Buying a Business and Employee Rights | TLR Law - Making law accessible

Buying a business and employee rights

Buying a business and employee rights

Buying a business can be an exciting and stressful experience.  First new owners must dig deep into their savings and-or remortgage their home.  Then, when they take over the business, they face a steep learning curve.  New owners step into the shoes of the selling owner, oblivious to the nuances and “personality” of the operation.

A new owner would be well advised to simply jump into the driver’s seat and stay the course.  Depending on the complexity of the business, this can range from six months to a year.  During that time, the new boss will acquaint him or herself with the business.  In addition to the operational functions, the new owner will learn about customers (which ones are good customers and which ones are bad).  He or she will also have a chance to see how employees perform in the job and how they interact with the rest of the staff.

After the initial familiarization period, the new owner will likely want to implement change.  We know that some people adapt to change better than others.  In certain situations, employees refuse to adapt. Or, the new owner will realize that while certain employees function well in their specific capacity, they do not work well with others.  In these situations, a new owner will have little choice, but to terminate employment.  While necessary, these are never pleasant experiences.

While not easy, so far, this sounds pretty straightforward, right?

Not so fast! 

Before the new owner terminates anyone’s employment, he or she should first determine the cost of doing so.  In Canada, the Supreme Court determined that employer-employee relationships are contractual in nature.  You can read more about the basics of employment contracts here.

Essentially, unless a written contract exists where an employee agreed (in writing) that the employer can terminate the contract without giving notice (subject to the labour code minimum notice periods), an employer must give sufficient notice of termination.  The notice period is determined by using several factors which include: employee age, seniority, position in company, and education level.  While each case is fact dependant, as a rule of thumb, an employee is entitled to 2 to 4 weeks notice for each year of service.

Example

Take the following scenario.  An employee is 50 years old.  He started with he company when he was 25 as a stock picker in the warehouse.  At the time of employment, he had only completed grade 11. Throughout the years, that employee worked his way up the company to the position of production manager with a staff of 12 working under him.  Unless written contract states otherwise, that person would be entitled to the upper end of the notice period.  Because of his age, seniority, education, and level of responsibility in the company, he would be entitled to the higher end of the notice period.  In this case, he would likely be entitled to close to 4 weeks of notice per year of service.  If you do the math, he is entitled to 100 weeks, or about two years.

If that person’s salary is $75,000 a year, an employer would have to give this employee either two years notice that his employment will end or pay him $150,000 in lieu of notice.

Back to our original scenario

The new owner realizes that certain employees must go, some of which have been with the company for a long time. After reading an article about notice periods, the new owner pauses to consider the impact on the bottom line.  But then the new owner asks: why would I be responsible for the seniority built up under previous ownership?  After all, the purchase agreement specifically stated that the previous owners terminated all of the employees while I re-hired them.  Wouldn’t seniority “reset”?

The short answer is no.  It doesn’t reset.  A new owner inherits employee seniority.  This can be a significant liability.  Terminating someone (who really should be fired) can be costly.  New owners can rarely afford this, especially considered the leveraged position they put themselves in to acquire the business in the first place.  Every bit of profit is needed to service the debt.

Options

In a case in Ontario, a judge concluded that an employee was entitled to his entire seniority.  In Ontario, the right to seniority is created by the Employment Standards Act which states that an employee retains his or her seniority when a business is sold and bought – the Manitoba Employment Code does not have a similar provision.  However, the same principle exists at common law, which applies across the country.

However, in the Ontario case, the judge stated the following in her decision:  In the absence of notice from [new employer] that [employee] would not be credited for his years of service with [old employer], recognition of that service is deemed to be part of [employee’s] contract of employment”.

In the Ontario case, the judge seems to suggest that a new employer could give proper notice that employees would not be given any notice going forward, or that their notice periods would be limited to the new owner’s ownership of the business.  Presumably, employees would then be entitled to notice for their employment to date, which would trigger liability.  While that case is specific to Ontario, that same principle should apply at common law in Manitoba.  If, at the time of possession, the vendor gives notice to employees that they are terminated and the purchasing owner clearly advises employees that their seniority is reset, that would likely be sufficient provided their loss of seniority is properly compensated. In this situation, the vendor would be responsible for payment in lieu of notice, as they are the one terminating.

Conclusion

The cost of paying out the notice period could (or should) be negotiated with the vendor at the time a potential buyer negotiates  the contract to buy and sell the business.  In any event, if someone buys a business with employees, they inherit all of the liability associated with those employees.  This is an often ignored fact when buying and selling.

Philippe Richer is President of TLR Law Group. TLR has been located in the St. Boniface neighbourhood, in Winnipeg, since 1996. The office serves the middle class and small business within the province. With a focus on estates, wills, real estate, and corporate law, he leads his team in providing accessible legal services. Philippe also authored the business law course for the Knowledge Bureau and instructed the français juridique class at the faculty of Law at the University of Manitoba.



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