Health and safety due diligence when buying a business

If you are buying a business with a shop floor, a plant or a crew, you will meet the phrase “due diligence” twice, and it means different things each time. It is also the name for the review of the business you are about to buy. In occupational health and safety, CCOHS uses it for the reasonable precautions an employer takes to prevent harm in the course of work. The two connect: the records that show an employer’s diligence are also the records a buyer can ask to see. This guide explains both meanings and what to request. It is general information, and occupational health and safety law is made province by province.

Two meanings of “due diligence”

The Canadian Centre for Occupational Health and Safety (CCOHS) says that, applied to occupational health and safety, due diligence refers to the reasonable precautions an employer takes, in the circumstances, to prevent harm in the course of work. It also says due diligence matters as a legal defence for a person charged under occupational health and safety legislation, who may be found not guilty if they prove it was exercised. Deal due diligence is different: it is the buyer’s own investigation of the business before closing. For the deal side, see the general guide to legal due diligence; only the first meaning is a defence in a safety prosecution.

Whose law applies

CCOHS says there are fourteen jurisdictions in Canada, one federal, ten provincial and three territorial, each with its own occupational health and safety legislation. It says federal law covers federal departments and federal Crown corporations and, under the Canada Labour Code, companies or sectors that operate across provincial or international borders. For most other workplaces, the Act of the province or territory where the work happens applies. So first confirm which jurisdiction governs the business you are buying. This guide names a workers’ compensation board or Act only as that province’s own.

What a diligent employer keeps on file

CCOHS describes what an employer needs to show due diligence, and the same list works as a request list for a seller. It says the employer must have written health and safety policies, practices and procedures, must train workers so they can follow them, must monitor the workplace, and should have an incident investigation and reporting system. It lists records that can help show diligence: workplace inspections with corrective actions, supervisor notes, worker orientation and training, and incident reports with corrective actions. It adds that all elements of a due diligence program must be in effect before any incident or injury occurs.

What to ask the seller for

• Inspection reports and orders from the safety regulator, plus proof that each order was complied with or what remains open
• The business’s own workplace inspection records, with the corrective actions taken
• Incident and injury records, including investigation reports and what changed afterwards
• The written safety program and the training and orientation records for current workers
• The workers’ compensation account standing and claims history, from the board for that province

CCOHS’s sample checklist asks whether the organization is legally compliant by reference to a gap analysis and inspectors’ orders, and whether items from inspections and incident reports were reviewed and acted on. You can put those same questions to the seller. If the seller cannot produce the records, treat that as a finding to raise with your lawyer. Ask too whether any order, charge or investigation is still open, who at the business has been dealing with the regulator, and whether that person will stay on through the handover. Keep copies of what you are shown, so your lawyer can compare it with what the purchase agreement says about compliance.

Why a buyer cares about these records

CCOHS says an employer shows due diligence through actions taken before an event, not after. If you will run the business as its employer, ask what the existing program looks like before you take over, because CCOHS says all elements of a due diligence program must be in effect before any incident or injury occurs. Ontario’s Occupational Health and Safety Act writes the defence into the Act for some duties. Section 66(3) says that, on a prosecution for a failure to comply with subsection 23(1), clause 25(1)(b), (c) or (d), or subsection 27(1), it shall be a defence for the accused to prove that every precaution reasonable in the circumstances was taken. That subsection lists only those provisions, so ask a lawyer how a due diligence defence would apply to a charge under any other provision. Other jurisdictions have their own Acts, so check the one that governs the business.

Asset sale or share sale

The sources used here do not say whether an open safety order stays with the seller’s company or follows the business in an asset sale or a share sale, so ask your lawyer. For workers’ compensation, one example is Ontario. There, the WSIB says that if you are purchasing a business’s assets you should get a purchase certificate, and that it may hold the purchaser liable for all amounts the vendor owes up to the date of sale if you do not get a valid one, and that the request must be made before the date of sale. For a share sale, it says a purchase certificate is not required because no new legal entity is created, but the Share Purchase Agreement must still be submitted to the WSIB. See what a WSIB clearance certificate is. For other provinces, ask that province’s board.