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Overview

The Canadian employment environment is very different from that of the United States. Those differences affect both substantive and procedural aspects of mergers and acquisitions (“M&A”) planning. The type of transaction and industry, and the employees' province(s) of work, influence how much freedom the Buyer/Seller may (not) have in dealing with the Target's employees. This QuickCounsel provides an overview of key employment issues to be considered when contemplating an M&A transaction in Canada.

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Understand the Canadian Employment Law Framework

Think of the employment law framework as a body:

The "Bones"

The “bones” consist of mandatory statutory laws governing human rights, employment/labour minimum standards, health and safety, workers’ compensation, unionization, and (federally and in some provinces) employee privacy. Generally, there is no ability to contract out of these laws.

A few industries (airlines, for example) are federally regulated. The majority of industries are provincially regulated, so the governing laws will be those of the province where the employee primarily works. Thus, for businesses with locations in different provinces, different statutory regimes apply. These statutory regimes have many elements in common, but differ significantly from province to province and federally in terms of substantive content and technical interpretation or application.

The "Flesh"

The “flesh” consists of judge-made common law (or in Quebec, codified civil law as interpreted by Quebec courts). Common-law rules, principles and tests are relatively uniform across the rest of Canada (with many similar concepts in Quebec) and they typically favour the employee. Many of these form “invisible” terms, in that they are implied terms of every employment relationship. Employers and employees can alter or override many “invisible” terms through carefully drafted written agreements (in unionized workplaces, through the collective agreements). However, if such agreements are to be (and remain) valid and enforceable, great care must be taken with both content (drafting) and process (delivery, execution and amendments).

Some of these rules, principles and tests are unavoidable – for example, those governing whether a contract is valid, non-competition provisions are enforceable, or a consultant is really an employee.

The "Clothing"

Written terms, if any (offer letters, employment agreements, collective agreements, confidentiality and invention ownership agreements, etc.), are merely “clothing” on the body. If for any reason written terms are invalid or incomplete, the law defaults to the statutory and judge-made (in Quebec, Civil Code) rules.

Ultimately, then, every Canadian employment relationship is governed by a combination of statutory provisions, unwritten common-law terms (or in Quebec, Civil Code), and written terms. Conducting careful employment due diligence is important, particularly on a share purchase transaction or whenever a union is in place….otherwise, Buyer buys a pig in a poke.

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Can Buyer Cherry-Pick Which of Target's Employees to Keep or Hire?

Except in Quebec, nothing compels Buyer to retain Target’s employees (share deal) or offer them employment with Buyer (asset deal).

Of course, Buyer’s decisions must not violate human rights (equal opportunity) laws or statutory job-protected leave rules. Thus, for example, Buyer cannot accept all employees except those on disability or maternity leave. But – except in Quebec –Buyer is otherwise free to cherry-pick.

That said, Canadian law does not recognize the concept of at-will employment. Separating employees is often costlier and more complicated than expected. If large groups will be affected, employment/labour standards “group termination” rules may be triggered. Regardless of how many are terminated, many employees will be entitled to contractual and/or common/civil law “reasonable notice” that can greatly exceed statutory minimum notice/severance entitlements. Thus, in purchase agreements, it is vital to pay careful attention to assumed/excluded liabilities and indemnity provisions related to employment obligations.

Asset Deals

Except in Quebec, unless Buyer specifically agrees in the purchase agreement to offer employment to Target’s employees, Buyer is free to choose which, if any, will be offered employment and on what terms. (While Target’s employees do not have to accept Buyer’s offer, refusal to accept a reasonable offer will, in many cases, reduce or eliminate the employee’s right to claim a termination package from Seller.)

Except in Quebec, normally, Target’s employees who are not offered (or do not accept) employment with Buyer remain Seller’s problem on closing.

Share Deals

Except in Quebec, unless Seller specifically agrees in the purchase agreement to terminate certain Target employees pre-closing, Buyer will automatically inherit the entire staff. A share deal does not, in itself, change (or give Buyer any right to change) employment status for any employees.

Vive la Différence - Quebec

Due to the combined effect of Article 2097 of the Civil Code of Quebec and s. 96 and 97 of the Quebec Labour Standards Act, in any M&A transaction, Target’s Quebec employees are automatically entitled to continued employment with Buyer, on terms and conditions substantially equivalent, in the aggregate, to those existing as of closing. (By the way, Quebec’s French language laws require special attention when communicating with employees.)

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What about Successor Employer Obligations?

Employment/Labour Standards Legislation

Both at the federal and provincial levels (see chart below), statutory “successor employer” provisions ensure that for statutory purposes, the sale of a business (whether via share or asset deal) does not interrupt employment if the employee is employed by Target until closing and by Buyer immediately after closing. (Some exceptions apply – Ontario, for example, still bridges service if the gap between employment with Seller and Buyer is 13 weeks or less.)

When applicable, the practical effect of these provisions is that Buyer must recognize prior service with Seller when calculating length of service for purposes of statutory entitlements (termination notice/severance, vacation entitlements, eligibility for service-based leaves).

Technically, Buyer is not obliged to recognize prior service for non-statutory purposes (for example, for purposes of eligibility for awards under Buyer’s incentive or equity plans). However, Buyer must, in its offers to Target’s employees, explicitly define the extent to which prior service will be recognized, so as to avoid any common-law implication that it will be recognized for all purposes.

Union/Collective Bargaining Legislation

Again, both at the federal and provincial levels (see chart below), statutory “successor employer” provisions apply when a unionized business is sold, transferred or leased, where all or part of that business continues in some recognizable form. In such cases, Buyer inherits Target’s collective agreement obligations and will generally inherit those union employees who worked with that business, except to the extent they choose to not work with Buyer.

Careful due diligence – by both Buyer and Seller –is critical when a union is involved. Both parties must review the collective agreement to identify those obligations triggered by the transaction (and inherited by Buyer).

Naturally, in the interests of ensuring smooth transition and “integration”, both parties have strong practical reasons to communicate regularly with the union well in advance of closing. Additionally, legislation and/or the collective agreement may compel pre-closing consultations between the Seller and the union.

Common Law Obligations - Asset Deals (Non-Unionized Target)

Usually, selling Target’s assets triggers the termination without cause of Target’s employees. (For those Target employees who accept an employment offer from Buyer, normally Seller can confirm in writing that the end of employment with Target is not a termination by Target.)

Normally, unless Buyer specifically agrees in the purchase agreement to assume responsibility for or indemnify Seller against certain liabilities, all employment-related liabilities accrued to or as a result of closing remain with Seller. (If Buyer hires any of Target’s employees, statutory successor employer rules apply.) Normally, Target’s employees who are not offered (or do not accept) employment with Buyer have no recourse against Buyer post-closing (except in Quebec!)

Vive la Différence - Quebec

In any M&A transaction, Target’s employees may still have recourse against both Seller and Buyer. (Of course, Seller and Buyer may have contractual indemnification rights as between them, but the employee can still pursue both.)

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Outside of Quebec, is Buyer Free to Alter Terms and Conditions of Employment?

Asset Deals (Non-Unionized Target)

Generally, except in Quebec, Buyer has no obligation to offer to match existing terms and conditions of employment. Subject to statutory successor rules (recognizing prior service for limited purposes), Buyer can choose those terms it sees fit. That said, the employee is perfectly free to decline an unattractive or unreasonable offer.

Share Deals (Non-Unionized Target)

Buying Target’s shares does not alter Target’s employer identity or give Buyer or Target any special right to change terms and conditions of employment. Thus, unless the purchase agreement provides otherwise, Buyer will inherit all liability for pre-closing claims and all employees on their current terms.

Apart from desirable “integration” messaging, unless Buyer intends to supplement or change existing terms, Buyer need take no action to confirm post-closing employment terms. To make a change, Buyer and Target will need to comply with all legal requirements. If the changes are disadvantageous to the employee Buyer may face a claim for “constructive dismissal” if:

1. Without the employee’s consent or condonation,
2. The employer makes one or more changes to an essential term of employment, and
3. The change (or combination of changes) constitutes an adverse “fundamental change”.

Even if a change is accepted, it may be unenforceable unless Target provides “fresh consideration” to that employee (i.e., a modest signing bonus or stock option grant). Mere continuation of employment is not sufficient “fresh consideration”. Failure to properly implement changes can result in a claim for breach of contract (if the change does not amount to a fundamental change), or constructive dismissal (if the change or cumulative changes amount to a fundamental change).

Thus, introducing significant changes needs to be managed carefully so as to minimize risks and maximize retention of desired employees.

Unionized Target

Since Buyer is bound by the collective agreement for inherited union employees, Buyer can generally only alter existing terms to the extent (and in the manner) permitted by the collective agreement or by negotiation with the union.

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Conclusion

The discussion above only reveals the tip of the employment/labour iceberg, and takes no account of tax considerations, industry-specific regulatory issues or other key matters that drive decision- making. Retaining experienced M&A counsel is essential to minimize risk, maximize value, and reduce bumps in the road to closing.

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Additional Resources

• Doing Business in Canada: Employment and Labour Law

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Published August 22, 2011

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