Can employment contracts be a closing condition in a business sale?

A closing condition is something that must be true, or be done, before a party is required to close. The parties write it into the purchase agreement, so a condition that key employees sign new employment contracts is a term the parties negotiate. A seller’s first job is to learn what the law already does to those employees in the sale. The LOI to closing page shows where such conditions sit in the timeline.

What the statutes already do

Ontario’s Employment Standards Act, 2000 says that if an employer sells a business or part of one and the purchaser employs an employee of the seller, the employment is deemed not to have been terminated or severed for the purposes of that Act, unless the purchaser hires the employee more than 13 weeks after the earlier of the employee’s last day with the seller and the day of the sale (s.9(2)). Alberta’s Employment Standards Code deems employment continuous and uninterrupted when a business, undertaking or other activity, or part of it, is sold, leased, transferred or merged. British Columbia’s Employment Standards Act has a similar rule for a business that is disposed of. Each rule is stated to apply for the purposes of that employment standards statute.

Quebec and British Columbia guidance

The CNESST, Quebec’s labour standards body, says that when a company changes owner the staff’s employment relationship is maintained as if no change had occurred, and that the new owner must demonstrate the continuity of the company’s operation for this to apply. British Columbia’s Employment Standards Branch says that when a purchaser buys a business from an employer who owes wages, one of the terms of the sale may be that the seller terminates the employees or pays all outstanding wages. A condition about employment can therefore be written alongside these rules, and the sources show that the rules differ by province.

If you will work for the buyer

Some sellers stay on as employees. Ontario’s Act prohibits an employer from entering into a non-compete agreement with an employee, subject to exceptions in s.67.2. Section 67.2(3) says that prohibition does not apply to an agreement made in a sale of a business or part of one, where, as part of the sale, the purchaser and seller agree the seller will not compete with the purchaser’s business after the sale and, immediately following the sale, the seller becomes the purchaser’s employee. If a condition ties your own new employment contract to a non-compete, ask a lawyer how your province’s rules apply, because each province runs its own regime.

• Ask which employees the buyer wants under contract, and by what date.
• Ask whether the condition is for the buyer’s benefit only, and whether the buyer can waive it.
• Confirm what happens to your deposit or timeline if an employee refuses to sign.