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Staff Liability in Asset Purchase Transactions

By November 24, 2013January 20th, 2022Buying a Practice, Employment Law, Selling A Practice

It happens every day. A receptionist with 20 years of experience working at the same dental office shows up to work, only to be told that the dental practice is now owned by another dentist. Her heart sinks. She fears she might lose her job. Or perhaps she’ll be asked to stay on – but her new terms of employment may be less favourable. She doesn’t think she can find other employment easily at her age. So she contacts an employment lawyer to find out where she legally stands vis-à-vis the dentist who sold the practice and the dentist who just bought it.

The next move is crucial. The wrong move could result in a time-consuming, emotionally draining, and costly legal battle against the selling and/or purchasing dentists. And much will depend on the various factors that may or may not exist.

Asset Purchase/Sale

This article will discuss staff liabilities that dentists may face when buying or selling the assets of a dental practice; this differs from when dentists buy or sell the shares of a dentistry professional corporation, which is a topic for another article.

So with that said… an asset purchase transaction starts with a “Seller”. This is the dentist who is carrying on their dental practice either personally or through a dentistry professional corporation. The Seller owns the assets that make up the dental practice and has oral or written employment agreements with staff. The Seller ultimately sells those assets to a purchaser, which may be a dentist or a dentistry professional corporation. We will call this person the “Purchaser”. The Purchaser will also likely assume the Seller’s lease or purchase the property where the dental practice is being carried on from.

After the sale is completed, staff who have not been provided with proper Notice may potentially make a claim against the Seller and/or the Purchaser. What follows is a brief discussion of what constitutes “proper notice” and for which the Seller and/or Purchaser may be held liable.

Proper Notice

“Proper notice” is the minimum amount of time (or payment equivalent to such time) which a dentist employer is required to give an employee before they can terminate them (“Notice”). The length of Notice is determined by the Employment Standards Act, 2000 (ESA) and the common law (ie judge-made law). As seen below, these two standards are very different. But, importantly, the common law may not always apply – for example, if the employee signed a valid employment agreement with the Seller or Purchaser giving up their entitlements to Notice at common law; in these situations, only the minimum Notice under the ESA would govern. Worth mentioning is that a dentist employer cannot avoid the ESA’s minimum standards by signing an employment agreement with staff that says otherwise.

Employment Standards Act

In the context of an asset sale, the ESA tends to impose liability for minimum Notice on the Purchaser. The ESA sets out the following minimum Notice which a dentist employer must provide an employee before terminating them:

Length of Service

Notice

3 Months < 1 Year 1 Week
1 Year < 3 Years 2 Weeks
3 Year < 4 Years 3 Weeks
4 Year < 5 Years 4 Weeks
5 Year < 6 Years 5 Weeks
6 Year < 7 Years 6 Weeks
7 Year < 8 Years 7 Weeks
+ 8 Years 8 Weeks

If the Seller provides Notice to staff prior to or on completion of the sale, this will eliminate their and the Purchaser’s liability concerning Notice under the ESA; the Purchaser would be free to hire the staff as if they were brand new. But sellers typically don’t want to notify staff in advance of the sale – for fear of lowering morale or losing staff – or pay them the equivalent of Notice on the day of the sale.   And in today’s (seller’s) marketplace, a Purchaser can rarely force a Seller to do so.

So instead, the Seller will generally require the Purchaser to immediately assume the staff after the sale (and often on the same employment terms and conditions as existed before the sale). In these circumstances, the ESA says that that employee will not be considered to have been terminated for the purposes of the ESA; this means that that employee’s past length of service with the Seller will be assumed by the Purchaser. So if the Purchaser wanted to terminate a veteran receptionist with 20 years of service a few days after the sale, the Purchaser would be required to give her at least eight weeks’ Notice in accordance with the ESA.

The exception to this rule is if the Purchaser does not hire the employee for the first thirteen weeks after the sale; in these situations, the employee’s past length of service with the Seller does not transfer over to the Purchaser. But this exception is of little help to the Purchaser, who will want to keep the staff employed at the practice immediately after the sale (to maintain business operations).

So to recap, if the Seller doesn’t provide Notice to staff prior to or on the day of the sale and the Purchaser doesn’t wait thirteen weeks before hiring the staff, the Purchaser will assume the employee’s past length of service with the Seller for the purposes of giving Notice after the sale. For these reasons, Purchasers should immediately provide staff with working Notice in accordance with the ESA immediately after the sale. After that working Notice expires, the Purchaser can then present staff with new employment agreements to sign; if and when staff sign those new agreements, the Purchaser’s liability under the ESA will have been mitigated, and the employee’s length of service will start from zero again.

Common-Law

In the context of an asset sale, the common law (ie judge-made law) may impose liability for reasonable Notice on the Seller and/or the Purchaser.

For an employment agreement with an indefinite term,[1] the common law generally requires an employer to provide an employee, prior to terminating them, with one month of Notice for each year of service, up to a maximum of roughly twenty-four months. For example, in Dechene v. Dr. Khurrum Ashraf Dentistry Professional Corp, [2011] OJ No 4940, affirmed by [2012] OJ No 3847, the Court ordered Dr. Khurrum Ashraf Dentistry Professional Corporation to pay Jennifer Dechene (a part-time hygienist) $25,000 after it terminated her without providing any Notice; that amount represented six months’ worth of reasonable Notice at common law, after factoring in Ms. Dechene’s six years of service.

Canadian courts have held that, when the assets of a business are sold, an employee of the Seller is considered to have been terminated without Notice and may look to the Seller for damages. But an employee who retains their employment with the Purchaser following an asset sale is entitled to have their length of service with the Seller, as well as with the Purchaser, taken into account for the purposes of calculating their Notice entitlements at common law after the sale. This means that the Purchaser could be liable for substantive Notice at common law if they decide to terminate that staff later on. That said, the Purchaser can avoid this liability by presenting an employment agreement to the employee immediately after the sale, which states that the employee’s past length of service with the Seller will not be credited with the Purchaser; in these situations, if the employee chooses not to sign the Purchaser’s employment agreement, they will only be able to look to the Seller for damages based on reasonable Notice at common law. See Addison v. M. Loeb Ltd (1986) 53 OR (2d) 602 (CA); Sorel v. Tomenson Saunders Whitehead Ltd (1987), 16 CCEL 223 (BCCA); Walker v. Serviplast Inc (1995), 13 CCEL (2d) 48 (Ont Gen Div), affirmed by [1998] OJ No 1451, Doc CA C22768, C22786 (Ont CA); Kamen v. Rose [2001] OJ No 2911 (Ont SCJ); and Debenham v. CSI-Maximus [2001] OJ No 6274, affirmed by [2003] OJ No 1210 (Ont CA); and Salazar v. Murt Canada Inc., [2007], OJ No 2406.

Bottom Line

Ideally, to help eliminate staff claims based on inadequate Notice in the context of an asset purchase transaction, the Seller and the Purchaser should consider taking the following steps:

Period

If

Then

Before the Sale

The Seller does not have any written employment agreements with staff. The Seller should simultaneously provide the staff with minimum Notice under the ESA and reasonable Notice at common law (especially before asking staff to sign a new employment agreement).
The employee has a written agreement with the Seller that PRECLUDES the employee from claiming reasonable Notice at common law. The Seller should provide existing staff with minimum Notice under the ESA.
The employee has a written agreement with the Seller that DOES NOT PRECLUDE the employee from claiming reasonable Notice at common law. The Seller should simultaneously provide staff with minimum Notice under the ESA and reasonable Notice at common law.

After the Sale

The Purchaser does not wish to keep any staff. The Seller should provide staff with minimum Notice under the ESA and/or reasonable Notice at common law (see above to determine the extent of the Seller’s liability).
Though not immediately, the Purchaser wants to present staff with a new employment agreement THAT DOES NOT INCLUDE a clause that denies credit for their past length of service with the Seller. The Purchaser should first simultaneously give working Notice under the ESA and reasonable Notice at common law before asking staff to sign that new agreement.
The Purchaser wants to immediately present staff with a new employment agreement THAT INCLUDES a clause that denies credit for their past length of service with the Seller. The Purchaser should first give working Notice under the ESA before asking staff to sign that new employment agreement.
The Purchaser keeps an employee but ultimately wishes to terminate them. See the first three tranches above to determine the extent of the Purchaser’s liability. Also, the termination costs should be allocated in the asset purchase agreement between the Seller and the Purchaser in a fair and reasonable manner (factoring in the employee’s length of service before and after the sale, as well as when the Purchaser terminates the employee).

[1]              This differs from a definite term, such as one year.

DMC