What Happens to Employees When a Business is Sold? A Guide for Accounting Professionals

As accounting professionals, we're often on the front lines when our clients face difficult business decisions. In today's economic climate, we're seeing more business restructuring and sales than ever before. One question that keeps coming up? "What happens to my employees when I sell my business?"

Whether you're advising a client through a sale or facing this situation yourself, understanding employee rights during business transitions is crucial. Let's break down what you need to know about employee protections, severance calculations, and how different types of sales affect your team.

The Two Types of Business Sales: Shares vs Assets

When a business changes hands, there are typically two ways it can happen:

Share Sale: The buyer purchases the controlling shares of the corporation. Think of it like buying a house with all the furniture included – the legal identity of the company stays the same.

Asset Sale: The buyer purchases the business assets themselves. This is more like buying just the furniture and moving it to a new house – the legal structure changes completely.

Why does this matter for employees? Everything.

Share Sales: Business as Usual (Mostly)

In a share sale, your employees are generally in luck. Since the corporation's legal identity doesn't change, their employment typically continues uninterrupted. Unless the purchase agreement specifically states otherwise, employees keep their jobs, their seniority, and their accumulated benefits.

It's like the company got new owners, but from an employment perspective, it's still the same employer. Your team's years of service remain intact, which is crucial for calculating future severance entitlements.

Asset Sales: Where Things Get Complicated

Asset sales are where we need to pay closer attention. Historically, these transactions automatically terminated all employees at the time of sale. Why? Because in Ontario, you can't simply transfer employment contracts from one company to another.

But here's where it gets interesting – many buyers will offer to hire the previous employees under new terms. This creates a fresh start employment-wise, but it can impact their accumulated service time.

The Game-Changer: Section 9 of the Employment Standards Act

Here's something many people don't know: Section 9 of Ontario's Employment Standards Act provides important protections. If a business buyer agrees to hire the vendor's employees during an asset sale, their employment is deemed to continue for ESA purposes.

This means their years of service, vacation entitlements, and other statutory benefits transfer over. It's like a bridge that connects their old employment to their new role.

Calculating Severance: What Changes and What Doesn't

When we're helping clients calculate severance entitlements after a business sale, the type of sale matters enormously:

Share Sale Severance: Since employment continues, all previous years of service count toward severance calculations. If an employee is later terminated, their entire service history is considered.

Asset Sale Severance: This is where it gets tricky. While the ESA protections under Section 9 help, common law considerations can be different. Courts may still consider the employee's prior service when calculating reasonable notice, especially if the new employer explicitly recognizes that service.

The Notice Period Reality Check

Under the ESA, employees get minimum notice of one week per year of service (up to eight weeks maximum). But many employees are entitled to common law reasonable notice, which can be much more generous – sometimes up to 24 months.

After a business sale, calculating this notice period depends on whether the courts view the employment as continuous or as a fresh start. This is where having proper legal documentation becomes crucial.

Practical Advice for Your Clients

For Sellers:

• Document everything about your employees' service history

• Work with your buyer to clarify who's responsible for what liabilities

• Consider the timing of the sale and any pending employee issues

For Buyers:

• Decide early whether you want to recognize previous service

• Understand what liabilities you're inheriting

• Have clear employment agreements ready for any employees you're hiring

When to Bring in Employment Lawyers

As accounting professionals, we know our strengths – and we know when to refer clients to specialists. Employment law during business sales is complex enough that both buyers and sellers benefit from legal representation.

An employment lawyer can:

• Review purchase agreements to clarify employment liabilities

• Ensure proper documentation of service recognition

• Advise on termination obligations and severance calculations

• Help navigate the ESA requirements

The Bottom Line

Business sales don't have to mean disaster for employees, but they do require careful planning. Share sales generally provide more continuity, while asset sales need extra attention to protect employee rights.

The key is understanding the rules, documenting everything properly, and getting the right expertise involved early in the process. Your clients' employees have invested years in building these businesses – they deserve protection during transitions.

Have you helped clients navigate business sales recently? What challenges have you encountered with employee transitions?

Until next time,