What is the employee classification risk when buying a business?

Classification risk is the chance that workers a seller calls contractors are, in law, employees. For a buyer, the practical question is who carries the cost if the label turns out to be wrong, and whether continuing the same arrangement makes the buyer the one treating employees as something else.

How the statutes define an employee

Ontario’s Employment Standards Act defines an employee to include a person who performs work for an employer for wages, or who supplies services to an employer for wages, and it forbids an employer from treating an employee as if the person were not one. Quebec’s Act respecting labour standards defines an employee as a person who works for an employer and is entitled to a wage, and extends the term to a worker under a contract with features the Act lists. Neither definition refers to what a contract calls the person.

How a sale carries the problem forward

In a share purchase the employer is the same corporation, so any claim stays with it. In an asset purchase, Ontario’s continuity rule applies when the purchaser employs an employee of the seller, so a worker who is an employee in law may arrive with credit for past service. Quebec makes the former and new employer bound solidarily for claims under the Act that were unpaid at the time of the sale.

What a buyer can check

• A list of everyone paid without payroll deductions, with the agreements behind each arrangement.
• How each person actually works day to day: who sets the hours, who supplies the tools and whether the person works for others. A lawyer can say which of those facts matter in your province.
• A representation and indemnity in the purchase agreement that covers misclassification claims.

Contractor agreements are a separate question

Whether a contractor agreement transfers to you is a contract question, covered in what happens to contractors and freelancers in a sale. This page is about the earlier question of whether the person was a contractor at all.