Who Pays Severance When an Ontario Business Is Sold?

After a sale closes, staff may be let go and then the bills arrive. Sellers say the buyer took the business and its people. Buyers say the liabilities were the seller's. Employees just want to be paid what they are owed.

Ontario's Employment Standards Act (ESA) answers part of the question, and the purchase agreement answers the rest. This article explains both.

Start with the employee's ESA rights

When a business is sold and the purchaser employs a seller's employee, the employment is deemed not terminated or severed for the purposes of the Act, and the seller's time counts as time with the purchaser. Notice, termination pay and severance pay are based on total service with seller and purchaser combined.

Calling the deal an asset sale does not change this if a business or part of one was in fact sold. The Ministry looks at substance, including things like non-compete covenants, use of the trade name and customer lists.

Who pays in different situations

An employee who refuses the buyer's offer does not lose notice or severance entitlements as a result.

How much is at stake

ESA notice for an employee employed at least three months runs from 1 week (under 1 year) and 2 weeks (1 to under 3 years) to 3 weeks at 3 years, rising one week per year to 8 weeks for 8 years or more. The employer may give written notice, termination pay, or a combination.

Severance pay is separate. It applies where the employee has 5 or more years of service and the employer has a global payroll of $2.5 million or more, or severed 50 or more employees in six months because of a permanent closure. It is one week of regular wages per completed year (plus months/12), to a maximum of 26 weeks.

Timing matters too. Termination pay is due on the later of seven days after termination or the next regular pay date. Severance pay is due on the later of seven days after employment is severed or the next regular payday, and instalments over up to three years need the employee's written or electronic agreement or Director approval.

Common law claims and the purchase agreement

ESA continuity applies only for the purposes of the Act. At common law, a sale that changes the employer's legal identity ends the original contract, and a new contract arises if the employee accepts the new employer's offer. An employee cannot both sue for wrongful dismissal and file an ESA claim for the same termination. Common law claims depend on the individual's facts, so get advice.

Between buyer and seller, the ESA does not set a default split. The purchase agreement is where the cost is usually allocated, for example through indemnities or a price adjustment. Clauses worth looking at include:

• Which employees the buyer will offer jobs to, and by when.
• Whether the seller indemnifies the buyer for pre-closing employment liabilities.
• Whether the price is adjusted for accrued vacation pay or expected termination costs.
• How disputes about employee claims will be handled after closing.

No contract term can take away what the employee is owed under the ESA. For example, continuity cannot be avoided by having the employee sign an acknowledgment that seniority is not carried forward.

What to do next

• Gather the purchase agreement, employee list, start dates and any termination letters.
• Work out which employees were hired, which were not, and the dates involved, keeping the 13-week window in mind.
• Check whether any ESA severance threshold may apply.
• Check whether the agreement has an indemnity or price adjustment covering employee costs.
• Speak with a lawyer before paying, refusing to pay or sending demand letters.

Frequently asked questions