Employment Law Considerations When Selling Your Business

For many, the prospect of retirement is a welcome thought. Perhaps you will finally have more time to spend with your spouse, children, or grandchildren. For others, retirement is an opportunity to catch up on golf, travelling, or just plain doing nothing.

For many business owners, including professionals such as doctors, lawyers, and accountants, the means by which to finance such a retirement have often come by way of a sale of one’s business or practice. A book of business can have incredible value to a willing purchaser and certainly our firm has helped several professionals successfully sell their business.

While my colleagues in Kelly Santini LLP's business law group would be more than happy to be of service to you with respects to the legalities of such a sale, the purpose of this post is to consider the employment law considerations of selling a business; because, in addition to being a successful business owner and professional, most such individuals are also employers.

Something that most business owners fail to appreciate is that, while, for all the years that one’s loyal staff has been an asset, for potential purchasers, long-service employees can be an costly liability.

For employment-law considerations when buying a business, consider the post:
Continuity of Employment Following the Sale of a Business

This post will look at:

1. What business owners / employers need to know about the right to end employment;
2. What business owners / employers need to know about written employment contracts; and
3. What business owners / employers need to know about human rights legislation in the employment context.

What business owners / employers need to know about the right to end employment

There are three fundamental things business owners / employers need to know about their right to end their staff’s employment:

1. In most cases, the employer does not need a reason or just cause to end the employment relationship;
2. Not all employees are entitled to a severance payment; and
3. What employees are entitled to depends.

The employer does not need a reason to end the employment relationship.

A common misconception among both employers and employees is that employers need a reason and/or legal just cause to end the employment relationship. There are a few points to unpack from that statement.

The first point is that there is a difference between having a reason to fire someone and having legal just cause. Legal just cause is a legal concept meaning that the employer is legally justified in firing someone without providing that employee without any form of notice, pay in lieu of notice or severance. Not all reasons for firing someone are legal just cause. For example, a common reason business owners let staff go is because the employee’s services are no longer necessary in the business – that is not legal just cause.

The second point is that outside of the unionized work environment, employers that are regulated by provincial legislation – that is to say, employers who are not regulated by federal legislation – do not need a reason to end the employment relationship. (If you are unsure whether you are provincially regulated or federally regulated it may be prudent to seek a legal opinion on that issue.) Most independent business owners in Ontario will fit into this category. Provided that the employer does not terminate the employee for an ‘illegal’ reason – more on that later – all the employer is obligated to do is (a) be honest, fair and courteous with the employee on dismissal; (b) provide the employee with notice of his or her termination from employment or a payment in lieu thereof; (c) maintain the employee’s non-salary benefits during that notice period; and (d) provide the employee with severance pay, if the employee is eligible.

Not all employees are entitled to a severance payment.

As was covered in a previous blog post (Not All Employees are Entitled to Severance ) a second common misconception is that every employee who gets fired in Ontario is entitled to a severance payment. The reality is that simply is not true.

Unlike “notice of termination,” to which all but a few enumerated employees are entitled (for the list of those exempted by the Ontario Employment Standards Act, 2000 from receiving notice of termination see section 2 of Ontario Regulation 288/01) only those employees who meet the eligibility criteria established by section 64 of the Ontario Employment Standards Act, 2000 are entitled to receive a severance payment.

Section 64 of the ESA prescribes under what circumstances an employer must provide “severance” to an employee:

(1) An employer who severs an employment relationship with an employee shall pay severance pay to the employee if the employee was employed by the employer for five years or more and,

(a) the severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result; or

(b) the employer has a payroll of $2.5 million or more. 2000, c. 41, s. 64 (1).

(2) For the purposes of subsection (1), an employer shall be considered to have a payroll of $2.5 million or more if,

(a) the total wages earned by all of the employer’s employees in the four weeks that ended with the last day of the last pay period completed prior to the severance of an employee’s employment, when multiplied by 13, was $2.5 million or more; or

(b) the total wages earned by all of the employer’s employees in the last or second-last fiscal year of the employer prior to the severance of an employee’s employment was $2.5 million or more.

While certain enumerated employees are exempted from receiving statutory severance (see section 9 of Ontario Regulation 288/01), for all other employees meeting the statutory criteria, severance must be paid on termination.

For most small business owners, unless their staff are exceptionally well paid, the requirement that the employer’s total annual payroll exceed $2.5 million means that the staff will not be entitled to a severance payment.

For employers unsure whether they are obligated to pay severance, it would be prudent to seek a professional legal opinion.

What employees are entitled to on termination depends

Ending an employment relationship can be costly. For that reason many potential purchasers of a business can be wary of continuing the employment of existing staff. It may be important for business owners / employers to appreciate that pursuant to section 9(1) of the Employment Standards Act, 2000:

If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

What that means is if a purchaser continues an employee’s employment after the close of the sale, the purchaser is legally deemed to have been the employee’s employer for the entire time the employee has worked for the business. This fact is critical when one considers the costs of terminating employment.

As is explained more fully on our page, What is Wrongful Dismissal? an employee’s entitlements on termination will vary greatly. While interested readers are encouraged to review that page in its entirety, here are some of the important highlights of which employers need to be aware:

1. Unless an employee specifically agrees, in writing, in a legally-binding employment agreement to only accept the minimum amount of termination pay prescribed by the Employment Standards Act, 2000, the employee will be entitled to “reasonable notice.”
2. What is “reasonable” to a judge may not be reasonable to you. It is not unheard of for judges to award dismissed employees upwards of two years of reasonable notice - or more.
3. There is no such legal construct as one-month by year of notice. (For example, I acted for an employee who worked for his employer for 51 weeks and was awarded four months of reasonable notice. For a summary of that case see ONSC Awards Four Months Notice to Employee With Less Than One Year of Service )
4. The amount of reasonable notice to which a dismissed employee is entitled is a function of a number of factors. The factors most frequently recognized by Ontario courts (See Bardal v. Globe & Mail, [1960] OWN 253 (HCJ)) as being determinative of the issue are: the employee’s age; the length of time that the employee spent with the employer; the character of the employee's employment (i.e. the position held); and the availability of similar employment.
5. No one factor is dispositive of the issue and there is no mathematical formula for calculating notice entitlements.

What business owners / employers need to know about written employment contracts

As one can see from the above, without a written employment agreement an employee’s legal entitlement can grow. Perhaps even more disconcerting is that rather than the certainty that comes from a written agreement, an employee’s entitlements are left to a judge’s determination of what is “reasonable.” The debate about what is “reasonable” is the hallmark of every wrongful dismissal case, which can be an expensive exercise in its own right.

Accordingly, most employers attempt to limit, or at least fix, their severance obligations by using written employment agreements.

While using written employment agreements is advisable, such agreements bring with them their own challenges.

First, the agreement itself must be legal. While that statement may seem obvious, it is actually more difficult than it may seem to draft a legally binding employment agreement. Section 5 of the Employment Standards Act, 2000 provides that:

(1) Subject to subsection (2), no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.

(2) If one or more provisions in an employment contract or in another Act that directly relate to the same subject matter as an employment standard provide a greater benefit to an employee than the employment standard, the provision or provisions in the contract or Act apply and the employment standard does not apply.

Legally, what section 5 means is that unless the employment agreement complies with all the requirements of the Employment Standards Act, 2000, the agreement is not legally binding or enforceable as against the employee– even if the employee has signed it.

Second, a basic principle of contract law is that both sides must receive some form of legal “consideration” for contracting. Case law has established that continued employment with one’s employer will generally not be accepted a valid legal consideration. As is explained more fully in the post No Changes without Consideration, what this means for business owner / employers is that they cannot simply slide a new employment agreement under their employee’s noses the day before closing and expect the contract to be enforced when required. A prudent and well-advised purchaser will know this, meaning that business owners need to think ahead.

How far ahead do business owners need to think? The answer to that question will vary depending on what kind of staff an employer has and how long the staff have been employed. Ideally at least one year before closing would be appreciated. The short answer is: longer the runway, the better!

Experience has shown that business owners who have used written employment agreements with their employees typically experience fewer employment law concerns on closing. Thus, while there is a cost to purchasing employment agreements, that cost is usually much, much lower than the costs associated with not having such agreements.

What business owners / employers need to know about human rights legislation in the employment context

Finally, this post would be remiss if it did not touch on the issue of human rights legislation in employment. Pursuant to section 5 of the Ontario Human Rights Code:

Every person has a right to equal treatment with respect to employment without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, gender identity, gender expression, age, record of offences, marital status, family status or disability.

For business owners / employers considering selling their businesses, where this issue most frequently arises is with respect to age discrimination. Under Ontario law, there is no mandatory retirement age for most professions. What that means is that employers cannot let or ask an employee to go simply because the employee has attained the age of 65, or 72, or any other age. In fact, doing so may expose the employer to a human rights claim – and those can be very expensive.

And, while human rights violations are among the most common offence employment lawyers see in termination, there are a number of other prohibited, or ‘illegal’ reasons for terminating an employee’s employment. Before terminating any employee it is always prudent to speak with an experienced employment lawyer.

Takeaways

This post, while long, is still overly simplistic of the employment law issues related to selling one’s business or practice. The important takeaways from this post are that: (a) it is always prudent to seek experienced, professional legal advice before acting; (b) the time to seek that advice is earlier rather than later.

If you are a business owner in Ontario and if you are considering selling your business, winding up your practice, or otherwise ending your status as an employer, the professional, experienced and cost-effective employment lawyers for employers at Ottawa's Kelly Santini LLP would be happy to be of service to your business or organization.

To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260.

--

As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

Sean Bawden, publisher of Labour Pains, can be reached by email at sbawden@kellysantini.com or by phone at 613.238.6321.

Sean P. Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Kelly Santini LLP. He is also a part-time professor at Algonquin College teaching Trial Advocacy for Paralegals and Small Claims Court Practice.