Employee Considerations in Mergers and Acquisitions

Key Takeaways: 

• The impact on employees differs depending on the type of M&A transaction, with share purchases preserving employment continuity and asset purchases requiring careful recognition of prior service and entitlements.
• Successor employers must honour accrued vacation, benefits, and seniority, and comply with both statutory and common law obligations to prevent disputes.
• Unionized workforces add complexity, as buyers inherit collective agreements and bargaining responsibilities, making thorough due diligence essential.
• Conducting comprehensive employment law due diligence, including reviewing contracts, bonuses, benefits, and HR compliance, helps identify potential liabilities before closing.
• Proper risk allocation in M&A agreements, through indemnities, termination cost provisions, and representations and warranties, mitigates post-transaction disputes.
• The proper management of employees depends on the retention strategies, clear communication and cultural integration programs. These factors result in easier transitions and reduce turnover..

Introduction

When businesses in Ontario go through mergers and acquisitions (M&A), the focus often falls on financials, tax planning, and corporate structures. But one of the most sensitive and impactful aspects of these deals is how they affect people, the employees in mergers and acquisitions in Ontario. Whether a company is buying assets or shares, the rights and obligations tied to its workforce can shape the success or failure of the transaction.

 

From navigating employee rights in M&A in Canada to understanding successor employer obligations under the Employment Standards Act, 2000 in Ontario (which sets the minimum standards for employment in Ontario, including hours of work, overtime, vacation, and termination), employers and buyers need to carefully manage the employment law side of any deal. Mishandling these issues can lead to claims of wrongful dismissal risk in M&A, costly disputes, or strained labour relations.

 

This article explains the key employment law considerations in M&A deals. It also highlights how working with an Ontario business lawyer experienced in employment law and M&A, such as the team at Pacific Legal, can help protect both the business and its employees.

Key Employment Law Issues in M&A Transactions

This section describes the key issues under employment law arising out of M&A transactions. It encompasses the rights of employees, the obligations of the successor employer, the consideration of unionised workforces and gives practical measures that businesses may follow in order to manage employees in a good way and minimize legal liability.

Asset Purchase vs. Share Purchase: Employee Impacts

One of the first distinctions in any M&A deal is whether it is an asset purchase or a share purchase.

Share Purchase:

In a share purchase, the buyer acquires the shares of the target company, meaning the company itself continues to exist as the same legal entity and remains the employer. As a result, employees keep their jobs without any interruption, and their continuity of employment under the ESA is automatically preserved. However, this also means that the buyer steps into the shoes of the company and takes on all existing obligations. This includes employment contracts in business acquisitions in Ontario, as well as accrued vacation pay, benefit entitlements, and any potential termination or severance liabilities tied to the workforce.

Example: If Company A buys Company B’s shares, Jane, who has worked at Company B for five years, continues her employment seamlessly with Company A, keeping her seniority and benefits intact.

Asset Purchase:

In an asset purchase, the buyer can decide which assets and which employees it wishes to assume. Employees are technically terminated by the seller unless rehired by the buyer. Section 9(1) of the Ontario ESA provides that when a purchaser hires employees in an asset deal, their service with the seller is deemed continuous. This means obligations such as vacation pay, termination notice, and severance remain based on the employee’s full length of service, not just their time with the buyer.

Example: If Company A buys only the assets (not the whole company) of Company B, it can choose which employees to keep. Suppose John worked at Company B for seven years, and Company A decides to rehire him. Even though his employer technically changes, Ontario’s Employment Standards Act (ESA) says his seven years still count. This matters because John’s length of service affects important things like how much vacation time he gets and what severance or termination pay he could be owed later.

In Manthadi v. ASCO Manufacturing (2020 ONCA 485, CanLII), the Ontario Court of Appeal made it clearer that in an asset purchase, a rehired employee of the company acquiring the assets may have his or her past employment experience added to common-law reasonable notice. It implies that the threat of wrongful dismissal against buyers is a possibility that arises during an M&A deal on the part of buyers who disregard continuity of service. It also highlights the importance of thoroughly examining employee background, collaborating with HR and legal departments and writing down agreements in a clear manner to avoid conflict. Buyers are supposed to take into consideration statutory rights and common-law obligations, retention schemes and communication strategies to ensure that the employees feel safe throughout the transition.

Also Read: Asset Purchase vs Share Purchase: A Comprehensive Analysis

Successor Employer Obligations

The successor employer’s obligations in Ontario under the ESA play a critical role in protecting employees when ownership changes hands. Section 9 of the ESA ensures that there is continuity of the service of the employees in asset deals and, in share deals, the continuity is automatic. This includes leaving intact the accrued entitlements of employees (with regard to vacation, benefits, seniority, etc.).

For example, if a long-serving employee is rehired in an asset purchase, the buyer must take into account his or her previous years of service when calculating termination notice and severance. Similarly, in the case of share purchases, all employee rights and obligations automatically continue without break, covering both statutory and contractual employee rights and obligations. Understanding and planning for these obligations helps buyers to avoid legal disputes, helps ensure compliance, and allows for employee trust during the M&A transitions.

Beyond statutory rights, courts may also recognize prior service when assessing termination clauses in employment contracts. For example, in Waksdale v. Swegon North America Inc. (2020 ONCA 391, CanLII), the Ontario Court of Appeal held that if any part of a termination clause in an employment contract breaches the ESA, the entire termination clause is unenforceable. This case is now a leading authority confirming that termination provisions must fully comply with the ESA and cannot undercut employees’ minimum entitlements.

 

Employers must also address accrued rights, such as:

• Vacation pay and benefits continuity mergers: Ensure employees receive the vacation days and benefits they have accrued. For example, if an employee had 3 weeks of vacation at the selling company, the buyer must honour this entitlement after the transition.
• Outstanding bonuses and incentive plans: Review promised bonuses and performance incentives. For instance, year-end or sales-based bonuses that were earned before the sale should be calculated and paid accordingly.
• Stock option plans: Determine whether stock options are accelerated, cancelled, or rolled over. For example, a long-term employee’s options may vest immediately upon a change of control, or may require renegotiation to reflect the new company ownership.
• Other accrued entitlements: Include unused sick leave, personal days, or profit-sharing arrangements. For example, unused personal leave balances should either be paid out or recognized under the new employer to prevent disputes.

Unionized Employees

Unionized workforces add another layer of complexity to mergers and acquisitions (M&A) deals. Under the Labour Relations Act, 1995 (Ontario), Section 69 deems a purchaser of a business to be a successor employer if there is substantial continuity in the business. This means the buyer automatically inherits the collective agreement and the duty to bargain with the union. 

 

In Ontario v. O.P.S.E.U. (2003 SCC 64, CanLII), the Supreme Court of Canada held that the rights of unionized employees under a collective agreement must be preserved by employers in the event of a restructuring or transfer. The Court made it clear that in such situations, established bargaining and grievance procedures cannot be ignored. This principle applies equally in mergers and acquisitions, where the new employer steps into the shoes of the old employer with respect to unionized obligations.

 

The buyers have to carry out a comprehensive analysis, which will entail checking of collective agreements in business purchases, evaluation of previous grievances and history of arbitration, and evaluation of the general climate of labour relations, union bargaining cycle and any unresolved cases. Like, whenever a unionized department is involved in a pending arbitration case concerning overtime compensation or seniority issues, the buyer needs to be aware of such liabilities to prevent future lawsuits. Knowledge of union culture and existing communication patterns can be used to foresee the possible challenges and come up with easier integration plans after the merger. The inability to evaluate these factors may lead to long-term risks in labour relations, slow down activity, and create financial risks which may not be anticipated.

Due Diligence Checklist

Conducting proper employment due diligence in M&A transactions protects buyers from inheriting hidden liabilities. A focused review should cover:

• Employee contracts in business acquisitions: Check if termination clauses comply with the ESA. For example, ensure that long-serving employees are not inadvertently given fewer rights than required.
• Wrongful dismissal risk in M&A: Identify any pending claims or litigation. For instance, if an employee has filed a grievance for improper termination, it must be addressed before the sale.
• Compliance with vacation pay and benefits continuity mergers: Confirm that accrued vacation and benefits are honoured. If Jane had 3 weeks of vacation at the seller, ensure she receives it after the transfer.
• HR compliance in acquisitions: Verify adherence to ESA, human rights, and occupational health and safety obligations. For example, confirm that required workplace safety training is up-to-date.
• Status of unionized employees of the merger: Review collective agreements, past grievances, and union communications. If a unionized team had an unresolved dispute, the buyer must be aware.
• Review of policies on harassment, workplace violence, and health & safety: Ensure company policies are current and being followed. For example, check if mandatory harassment training is completed.
• Pension, benefits, and incentive plans: Examine whether pensions and bonuses continue seamlessly. For example, stock options or profit-sharing plans may need adjustment.
• Executive employment agreements, golden parachutes, or change-of-control clauses: Confirm that senior staff contracts are clear and obligations are understood. For instance, determine if a CEO’s severance triggers automatically on a sale.

This due diligence checklist on employment law helps buyers uncover potential problems and provides practical steps to prevent costly disputes or employee dissatisfaction after closing.

Risk Allocation in M&A Agreements

Where due diligence reveals possible risks, the parties need to figure out how to distribute them in the transaction documents.

 

Common approaches include:

• Indemnities: The seller can indemnify the buyer against liabilities like claims in wrongful termination that occurred prior to closing. As an example, when a rejected employee claims damages in the future, the seller would pay such expenses.
• Termination Costs: The agreement may specify who pays severance if employees are not retained. For instance, if the buyer chooses not to retain certain employees, the contract clarifies whether the buyer or seller pays their ESA-mandated severance.
• Benefit Continuity: Negotiating whether the buyer will recognize past service for benefit plan eligibility and vacation accruals. For example, if an employee had five years of service for pension and vacation purposes, the agreement can ensure the buyer honours that prior service.
• Representations and Warranties: The seller provides assurances about compliance with employment law, mergers and acquisitions in Ontario. As an example, the seller can ensure that contracts of all the employees are in ESA compliance, that there are no continuing labour conflicts and that benefits and entitlements are properly recorded. 

In Evans v. Teamsters Local Union No. 31 (2008 SCC 20, CanLII), the Supreme Court of Canada emphasized the duty of employees to mitigate damages in wrongful dismissal. This is a common principle that determines the nature of the negotiations on the subject of termination in M&A agreements. It is used by parties as a method to limit the potential risks, distribute them, and formulate indemnities and benefits.

Managing Employees During Mergers and Acquisitions

Beyond the legal documents, managing people effectively is just as critical. Failure to communicate or miscommunication may lead to anxiety, demoralization, and loss of important personnel. The employer should be prepared for: 

• Retention of employees in the event of mergers is based on retention bonuses, career development strategy, and a definite transition path. These interventions motivate the important employees to remain. As an example, continuity is provided by a retention bonus to senior engineers who remain six months following an acquisition.
• Employees are kept informed and updated using post-merger communication strategies. The issues and rumours are tackled early by holding regular updates, town halls and answering questions. Witnessing changes in reporting structure, such as explaining changes in weekly team meetings, reduces uncertainty.
• M&A is a challenge in terms of cultural integration that influences productivity and satisfaction. The combination of cultures can be facilitated with the help of cross-company mentorship programs or team-building workshops.

By combining transparent communication, early HR involvement, and practical initiatives, employees feel valued and secure, reducing the risk of turnover and ensuring a smoother transition.

Why Work With Pacific Legal on M&A Employment Matters

Navigating employment law, mergers and acquisitions in Ontario requires both legal insight and practical business sense, and Pacific Legal is here to help. Our team advises on drafting and reviewing employee contracts in business acquisitions in Ontario, assessing wrongful dismissal risk in M&A, conducting employment due diligence in M&A transactions, guiding on successor employer rights and obligations in Canada, and supporting businesses with labour relations and Ontario M&A deals, including unionized employees. We combine technical legal knowledge with a business-focused approach, working alongside owners, HR teams, and deal advisors to ensure employees are managed fairly while protecting the buyer’s long-term interests.

 

Pacific Legal is here to help businesses manage the human side of mergers and acquisitions with clarity, compliance, and confidence. Contact us today!