Getting your employment paperwork in order before you sell

An employer preparing to sell can do one useful thing before any buyer asks: put the employment side in order. That means knowing which records the law requires you to keep, finding the gaps, and reconciling what you owe staff against what your books show. This page is about that clean-up. It covers Ontario’s Employment Standards Act, 2000 (ESA) and the Canada Revenue Agency’s (CRA) payroll guidance. If your business is in another province, or is federally regulated, check the rules that apply to you with the issuing office or an employment lawyer.

Know which employment records the ESA requires

The Ontario Ministry of Labour’s guide to the ESA says an employer must record and retain information about each employee and keep it readily available for inspection. It gives periods for different records. Most employee information is kept for three years after the employee stopped working for the employer; the guide gives the record of a student under 18’s date of birth its own, earlier-ending period. Hours-of-work records are kept for three years after the day or week of work. Vacation time and vacation pay records must generally be kept for five years after the record was made. Leave documents are kept for three years after the day the leave expired. Pull each category for each current and former employee, and list what is missing.

Reconcile payroll against the CRA’s record rules

The CRA says employers have their own list of records to keep. For required records and supporting documents, it says you must generally keep them for six years from the end of the last tax year they relate to, and that a CRA official can tell you to keep them longer. The CRA’s “Keeping records” page points employers to its payroll records section for the detail. Ask your accountant to confirm that payroll records are complete for those years, and that the source deductions shown on them match what was remitted.

Check how each worker is classified

The CRA’s page on employee or self-employed workers (the former publication RC4110, now marked cancelled on the page) says employers are responsible for deducting Canada Pension Plan contributions, Employment Insurance premiums and income tax from what they pay employees. It also says an employer who fails to deduct the required contributions or premiums has to pay both the employer’s share and the employee’s share owing, plus penalties and interest. The CRA asks the worker and the payer what their intent was, and says all of the facts, including the actual terms and conditions of employment, determine a worker’s status, not just the intention. If a worker or payer is not sure of the worker’s status, either can ask the CRA for a CPP/EI ruling. List everyone you pay without deductions and ask your accountant or lawyer how that arrangement measures against the CRA’s factors.

Gather contracts and ask about their termination terms

Collect every written employment agreement, offer letter and bonus or commission plan, and note who has nothing in writing and what was promised verbally. Then ask your employment lawyer to read the termination clauses, any change-of-control or retention terms, and any promises of payment on a sale. You are not trying to rewrite them before a sale. You are finding out what they say before a buyer reads them, so you can answer questions accurately.

Reconcile vacation and other entitlements owing

Treat vacation pay, unpaid wages, bonuses and leave balances as records to reconcile, not as items to estimate from memory. The ESA guide expects vacation time and vacation pay records, including how the pay was calculated. Compare those records with payroll and with what each employee believes is owing. Differences are easier to explain and correct now than during someone else’s review. Your accountant can help you prepare a schedule showing the balance for each person and where each number comes from.

• Employee list with start dates, roles and pay, matched to payroll.
• Written agreements, offer letters and incentive plans, with gaps noted.
• Hours, vacation and leave records for the periods listed above.
• Payroll filings and remittance records for the CRA’s retention period.
• A list of workers paid as contractors, with the reasoning for each.

Understand what the ESA says happens on a sale

Section 9 of Ontario’s ESA says that if an employer sells a business or a part of one and the purchaser employs an employee of the seller, the employee’s employment is deemed not to have been terminated or severed for the purposes of the Act. The seller’s employment also counts toward later calculations of length of employment. Under s.9(2), that does not apply if 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. The Act defines “sells” to include leases, transfers or disposes of in any other manner, so read the rest of section 9 and the Ministry’s employees guide before relying on this summary. Employees when you sell a business in Ontario explains this in more depth.

Handle staff information carefully in due diligence

Staff files hold personal information. Section 7.2 of the federal Personal Information Protection and Electronic Documents Act sets out, in addition to its other exceptions, when parties to a prospective business transaction may use and disclose personal information without the individual’s knowledge or consent. Whether that Act or a provincial law governs your employees’ records depends on the employer, so check before sharing named files. Which privacy law applies to employee information shared during due diligence? walks through it.