What Happens to Employee Seniority on Sale of Business

Your company just announced that it has been sold. What happens to the seniority of all the employees who stay with the new owner? If the new owner decides to lay off one of them later, does he get severance based on the entire time he has worked for the business or only the time worked for the new owner?

Even small business owners need to know the answers to avoid being hit with unexpected liabilities, as the British Columbia Supreme Court case of Perkins v. Shuen demonstrates. In that case, the plaintiff started working as a dental assistant for Dr. Armstrong in 1981. Her duties expanded and became more administrative. She eventually assumed responsibility for supervising the small office staff and was instrumental in retaining patients when Dr. Armstrong fell ill. Eventually, he sold his practice to two other dentists, Drs. Schuen and Ling. Under the agreement of sale, Dr. Armstrong was required to give all staff notice of termination and he did discuss it briefly with the plaintiff. She continued with her regular duties with no change in pay but reduced vacation when the new owners took over.

Six months later, Drs. Schuen and Ling decided to terminate the plaintiff’s employment, offering her two weeks’ severance. Ms. Perkins sued for wrongful dismissal. The judge applied principles established in prior case law, ruling that absent clear notice or agreement to the contrary at the time she was hired by the defendants, the plaintiff was entitled to severance based on her entire time worked at the practice. The fact that she had received some advance notice of termination from Dr. Armstrong did not change or reduce that entitlement, nor did the judge accept the defendants’ arguments they had only bought selected assets, not a “going concern.” In conclusion, he awarded the plaintiff 12 months of severance (26 times the amount originally offered!) as compensation for the “reasonable notice” the defendants were required to provide under common law, an amount based in large part on her over 23 years of service with Dr. Armstrong.

At trial, the defendants sought to have Dr. Armstrong held liable to pay a portion of the severance cost but the indemnity clause in the purchase agreement only required him to do so if the employee was terminated within 90 days of closing. Since the defendants terminated the plaintiff after that time limit, Dr. Armstrong was held not to be liable to pay any of the award.

The Employment Standards Act (ESA) contains strong protections for employees on the sale or transfer of a business. The purchaser must recognize the prior service for all purposes under the ESA including vacation entitlements and notice/severance on termination. In addition, the purchaser can be liable for wages earned under the previous owner such as banked overtime or earned but unpaid commissions.

The ESA expressly bars any attempt by employers to “contract out” of this rule. By contrast, under the common law, the courts allow purchasers to agree with employees acquired with a business that their prior service will not be recognized except as mandated by the ESA. The most important aspect to this “freedom of contract” is the ability to tell the employees their service with the prior owner will not be recognized when giving the “reasonable notice” required by common law. Of course, purchasers need to carefully consider the practical implications of not recognizing prior service. Employees may be upset, some may decide not to take the job or start looking for another job. Others may refuse to sign or acknowledge such a term. Some vendors require the purchaser to recognize employees’ prior service as a term of the sale.

Purchasers who do want to limit their common law liability can do so by:

• advising continuing employees before or at the time of offering a job with the purchaser (e.g. by inserting a clause in a letter offering employment) that their prior service will not be recognized for common law reasonable notice purposes and in any other context permissible under the ESA (e.g. a waiting period to participate in benefit plans); or
• having the employees sign a comprehensive employment agreement that defines and limits severance to an acceptable amount or formula (that still complies with the ESA by recognizing prior service to the extent mandated by the ESA – approximately one week per year to a maximum of eight except “mass layoff” situations). For example, for an employee with seven years’ service must be offered a termination clause which pays at least seven weeks’ severance from the first day of work. Also, a probation clause will not be effective with continuing employees either, since its purposes are to allow the employer to terminate without any notice of severance.

This is just another reason why it makes sense to use employment agreements. They are particularly valuable when hiring employees as part of a business acquisition.

Alternatively, if purchasers do not want to upset newly hired employees by refusing to recognize their prior service, they should try to negotiate clauses in their purchase agreements that effectively allow them to shift some of potential severance liability to the vendor for an initial period, by way of an indemnity clause or securing the right to deduct severance from an unpaid portion of the purchase price. As Perkins v. Shuen demonstrates, it may be prudent to secure at least 6 months to properly assess the suitability of the employee and the purchaser’s need for the employee’s continuing services.

Note that this information applies to non-union environments. There may be additional considerations with respect to handling employee seniority upon sale of a business in a union environment.

The following series of questions address other issues typically faced by both employees and employers following the sale of an ongoing business.

Q: What wages is the purchasing employer responsible for after the sale of the business?

A: The purchasing employer is responsible for an employee’s wages on the date the business was taken over. Wages that have not been paid by the vendor, such as accrued vacation pay and banked overtime, become the responsibility of the purchasing employer.

Q: What is the impact of an employee’s length of service at the place of business on the purchasing employer’s calculation of wages?

A: If employees continue working for the business with the new employer, that employer is required to recognize employees’ length of service with the previous ownership when calculating minimum entitlements such as vacation pay and compensation for length of service. The new employer must consider the date the employee commenced work at the place of business, not the new purchase date. For more information, visit the Government’s Interpretation Manual – Section 97 – Sale of a Business.

Q: How are employees on leave treated when a business is purchased?

A: Employees who are on leave, paid or unpaid, at the time of the sale, transfer, or disposal of the business are still considered to be employees. They must be treated in the same way as employees who are working.

Reprinted with permission. “What Happens to Employee Seniority on Sale of Business” by J. Geoffrey Howard, from Business in Vancouver, where he writes a column.

Additional information provided by Ryan Anderson and Cameron Wardell, employment lawyers with Mathews Dinsdale & Clark LLP. The information provided in this article is necessarily of a general nature and must not be regarded as legal advice. For more information about Mathews Dinsdale & Clark LLP, please visit mathewsdinsdale.com.