Employment and Labour Considerations in Business Transactions – Part II: Typical Labour and Employment Issues

Those who plan, structure and execute business transactions, and those with HR and Labour Relations responsibilities in the organization, must identify and understand the employment and labour issues, take appropriate steps to ensure the objectives of the transaction are met, and avoid unintended consequences. In our previous issue of the LEQ, we looked at the importance of gaining an early and complete understanding of the proposed transaction. Here in Part II, we provide a summary guide to the labour and employment issues that typically arise.

1) Terms of employment

You need full information about all terms and conditions of employment:  the statutory and common law requirements, written terms in employment contracts, collective agreements, and policies.

2) Collective bargaining obligations

Review all collective agreements for provisions relevant to the transaction. Some collective agreements even have obligations that are triggered by a sale of shares.

Certifications granted by labour relations boards and scope clauses of collective agreements have to be reviewed to understand the full scope of collective bargaining obligations that may affect the transaction.

Review the expiry date of collective agreements and consider if the bargaining cycle could affect, or may be affected by, the proposed transaction.

Advance notice to unions of a proposed transaction, and negotiation of an adjustment plan, may be required by statute or a collective agreement. This can affect the timing of a transaction and other disclosure obligations a party may have. Even without such an obligation, the parties should consider how and when to inform the union of the proposed transaction.

3) Union and non-union successorship

Most asset purchase transactions will trigger successorship under labour law, i.e., the buyer of the business will become bound to the certifications, collective agreements and ongoing labour disputes of the seller. That requires a full review of the current state of labour relations, collective bargaining, and grievances.

Less well-known is the concept of non-union successorship. Employment standards legislation generally deems employment to be continuous when a business is sold and the employees continue in employment with the buyer. In such cases, the seller will not have termination obligations, but the buyer takes the employees with accrued seniority and other rights. Each jurisdiction is different, so the applicable statute must be considered.

The common law also has a form of successorship by presuming the buyer hires employees from the seller with the employees’ accrued length of service for things like benefits, vacation and future termination.

4) Offers of employment

When and how offers of employment are made by a purchaser will depend on many factors, including applicable legislation, the state of the transaction negotiations, restrictions on disclosure, getting set up to take over the employees, and the desired human resources outcome. To whom offers are to be made, and on what terms, is governed by the terms of the deal. A purchaser has to be sure it can meet an obligation to offer employment on “the same” or “substantially similar terms” if required by the agreement.

5) Terminations

The full cost of terminations, and who will bear that cost, must be considered. The liability will flow from specific employment contract provisions, the common law and statute.

Common law obligations for reasonable notice of termination will require gathering and reviewing information about the affected employees; in particular, their age, length of service, character of employment, and availability of suitable alternative employment.

All employment standards statutes in Canada provide for a minimum amount of notice or compensation in lieu of notice to be provided. Some statutes also require severance pay.

Employment standards statutes also have provisions for the termination of large numbers of employees in a short period of time. The numerical and timing triggers for group termination provisions, and how they might apply to a group of related entities, have to be reviewed in each jurisdiction.

6) Employees not actively at work

There may be a large number of employees who are not actively at work when the transaction is closed. Employees may be away from work for any number of reasons – statutory leaves such as maternity or parental leave, disability, leaves of absence – and with varying degrees of certainty about their return to work.

This can be a problem for both the buyer and seller:  the seller wants all employees of the business to be hired by the buyer; the buyer does not want liability for employees who may not return to work any time soon. Meanwhile, both buyer and seller have to recognize the rights and interests of the employees. An employee on leave from work may be protected by human rights legislation, and benefits could be adversely affected by the transaction.

7) Employment/labour litigation

A comprehensive review of all current, pending and threatened employment and labour claims is important. It will help to identify prospective liability and can help to guide negotiations on price and price adjustments, holdbacks, indemnities, and the handling of claims after closing. It will also help to provide a general sense of the human resource and labour relations climate in the organization and identify corrective actions that are necessary.

8) Pensions and benefits

An early understanding of the pension and benefits plans that each party has will assist negotiations on issues such as the buyer’s obligation to offer comparable employment to the seller’s employees. Before committing to offering employment on the “same” or “substantially similar” terms of employment, it is necessary to understand the details of the pension and benefits plans and determine what can be offered and how soon.

Pension statutes and related income tax laws, at the very least, may impose registration requirements with strict time limits.

Some time, effort and expense will be required to ensure a defined benefit pension plan is fully and properly funded.

9) Workers’ compensation

Provincial and Territorial statutes governing compensation for workplace injury and illness will apply to almost all employees in Canada. These mandatory insurance schemes use different methodologies, but generally assess employers based on the nature of the industry and the employer’s safety record.

A transaction may involve combining or separating businesses with different assessment rates in the same province or territory. An early review of the assessment rates and safety records of the employers involved is required to see if there is an opportunity for a lower assessment rate, or a risk of a higher assessment rate.

10) Employment Insurance, Canada Pension Plan

An often overlooked but sometimes significant issue is the effect of a transaction on an employer’s Employment Insurance and Canada Pension Plan contributions. Such contributions are subject to a yearly maximum and many employers reach that maximum long before the end of the year. However, depending on the nature of the transaction, a new employer may have to restart contributions. Early identification of the issue may allow for changes to the timing or structure of the transaction to minimize or eliminate the extra liability.

11. Immigration

Employees of a party who need to come to Canada to negotiate the transaction or conduct due diligence, may be able to enter as business visitors, but on certain conditions. Others may not qualify for business visitor status and may need to obtain a special visa before arriving.

If the transaction will involve hiring an employee on a work permit, application must be made to vary the work permit to show the name of the new employer. In some cases, a labour market opinion will be required. Any offer of employment should be conditional on obtaining the new work permit.