When businesses change ownership, employees are usually just happy to hear that they aren’t immediately losing their jobs. However, change of ownership can have far reaching consequences on an employee’s severance entitlements.
There are two methods in which a business can change hands:
- If the company is established as a corporation, the shares can be sold to a new person who will then take ownership; or
- The company can sell its assets to a new buyer.
When a company changes ownership through the sale of shares, the existing employees will automatically become employees of the new company. A share purchase means that the employer does not change – all that changes is who owns the company. It is the same cause and effect for unionized or unionized employees.
Alternatively, if the company changes hands via an asset sale, all employees’ tenure ends on the date the sale is finalized. This is because the purchaser has acquired all assets from the previous owner, however, employees are not commodities, and cannot be bought or sold.
Unless there has been an alternative arrangement, such as a condition of the sale that all employees will be retained under new ownership, the purchaser becomes liable for severance entitlement to all employees who will stand to lose their positions as a result of the sale. This can be avoided however if the purchaser expressly advises the employees that their service with the prior owner will not be recognized.
The Courts of British Columbia have taken steps to safeguard employees by providing procedures that ensure fairness if an employee is dismissed and becomes entitled to severance.
- When a purchaser acquires a business via shares, there is an implied term of the contract between the new purchaser and the existing employees continuing service of the business. This means that the employees will be given credit for the years that they have already been employed by the company, including salaries, notice of termination, and bonus entitlements;
- The implied term may be voided by an express term that provides a contrary position. This means that the purchaser can advise the employees that their past
service will not be recognized. When this happens, the employees have the option of either entering into a contract that takes their length of service back to day 1, or
they can choose to decline the offer of employment from the purchasing company, and instead sue the vendor for damages in lieu of notice, and wrongful dismissal.
For employees, if you learn your employer’s business is being sold, do not sign any termination letter or severance offer until you receive advice from an employment lawyer. You should also try to determine whether you are being offered employment by the purchaser before seeking legal advice.
For employers, well before the closing date of the sale of the business, consider whether existing employees of the business will be offered continued employment after the sale. Specific consideration should be given to whether the vendor or purchaser will assume liabilities for severance, and this should be accounted for in a purchase and sale agreement. Vendors should also consider whether working notice should be given to employee in advance of the sale/closing date to reduce severance liabilities.