BC Seniors Living Association Conference

September 29, 2014

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Roper Greyell LLP or any member of the Firm on the points of law discussed. © Roper Greyell LLP 2014

Najeeb Hassan604.806.3820

nhassan@ropergreyell.com

Employment Concerns in the

Purchase and Sale of a Business

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Introduction

▪ The importance of human capital▪ Human capital is a highly valuable asset

▪ Compared to land and equipment, human assets are more difficult to manage and to obtain

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Introduction

▪ Only two ways of obtaining human assets▪ hiring them▪ buying someone else’s employees

▪ Purchasing a business is a potentially effective way to acquire necessary human capital

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Introduction

▪ Mergers and Acquisitions:▪ risk and reward in obtaining employees

▪ A successful acquisition:▪ Acquiring business inherits talented, happy

employee group

▪ A poorly executed acquisition:▪ loses the value of the human capital▪ serious consequences for the acquiring

business

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Examples

▪ Credit Suisse First Boston acquires California investment bank DLJ for $12.8 billion

▪ Est. $1.2 billion retention bonus pool

▪ Immediately following the deal, key market players for DLJ walked.

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Examples

▪ Result was the value of the transaction was effectively lost

▪ “Why are we signing the deal without having key players locked up?”

▪ Risks are not limited to an asset deal, or the financial sector

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Legal Landscape

▪ Asset vs. share transaction▪ Landscape at common law▪ Employment Standards Issues

▪ Successorship▪ Group termination

▪ Labour Relations Code▪ Successorship▪ Common Employer▪ Section 54

Constructive Dismissal▪ Indemnities

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Legal Landscape

▪ Hidden liabilities

▪ Employees on disability

▪ Benefits integration issues

▪ Post-employment obligations

▪ Privacy Issues

▪ Employee retention and communication strategies

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Share Deal v. Asset Deal

▪ Share Deal▪ no “transfer” of employees or

employment results at the date of purchase

▪ executives may have change of control arrangements triggered by sale of the shares to third party

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Share Deal

▪ There must be a change in the identity of the employer to terminate the employment relationship▪ Mere change in ownership of a company by

another entity does not automatically amount to a termination of that company’s employment contracts

▪ Mere transfer of employee from subsidiary to parent does not sever the employment contract or automatically constitute constructive dismissal

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Asset Deal

▪ Can result in significant changes in employee circumstances

▪ Often the vendor employer ceases to do business or exist

▪ Consequences divided into:▪ common law▪ statutory (Employment Standards and Labour

Relations Code)

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Asset Deal

▪ When the assets of a business are sold as a going concern, the business “transfers” from one legal entity to another

▪ At common law, employees cannot be “transferred” against their will

▪ At common law, change of legal employer equals “constructive dismissal”

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Common Law Landscape

▪ An employee has a technical legal right to consider employment at an end when vendor sells

▪ But subject to the duty to mitigate▪ If purchaser offers employee

same job on same terms, no loss by employee

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Common Law Landscape

▪ Cases turn on the legal consequences when the new employment with purchaser does not work out

▪ Sorel v. Tomensen Saunders▪ Implied term of continued service from

vendor to purchaser▪ Can be negated by express contract▪ Silence results in imposition of implied term▪ 37 years of service followed the purchaser

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Common Law Landscape

▪ Major v. Philips Electronics▪ Employee engineer accepted employment

from the purchaser on substantially similar terms as with the vendor

▪ Purchaser terminated employee▪ Does the vendor continue to be liable to its

employee for severance pay when the employee continues in the same job with the purchaser and the purchaser agrees to recognize past service and benefits with the vendor?

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Common Law Landscape

▪ Major v. Philips Electronics (cont’d)▪ in the absence of express agreement to the

contrary, an employee would have a claim against vendor or purchaser or both

▪ requires an express provision to inoculate against an employee claim during the notice period

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Common Law Landscape

▪ Vendor and purchaser should arrange proper indemnities in the agreement if the purchaser terminates any employee during the notice period

▪ i.e., determine in advance who will bear the risk

▪ Understand severance liability risks

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Common Law Landscape

▪ Get a proper indemnity

▪ Perkins v. Shuen & Ling▪ indemnity language was not adequate to

protect the purchaser [only covered terminations within 90 days of closing]

▪ the vendor failed to unequivocally terminate Perkins’ employment, “things would carry on the same” with the purchaser

▪ six months later purchaser terminated Perkins

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Common Law Landscape

▪ Perkins v. Shuen & Ling (cont’d)▪ Vendor insolvent▪ Outside the indemnity period, the

employee sued the purchaser alone and purchaser was liable for full loss

▪ Past service recognized – 12 months severance

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Employment Standards

▪ Two areas where Employment Standards legislation modify common law▪ successorship▪ group termination

▪ ESA, Section 97 - Successorship▪ Preserves employee’s rights as against

the purchaser

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Employment Standards

▪ ESA, Section 97 - If substantial part of the entire assets of a business is disposed of, employment deemed continuous and uninterrupted

▪ Purchaser is required to credit a continuing employee with past service and to assume all of the vendor’s liabilities and obligations under the Act

▪ Does not apply where vendor terminates employment of employees prior to disposition

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Employment Standards – Successorship▪ Re: Mitchell (1998) – a case that adds

a wrinkle in British Columbia▪ If vendor failed to clearly terminate

employees, and the purchaser offered employment on different terms and conditions, then purchaser may be liable for Employment Standards severance even though not actually employing them – constructive dismissal

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Employment Standards – Group Termination

▪ ESA, Section 64

▪ 50 or more employees are terminated at a simple location then severance and group notice obligations may apply

▪ Notice: depending on the number of employees affected, a maximum of 16 weeks

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Employment Standards – Practical Tips

1. Ensure that vendor gives appropriate “notices” in advance

2. If the purchaser intends to acquire the employees, the employment will be deemed continuous if made on the same terms and conditions

▪ communicate to employees, prior to closing, the practical impact of the sale

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Employment Standards – Practical Tips

3. Know who is assuming any liabilities under Employment Standards legislation, and write it into the Sale Agreement

4. Co-ordinate vendor and purchaser communications to maximize employee comfort and certainty

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Constructive Dismissal

▪ An employer may unilaterally change terms and conditions of employment, with notice

▪ If a fundamental term is changed without notice, then risk of constructive dismissal

▪ Employee may choose to accept, wait and see, or leave (and sue)

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Constructive Dismissal

▪ This area of law is notoriously fact specific▪ reporting structure▪ pay▪ fringe benefits▪ bonus and stock options▪ work environment

▪ On a sale, new circumstances have to be introduced with care

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Constructive Dismissal

▪ Examine written contracts of employment for express reporting structure

▪ Consider how organizational changes may impact work life, and introduce with caution

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Hidden Liabilities – Due Diligence▪ Overtime banks/overtime claims

▪ Vacation accruals

▪ Outstanding/pending complaints▪ Dismissal claims▪ Human rights violations▪ Employment Standards complaints▪ Canada Labour Code complaints▪ Labour Board proceedings▪ Union certification applications/drives

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Hidden Liabilities – Due Diligence▪ Employment contracts – special

features include golden parachutes?

▪ Employees on disability

▪ Review of personnel policies

▪ Review of benefits plans

▪ Restrictive covenants (non-competition and non-solicitation)

▪ Change of control arrangements

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Hidden Liabilities – Due Diligence▪ To avoid surprises and determine the

scope of indemnities necessary, attach schedule to Letter of Intent showing common law employment relationships, including length of services, but subject to privacy considerations

▪ Purchaser must determine, in advance, what employees it wants, and under what terms

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Special Employment Issues

▪ Employment contracts should be negotiated in advance between the purchaser and particular key employees

▪ Does the purchaser really know what human assets they are buying?

▪ Key “knowledge value” within the target business – who has it?

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Post-Employment Obligations

▪ Non-Competitions and Non-Solicitation balance between public interest - free marketplace activity vs. the right to contract

▪ True non-competes considered unenforceable, unless reasonable in duration, scope and certainty

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Post-Employment Obligations

▪ Courts have always distinguished covenants given as part of the sale of a business vs. employment (owners)

▪ But non-compete could result in larger notice period if employee later terminated

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The Disabled Employee and Leaves

▪ Treatment of disabled employees on the sale will depend on the circumstances, but there are pitfalls▪ Ex. If the purchaser chooses to employ

certain employees, but not those on disability, maternity, parental or involuntary leaves

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The Disabled Employee and Leaves

▪ Part of due diligence should include consideration and agreement as to how employees on leave are dealt with, and who will deal with them

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The Disabled Employee and Leaves

▪ Status of the employee and terms of the plan are key practical questions

▪ ESA, Section 54▪ an employer must return an

employee on a statutory leave to the same or a comparable position

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The Disabled Employee and Leaves▪ A disabled employee may not be

protected by Employment Standards legislation, but may have a human rights claim, depending on the circumstances

▪ Fenton v. Rona (2004) – failure to enquire as to status of an employee on disability prior to dismissal resulted in human rights liability when her employment was terminated

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The Disabled Employee

▪ Fenton v. Rona (2004) ▪ 15 year employee on LTD▪ Purchaser did not offer her employment because

of her disability and terminated her▪ Awarded two years of wages and the loss of

benefits; and $10,000 for injury to dignity

▪ There can be potential for human rights liability based on a blanket decision not to hire or enquire on a vendor employee on LTD

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The Disabled Employee

▪ Common law doctrine of frustration still applies

▪ Wightman Estate v. 2774046 Canada Inc.▪ Employee was on sick leave when assets of

business sold▪ No prospect of employee returning to work

given his sickness▪ Purchaser terminated employee without

cause, but the obligation to give reasonable notice was discharged due to frustration

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Benefits Integration Issues

▪ Will the purchase/sale affect entitlements to benefits?

▪ Are pension plans registered with any regulator? Are formal notices required?

▪ Integration, if necessary, will require a careful assessment of the relative quality and cost of the schemes

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Benefits Integration Issues

▪ Can the benefit plans be “transferred” to the purchaser?

▪ “Constructive dismissal” if the benefits are critical, or if an employee is reaching a key benchmark that is cut-off by the sale, then could be a fundamental term

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Labour Relations Code Issues

▪ Successorship▪ Common Employer▪ Section 54 – Labour Adjustment

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Labour Relations Code Issues

Successorship▪ Similar to ESA successorship except applies

to union and unionized employees▪ Certification, collective agreement and

Labour Code proceedings follow the business or part of them

▪ Grievances and arbitrations become problem of purchaser

▪ Past practices may impact how collective agreement administered

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Labour Relations Code Issues

Common Employer

▪ Intermingling of employee groups could lead to common employer declaration

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Labour Relations Code Issues

Section 54 – Labour Adjustment 60 days notice of change that affects

significant number of bargaining unit employees

Must try to develop labour adjustment plan – (meet and discuss in good faith various issues)

Could slow down planned changes post-sale

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Conclusion

▪ Know what you are buying▪ Salaries▪ Length of service▪ Disabilities▪ Leaves▪ Union relationships, collective

agreements, LRB proceedings, grievances & arbitrations, practices

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QUESTIONS?

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