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Buying a Dental Practice: What to do about the Employees!

By September 7, 2012January 19th, 2022Buying a Practice

It’s amazing. Nobody out there has a clue about what to do about the employees when they are buying a dental practice. There’s always liability surrounding employees for a dentist buying a practice, but what, if anything, can the dentist do about it?. Too often, the lawyers and realtors who put together agreements of purchase and sale either do not address the employee issues or get it all wrong – at the expense of the purchasing dentist!

Well, let me shed some light on all of this.

Employee Status

First of all, you need to understand what the status is of the employees. How many employees are there? Are they truly employees or independent contractors (e.g. associates and possibly hygienists)? Do they have written contracts in place? Is there any ongoing litigation, proceedings, claims – threatened or real – involving the employee? How long have they been there? What is their role? Will they be staying on after the purchase/sale is completed?

By gathering some initial information, you’ll be in a much better position to not only plan for employment-related matters AFTER the deal finishes but also mitigate your employment-related risks leading up to the deal finishing!

Asset vs. Share Sale

Next, you need to understand the implications of buying assets of a dental practice vs. buying the shares of a dentistry professional corporation from a dentist.

Simply because you’re buying assets doesn’t necessarily mean that you won’t become the DEEMED employer of the old business’ employees!   The Ontario Employment Standards Act, 2000 (ESA) says, for example:

9.  1) If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and their employment with the seller shall be deemed to have been employed with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

So if the assets of a dental practice are sold, and the purchaser employs a dental hygienist or receptionist of that old business, then that person’s employment is deemed to have continued under the purchase. Unless otherwise agreed to by the purchaser, seller, or employee, this could affect the purchaser when it comes to things like salary, notice periods for termination, bonuses, and severance! Worth noting is that the purchaser and the employee CANNOT contract out of the Employment Standards Act, 2000. So a contract that tries to override these terms is void. Also, if the purchaser requires the vendor to terminate all the staff prior to the closing and then the purchaser rehires them immediately after the closing, it still won’t make a lick of difference. The ESA cannot be overridden with terminations!

But there is an exception to this rule: if the purchaser waits thirteen (13) weeks before hiring an employee, then the purchaser will NOT inherit the employee’s length of service prior to the deal closing. But who has time to wait 13 weeks? There’s a limited talent pool out there of good employees, so you’ll need to keep ’em if you got ’em.

So how can the purchaser protect him or herself (if the purchaser is an individual) or itself (if the purchaser is a dentistry professional corporation)?

Well, first, there is something we lawyers like to call indemnification. It’s basically a promise to pay. So if I were representing the purchaser, I would ask for an indemnification from the vendor such that, if the purchaser is deemed by the Labour Relations Board of Ontario (the government body responsible for enforcing the Employment Standards Act, 2000), then I would want the vendor to cover the costs related to the employee’s pre-closing length of service. It’s only fair.

Now, what if the purchaser is buying the shares? Well, at first glance, the provisions of section 9 of the Employment Standards Act, 2000 may not apply. Why? Because a share sale doesn’t appear to fit with the asset sale that is contemplated in that section. All that is happening is the owner of the corporation (which is a separate legal person from its owners) changes hand. But the employment relationships that existed before the deal finished will – unless something is done to the contrary – remain in place with those employees. So if the corporation had an employment agreement in place with an office manager, treatment coordinator, dental assistant, hygienist, associate dentist or principal dentist AND none of those employment agreements were terminated by either party as a result of the share purchase deal finishing, then the liabilities that existed with respect to employees BEFORE the deal finished will continue to apply AFTER the deal finishes. Again, without any termination or resignation, the new owner of the corporation will simply continue to indirectly (through the corporation) assume the employee liabilities that existed before the deal finishes. S you’d think that the vendor merely needs to agree to terminate its employees and have the existing employees rehired by the purchaser (either on terms that are similar to the pre-closing employment OR on terms that are completely up to the purchaser. T  idea here is that if the vendor provides written notice that is sufficient under the common law and Employment Standards Act, 2000, then the purchaser would be off the hook with respect to employee liabilities, right? Keep reading.

There may be an argument that an amalgamation of two dentistry professional corporations may trigger section 9 of that ESA– and therefore create liabilities under the Employment Standards Act, 2000 – EVEN IF THERE ARE TERMINATIONS PRIOR TO THE CLOSING! There is case law and legal jurisprudence to support this view. Basically, it’s often the case that a dentistry professional corporation will purchase the shares of another dentistry professional corporation from a dentist shareholder (there may also be other shareholders. From here, the purchasing dentistry professional corporation will need to amalgamate with the vendor dentistry professional corporation (combine assets, change the name of the corporation, etc.) and become a newly amalgamated corporation. It is this process of amalgamation that may trigger section 9 of the ESA.   And remember: you cannot contract out of section  9! T  only way to have the amalgamated corporation avoid being credited with the length of service for employees prior to the deal finishing IS NOT TO HIRE THEM FOR AT LEAST 13 weeks after the closing. But who really does that? Nobody I know.

So what else can be done? Well, how about an indemnification. We talked about these above. They’re basically promises to pay. That’s why I like to include – in asset AND share sales – that the vendor provide an indemnification such that, if the Ontario Labour Relations Board ever comes after the purchaser amalgamated corporation and credits them with an employee’s length of service prior to the closing date (i.e. when the deal finished and ownership changed), then the VENDOR will agree to pay the purchaser for such credit being attributed to it. Nic and easy.

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.