, an employee's length of employment with the seller is treated as employment with the purchaser, so the employee is not a new hire for ESA purposes. In the ordinary case, the Ministry's interpretation is that only vacation pay that was both accrued and due before the sale stays with you, while vacation pay that accrued before the sale but became due afterward passes to the purchaser.

Three points often surprise sellers and buyers.

• A share sale is not a sale of a business under section 9, because the corporation stays the same employer and employment simply continues.
• In an asset deal, the Ministry looks at substance, such as a non-compete, giving up the trade name, transferring client lists, taking over contracts and assigning goodwill. Calling it an asset sale is not decisive.
• The buyer's duty to carry service over cannot be waived or contracted out of, and new contracts on new terms do not avoid it.

Timing matters too. If the purchaser hires an employee more than 13 weeks after the earlier of the employee's last day with you and the day of the sale, section 9(1) does not apply, and you remain liable for all vacation pay accrued to the last day of your employment. If the buyer hires and later terminates, the buyer alone is responsible for ESA termination and severance based on total service. There is no pro-rata split with you.

Allocating the cost in the purchase agreement

The ESA sets what employees are owed. Who bears the cost as between you and the buyer is a matter of negotiation, usually through the price or a holdback. The following points often come up.

• Decide employee by employee: who the buyer will hire, who it will not, and who you will terminate before closing.
• Remember that a promise in the sale agreement to offer jobs does not make the buyer liable to the employees under the ESA if it does not make the offers.
• Price accrued vacation into the deal. Unused vacation can be outstanding at closing because it may be taken within 10 months after the vacation year ends. If contracts give more than the ESA minimum, that higher entitlement is what must be priced.
• Where the buyer will hire and terminate later, agree who bears that risk. The buyer gets no credit for notice or pay you gave at the sale, although severance you paid may be offset against the buyer's contractual liability.
• Consider an indemnity or holdback for claims the Ministry's interpretation or a court might treat differently. The Manual is an interpretation, not binding on a court.

Also keep in mind that ESA minimums are not always the whole picture. Employment contracts and other legal rights may add to the cost, and decisions about who to keep can raise human rights issues if they are connected to a protected ground such as disability, pregnancy or family status. A lawyer can confirm how these apply to your staff.

What to do next

• Make a list of every employee with start date, pay, vacation balance, benefits and any written contract.
• Note anyone on pregnancy, parental or other leave, since those employees keep protections and the rules around reprisal apply.
• Work out each person's likely notice, termination pay, vacation pay and severance using the rules above.
• Ask the buyer in writing which employees it intends to hire and when.
• Have the purchase agreement spell out who pays what, and how it is adjusted or held back at closing.
• Speak with an Ontario business lawyer before you sign a letter of intent or tell staff about the sale.

Frequently asked questions