The Contractors Who Were Actually Employees

The situation

Oksana had spent fourteen years as a licensed electrician, the last six of them running crews for someone else. She wanted her own company, and in early 2026 she found one: a residential and light-commercial electrical services business in Orleans with a loyal customer base, a fleet of five service vans, and a seller, Halima, who had built it from nothing over eighteen years and was ready to retire. The asking price was about $1,400,000, structured as a purchase of the shares of the corporation rather than just its assets.

Oksana's spouse, Yusuf, worked as a paramedic and had no plans to leave that job, but he was going to co-invest and co-sign on the financing, so he was named as a joint buyer on the offer. Between their savings, a family loan, and a small business loan they expected to qualify for, they could put together the purchase price if the numbers held up. The seller's asking price was based on a business that, on paper, ran lean: six full-time technicians paid as contractors, each invoicing the company monthly, with no payroll remittances, no vacation pay, and no employer contributions to the Canada Pension Plan or Employment Insurance. That lean structure was a large part of why the business looked so profitable.

What the review found

Our firm was retained to act on the purchase once the offer was accepted, subject to a due diligence period. Because the deal was structured as a share purchase, Oksana and Yusuf would be buying the corporation itself — its assets, its contracts, its bank accounts, and also its liabilities, known and unknown. That distinction matters enormously in a business sale: buy the shares and you inherit the company's history; buy the assets instead and you can generally leave old liabilities behind with the seller. Halima's accountant had pushed for a share sale for tax reasons, and Oksana's own accountant had signed off on the price based on the reported profit margins, but nobody had yet looked closely at how those margins were achieved.

Our review of the corporate minute book, contracts, and payroll records turned up the six technician agreements. On paper, each was styled as an independent contractor arrangement: the technicians submitted invoices, carried their own tools, and had no group benefits. In practice, our review of dispatch records, van assignments, and scheduling showed something different. The technicians worked exclusively for this one company, wore its uniforms and branding, used its vans and equipment, followed a schedule set by the company each week, and had done so for periods ranging from three to eleven years. Under the tests Ontario courts and the Canada Revenue Agency use to distinguish employees from contractors, this pattern points strongly toward employment, regardless of what the paperwork calls the relationship. The Employment Standards Act, 2000 sets out minimum entitlements — including vacation pay and notice or pay in lieu on termination — that apply to employees and cannot be waived by simply labelling someone a contractor.

The exposure was not hypothetical. If even some of these six were reclassified as employees, either through a complaint to the Ministry of Labour, a claim by a departing worker, or a Canada Revenue Agency payroll audit, the corporation could face liability for years of unpaid vacation pay, source deduction remittances the company should have made on their behalf, and potential penalties and interest. Because the deal was a share purchase, that liability would land on the corporation Oksana and Yusuf were about to own — not on Halima personally, once the sale closed.

What we did

1. Quantified the exposure before negotiating anything. Working with the couple's accountant, we estimated the potential back-pay and remittance liability across the six technicians, using conservative assumptions about how far back a claim or audit could reach and what vacation pay and employer contributions would have totalled. The range was wide, but even the low end was a serious number relative to the purchase price — enough to matter, not enough to walk away over.
2. Raised the issue directly with the seller's side rather than staying silent. Some buyers are tempted to say nothing, close the deal, and deal with the fallout later if it ever surfaces. We advised against that. The corporation's own tax filings and financial statements represented these workers as contractors, and Oksana and Yusuf would be certifying, through the purchase agreement, that they had reviewed the company's compliance with employment law as part of their due diligence. Raising it openly protected their negotiating position and their credibility.
3. Proposed converting the technicians to proper employees before closing, and pricing the difference. We recommended two things happen together: first, that the six technicians be reclassified as employees going forward, with proper payroll, vacation accrual, and remittances starting immediately, which would raise the company's ongoing costs and lower its future profit margin; and second, that the purchase price be reduced to reflect both that lower forward-looking profitability and the historical exposure the corporation still carried for the years before closing.
4. Negotiated a holdback and an indemnity as backstops. Beyond the price reduction, we negotiated a holdback — a portion of the purchase price kept in trust for a fixed period after closing — to cover any claim from a technician or a government audit that related to the pre-closing period. We also secured a specific indemnity from Halima personally for misclassification liability tracing back to before the sale, on top of the general representations and warranties already standard in the agreement.
5. Adjusted the financing and closing timeline to match. The lower purchase price changed the loan amount Oksana and Yusuf needed, which meant a short delay while their lender re-underwrote the deal. We coordinated with their broker and Halima's lawyer to keep the revised closing date realistic rather than optimistic, so the deal did not collapse under a deadline nobody could actually meet.

The outcome

Halima did not accept the full reduction our client proposed. Her position was that the business had operated this way for years without incident, that the technicians were content, and that some of the exposure estimate was speculative. After several weeks of negotiation, the parties settled on a price reduction of roughly $95,000 off the original $1,400,000 asking price, along with a holdback of about $60,000 held in trust for eighteen months to cover any claim arising from the pre-closing period. Halima also agreed to the personal indemnity for pre-closing misclassification liability, capped at a defined amount.

It was not the full number Oksana and Yusuf had hoped for, and Halima gave up more than she wanted to on a sale she had assumed would close cleanly at her asking price. Both sides left something on the table. But the deal closed, roughly six weeks later than the original target date, with all six technicians moved onto proper payroll as employees before the sale completed. Oksana took over a business she could run without an open compliance problem sitting underneath it, and Halima retired with most of the value she expected, minus a fair accounting for a risk that was real. Neither side got everything, which is often what a workable compromise looks like in a business sale where a serious issue surfaces during due diligence rather than after.

Eight months after closing, no claims had been made by any of the technicians and no audit had been triggered, and the holdback period was still running down without incident — the kind of quiet outcome that due diligence is meant to produce.

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