Dealing with Employees During the Sale of a Business 



August 10, 2007 - (Employment & Labour Brief)

Employment & Labour Brief

The responsibilities and liabilities with respect to employees are often issues in the sale of a business, particularly in an asset sale. The liabilities can be substantial and must be understood in structuring the transaction. The recent decision of the British Columbia Employment Standards Tribunal (the "Tribunal") in Nanaimo Seniors Village Partner­ship ("Nanaimo") and Well-Being Senior Services Ltd. ("Well-Being")1 illustrates the problem and clarifies the jurisprudence on section 97 of the Employment Standards Act (B.C.)(the "ESA"), which provides:

Sale of business or assets

Section 97. If all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.

This matter arose out of Nanaimo's attempts to reduce its labour costs for several of its seniors' homes by contracting out certain health care ser­vices. These attempts also became the subject of unfair labour practice complaints before the Labour Relations Board.

Initially, Nanaimo (a related company) created a separate entity, Well-Being, and transferred its employees to that related entity. However, in order to properly effect the contracting out it was determined that Nanaimo had to contract out the labour services to an arm's-length contractor. The plan was for Well-Being to terminate its employees and to persuade the new contractor to hire all or most of them.

An initial contractor was identified and Well-Being provided its employees with letters advising them that their employment would be terminated and that the new employer would contact them to discuss employment terms. It was made clear in the correspondence that Well-Being and/or Nanaimo would use their best efforts to convince the new employer to hire the Well-Being employees. There was no guarantee of employment for the 61 full-time and 51 casual employees.

An agreement was reached with a new service provider, CareSource, that would see the company commence its contract with Nanaimo on the specified date, September 9, 2004. CareSource interviewed all of the Well-Being employees and decided to hire all but nine of them. Well-Being carried out what appeared to be its initial intention and terminated all of its employees and provided them with records of employment. The former Well-Being employees hired by CareSource all signed new contracts of employment, made as of September 9th.

A group of employees filed a complaint with the Employ­ment Standards Branch alleging that Well-Being and Nanaimo had not complied with the group termination provisions (there being more than 50 employees) in s. 64 of the ESA, which provides for mandatory additional notice or pay in lieu.

The Director of the Employment Standards Branch, who made the initial decision in this matter, had to determine whether the Well-Being employees were terminated or whether their employment continued with CareSource uninterrupted by operation of ESA s. 97. The Director found that the service contract between Well-Being and Nanaimo was terminated on Sep­tember 9, 2004 at 6:30 a.m. (as provided by the agreement), and that none of the Well-Being employees became employed by CareSource before 7:00 a.m. on September 9th. The Director concluded, therefore, that at the time CareSource acquired the business at 7:00 a.m. on Sep­tember 9th, there were no Well-Being employees. As a result of that factual finding, the Director determined that the group termination provisions of the ESA applied and each terminated employee was entitled to the additional eight weeks provided by s. 64. This liability, which also triggered additional vacation pay, interest and an administrative penalty, totalled approximately $730,000. This sum was found to be payable by the vendors, Well-Being and Nanaimo. Of note, the notice required under s. 64, or pay in lieu of that notice, was not reduced by virtue of subsequent employment, that is, it was not subject to any mitigation principle.

An appeal from this ruling was taken to the Employment Standards Tribunal. The main issue was the applicability of s. 97 of the ESA, which provides for continuity of employment in the event of the sale of a business. Although there were factual issues raised concerning the meaning of the letters provided by Well-Being to its employees, and whether or not these notices were legally sufficient to terminate them, the main submission of the appellant, Nanaimo, was that the letters were not determinative of the applicability of s. 97. Nanaimo argued that what was determinative was that the employment of the Well-Being employees was virtually seamless in their transfer to CareSource, and because there was no gap in the actual working situation of those employees (except for the nine that were not hired), that s. 97 applied, and there was no reason to give group termination notice. Nanaimo further argued that by not applying s. 97, the vast majority of employees who did continue in employment would receive a windfall.

In this decision the Tribunal member reviewed a substantial part of the Tribunal and judicial jurisprudence with respect to s. 97. Indeed, some of that jurisprudence included cases where it had previously been determined that the termination of employees by the vendor, or the issuance of a record of employment, had no effect on the application of s. 97 as long as the employment was continuous. The Tribunal rejected that approach and followed the line of cases that establish the two requirements for the application of s. 97:

  1. (a)  that all or part of a business; or
    (b) a substantial part of the en­tire assets of the business is disposed of; and
  2. there be employees employed by the business at the time of transfer.

In this case, because the em­ploy­ees were actually terminated prior to the actual transfer of the business, s. 97 did not apply to deem their employment continuous and triggered the group termination provisions.

As stated by the Tribunal, the test provides certainty in the disposition of a business. Prospective vendors will know that if they intend on terminating their employees, they will be responsible for giving the regular notice or pay in lieu under the ESA (s. 63) and, if applicable, the group termination notice under s. 64. If parties in negotiating the commercial terms of the sale or disposition of the business determine that the purchaser will inherit all of the accrued obligations of the employees, then it is important that the vendor does not actually terminate its employees. The considerations as to whether or not to terminate the employees in the event of the sale of a business are a matter for negotiation between the vendor and the purchaser and will depend in large part on the purchaser's requirements or desire to take on the vendor's employees. All of these matters will be taken into account in determining the price that the respective parties will accept or pay.

  1. Decision No. D010/07 January 23, 2007, upheld on reconsideration on May 14, 2007.
  2. This decision was upheld by a Reconsideration Panel on May 14, 2007. As of the date of publication, we do not have any advice that a party has sought judicial review.