What employment red flags should I look for when buying a business?

An employment red flag is a gap between what the seller says about the workforce and what the records show. Employment standards are provincial, so the details differ, but each of the signs below can be tested against a document rather than taken on trust. The employment records checklist lists what to request.

Payroll deductions that do not reconcile

Employers deduct and remit payroll amounts to the Canada Revenue Agency, and the CRA’s remittance pages describe how to correct under-remitted deductions and link to its trust account examinations. Ask for the CRA statements of account and compare them with the payroll registers. A shortfall is an unresolved tax problem, and your advisors can tell you whether it would stay with the seller in your structure.

A workers’ compensation account that is not in good standing

WorkSafeBC says that if a seller owes premiums, the firm’s assets may be subject to a lien, and that a clearance letter protects a buyer against it. Alberta’s WCB says a buyer has a responsibility to get a clearance when buying a business, its stock or equipment. Other provinces have their own boards and rules. A seller who stalls on a clearance request deserves a follow-up question.

Long service and unrecorded entitlements

In British Columbia, employment is treated as continuous across a sale, and a purchaser that later terminates staff is responsible for compensation for length of service and outstanding wages, including vacation pay, calculated from the original hire date. Long-serving employees with no written terms, missing hire dates, or vacation balances that appear nowhere on the books are the usual warning signs. Check how your province treats continuity of service.

Terminations timed around the sale

In British Columbia the answer turns on whether an employee was still employed when the business was disposed of. Where the seller terminated staff beforehand, outstanding wages and compensation are the seller’s responsibility. A cluster of departures just before closing is worth asking about: who left, why, and what each person was paid. Pay in cash is a separate warning, covered in What if staff have been paid off the books?