How do key employee retention agreements work in a business sale?

A key employee retention agreement is a contract that offers a person the business depends on something in return for staying through the sale and, if the parties agree, a period after it. The employment-standards statutes cited on this page do not define or require such an agreement. Its terms come from what the parties write, and the statutes set limits around it. If the employee is not a party to the purchase agreement, ask a lawyer how a retention term will be made binding on them and enforceable by them.

Questions the agreement has to answer

• Who is paying: the seller, the buyer, or the business, and from what funds.
• What the employee must do to earn it: stay to closing, stay for a set period afterward, or reach stated handover tasks.
• What happens if the buyer ends the employment or changes the job before the period is over.
• Whether the agreement binds the employee if the sale does not close.

What employment-standards law already gives the employee

A retention agreement sits on top of the minimums, not in place of them: Ontario’s ESA, s.5(1), says contracting out of or waiving an employment standard is void, subject to s.5(2) on greater contractual benefits. In Ontario, ESA s.9(1) deems employment not terminated or severed, for the purposes of the Act, when a purchaser employs a seller’s employee, and counts service with the seller toward later calculations of length of employment, subject to the exception in s.9(2). Alberta’s Employment Standards Code, s.5, deems employment continuous and uninterrupted, for the purposes of the Code, when a business, undertaking or other activity or part of it is sold, leased, transferred or merged, and s.4 says an agreement that the Code or a provision of it does not apply, or that its remedies are not to be available for an employee, is against public policy and void. BC’s s.97 has its own continuity rule.

The Ontario non-compete limit

Ontario’s ESA, s.67.2, says no employer shall enter into an employment contract or other agreement with an employee that includes a non-compete agreement, and if an employer contravenes that, the non-compete agreement is void. There are exceptions. One covers a sale of a business where, as part of the sale, the purchaser and seller agree that the seller will not compete with the purchaser’s business after the sale and, immediately following the sale, the seller becomes an employee of the purchaser. Another covers an employee who is an executive, as the section defines that term. A retention package for an ordinary key employee in Ontario should not assume a non-compete will hold. Other provinces differ, so ask a lawyer before drafting.

When to put it in place

If the buyer wants specific people signed up, the purchase agreement can make signed retention or employment agreements a closing condition. That step is the buyer’s to ask for and the seller’s to plan around, so raise it before the agreement is signed, not in the last week.