A family sale nearly derailed by who counted as an employee

The situation

Farid called our office on a Tuesday morning, before he had said anything to his sister Nasrin or his brother-in-law Soo-jin, who together with him owned the family business the three of them had run in Fort Frances for close to fifteen years. He wanted to know, quietly, whether a sale was even realistic. A regional buyer had approached him informally, and Farid was cautiously interested, but he was not ready to raise it with the family until he understood what he was actually sitting on, and he did not want to raise their hopes only to have the idea fall apart once someone actually looked closely at the books.

The business, a modest operation valued in the $8M to $15M range, had grown gradually over those fifteen years from a small local shop into a company with a dozen or so people doing regular, ongoing work for it. Some were on payroll as employees, receiving the vacation pay and other statutory entitlements that come with that status. A meaningful number, though, had been engaged for years as independent contractors, invoicing the business rather than receiving a paycheque, with no vacation pay, no severance provision, and no employment standards protections built into how they were paid or how their work was structured.

Farid, Nasrin, and Soo-jin had never treated this as a legal question. It was simply how the business had always operated, a structure inherited from Farid's father, who had started the company and set up several of the longest-serving workers this way decades earlier because it suited everyone's tax situation at the time, and because nobody involved had ever thought to ask whether the arrangement matched what the law actually required. Nobody had revisited it since, through multiple changes in the business's size and structure.

Once the family agreed to move forward and the buyer's own advisors began due diligence, that arrangement stopped being a quiet internal matter and became the single biggest issue in the deal. If those long-term contractors were, in substance, employees, misclassified rather than genuinely independent, the business could owe years of accrued vacation pay and, on termination, severance obligations that had never been recognized on the books or budgeted for in any financial projection the family had prepared for a buyer. A buyer's diligence team does not let that pass quietly, and this one did not, raising it formally within the first weeks of its review.

For Farid in particular, the discovery landed hard. He was the one who had made the initial call to explore a sale, and he now had to explain to his sister and brother-in-law that a practice their father had set up decades earlier, one none of them had ever questioned, might be worth a substantial amount of money owed to people who had worked for the family for years.

What the law actually said

Ontario's employment standards framework does not let a business decide someone is a contractor simply by calling them one or by having them invoice rather than submit a timesheet. What actually determines classification is the substance of the working relationship: how much control the business exercises over the work, whether the worker uses their own tools and can work for others, whether they bear any real financial risk of profit or loss, and how integrated their work is into the ongoing operation of the business. When those factors point toward genuine dependence on one employer, the relationship is treated as employment regardless of what the paperwork calls it or how long that paperwork has said otherwise.

Several of the long-term workers in Farid's business fit that pattern closely. They worked set hours, used the company's equipment, took direction the way any employee would, reported to the same supervisors as payroll staff, and had done so continuously for years without any real change in how their work was structured. That combination made a genuine misclassification finding a real possibility, not a remote one, and it meant the exposure was not hypothetical, it was the kind of thing an employment standards complaint or a wrongful dismissal claim could surface at any point, sale or no sale, simply because the underlying facts had not matched the paperwork for a very long time.

For the buyer, this mattered because acquiring the business, whether by share purchase or asset purchase, meant potentially inheriting that liability along with everything else the company owned. Accrued vacation pay that should have been paid over the years does not disappear because ownership changes hands, and severance obligations owed to long-term workers, if their relationship were ever found to be employment rather than an independent contract, could be substantial precisely because of how long some of these individuals had been with the company, since length of service is one of the main factors driving the size of a severance entitlement.

The legal question, then, was not really whether the family had done something wrong years ago, and we were careful to say that plainly to Farid, Nasrin, and Soo-jin early on. It was how to quantify a real but uncertain liability and allocate it fairly between a family that had operated in good faith under a practice they inherited rather than invented, and a buyer that could not simply absorb an open-ended risk it had not priced into its offer and could not explain to its own lender.

What we did

1. Reviewed each contractor relationship individually against the factors courts and tribunals actually look at, rather than treating the group as one uniform risk, because some of the twelve workers were closer to genuine independent contractors than others, and lumping them together would have overstated the exposure for some workers and understated it for others, undermining the credibility of whatever number we eventually presented to a buyer whose own advisors would scrutinize every figure closely.
2. Engaged an employment law specialist to produce a written classification risk assessment for the workers most likely to be found misclassified, giving the family and the buyer a credible, independent basis for the numbers rather than a negotiated guess from either side that neither party's lender or advisors would have trusted, and which could easily have reopened the same dispute the family was trying to avoid.
3. Quantified accrued vacation pay and estimated severance exposure for each higher-risk worker, based on their length of service, role, and pay history, producing a specific aggregate figure the parties could actually negotiate around instead of an abstract worry that could have derailed the deal through sheer uncertainty alone, since buyers and lenders are typically far more comfortable with a defined risk than an open question they cannot bound.
4. Held a direct, calm conversation with Farid, Nasrin, and Soo-jin together about what the exposure meant and where it came from, since emotions were running high, particularly around a practice their late father had set up decades earlier, and the legal fix could not proceed until the family agreed among themselves on how to talk about it honestly with the buyer, without turning the negotiation into a dispute about their father's memory.
5. Proposed an escrow holdback tied to the quantified exposure rather than a price reduction or an open-ended indemnity, so the family did not have to accept a permanent haircut on the sale price for a risk that might never actually materialize into a claim from any of the workers involved. A price reduction would have made the family pay for a risk immediately and in full, whether or not it ever became real, while the escrow structure kept that outcome tied to whether an actual claim showed up.
6. Negotiated a defined survival period on the escrow, after which any undrawn portion would release automatically to the sellers, giving the buyer reasonable time to see whether any classification claims actually surfaced post-closing while giving the family a clear end date rather than indefinite exposure hanging over their proceeds for years after they had already moved on and put the sale behind them.
7. Recommended the business begin transitioning the highest-risk workers to proper employment status going forward, addressing the root cause rather than just the closing-day number, which also gave the buyer real comfort that the underlying practice would not simply continue unchanged under new ownership after the sale closed, and reduced the odds of a similar issue resurfacing in a future review.

The outcome

The deal closed with an escrow holdback in the low hundreds of thousands of dollars, calculated from the employment specialist's written assessment of accrued vacation pay and estimated severance exposure across the higher-risk contractor group. That figure came directly off the negotiating table as a point of ongoing dispute once both sides had an independent number to work from, rather than dueling estimates from each party's own advisors that could have dragged the negotiation out for weeks longer than the family could comfortably afford.

Farid, Nasrin, and Soo-jin did not have to accept an open-ended promise to cover future claims, and they did not have to permanently reduce the sale price either, which mattered a great deal to all three given how much of their retirement and future plans depended on the proceeds from this one transaction. The escrow structure meant that if no claims materialized during the survival period, which was the outcome all three hoped for, the withheld funds would return to them in full rather than staying with the buyer indefinitely. The family's relationship, strained briefly by the difficulty of discussing their father's old practice honestly and without defensiveness, held together through the process once the conversation moved from blame to a practical, forward-looking fix.

For the buyer, the risk that had nearly stalled the transaction during diligence was no longer an unknown. It was a defined, time-limited, and financially bounded exposure, backed by an independent professional assessment rather than the family's own assurances that everything had always been fine. The sale closed on schedule, the family kept the bulk of their proceeds, and the business moved forward with a clearer, more defensible employment structure than the one it had operated under for the previous fifteen years, one that the new owners could maintain with confidence rather than inherit as a lingering question mark.

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