header_iceberg.jpg

Posts tagged: termination costs

The Cost of Terminating Employees When a Business is Sold

By , April 17, 2018 8:29 am

When a business is sold the cost of terminating unwanted employees can significantly impact the sale price. The purchaser does not want to pay the cost of terminating long service employees, and the seller doesn’t want to incur termination costs which reduces the net sale price.

General Rules on Termination Pay Obligation when a Business is Sold

  1. Under the Employment Standards Act (the “ESA”)

A section in the ESA states that when a business is sold an employee’s service with the seller is deemed to be service with the buyer when the buyer subsequently terminates the employee. So if an employee worked five years with the seller and is terminated six months later by the buyer then the buyer owes the employee five weeks notice of termination; not one week notice.

  1. At Common law

Unless the buyer stipulates otherwise, an employee’s service with the seller is taken into account by the courts when determining common law reasonable notice of termination when the buyer subsequently terminates the employee.

How the Seller of a Business Can Reduce Termination Costs

If you are thinking of selling your business over the next 2 to 3 years then a great way to reduce termination costs is to make sure that all of your employees have signed an employment contract with an enforceable termination clause. This clause can significantly reduce your termination pay obligations for employees you are required to terminate as a condition of the sale.

Existing employees can sign an employment contract but managing this process can be very tricky. We help sellers navigate this legal and HR minefield.

How a Purchaser of a Business Can Reduce Termination Costs

If you are buying a business then a great way to limit liability for termination pay for the employees you inherit from the seller is to require them to sign an employment contract with an enforceable termination clause.

We help buyers prepare employment contracts for the seller’s employees that address employee benefits, vacation, termination pay and other terms of employment that are of interest to the seller’s employees. This is especially important for key employees who are critical to the continued success of the business.

Lessons to Be Learned:

1. The cost of terminating long-term employees can be significant. In fact, in some cases I have seen termination costs eat up most of the sale proceeds.

2. To avoid this situation, termination costs can be reduced by including a termination clause in an employment contract. These contracts can significantly benefit the seller.

3. Often one of the key challenges for the seller is convincing the buyer to take on all employees on substantially the same terms and conditions of employment. We help our clients with this issue.

4. On the other hand, one of the key success factors in a sale of a business for the buyer is retaining certain key employees. Negotiating a “fair” employment contract with these employees can be difficult because these employees have so much bargaining power. We help our clients with this negotiation.

5. Sellers and buyers can benefit from speaking with an employment lawyer well in advance of the sale of a business.

For over 30 years Doug MacLeod has been advising employers on all aspects of the employment relationship. You can contact Doug directly at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

Avoiding Wrongful Dismissal Litigation: One Employment Contract at a Time

By , March 24, 2015 9:55 am

Many wrongful dismissal cases are determined by the sensibilities of the judge who is appointed to the case. Some are employee friendly. Others are employer friendly.

Consider the opening sentence of a wrongful dismissal case that was decided earlier this month: “Employment law is governed by the notion that the employer should not be able to use its larger power to unfairly gain an advantage over the employee.” I didn’t need to read any further to know who won this case…

The Case of An Employer Trying to Avoid Termination Pay By Requiring An Employee to Enter into a Series of One-Year Fixed Term Contracts

 I strongly oppose the use of fixed term contracts. A contract of indefinite employment with a well-drafted termination clause can usually achieve the same end. It also avoids you the time, cost, disruption and uncertainty associated with litigation.

Here’s what can happen if an organization uses a fixed-term contract:

In Michela v. St. Thomas of Villanova Catholic School, three teachers signed a series of one-year contracts; two of them signed 12 one-year contracts, and the other signed 8 one-year contracts. They were all notified that the last contract would not be renewed when it expired on August 31, 2013. These types of contracts are common in private schools.

The teachers claimed the last contract was not a fixed term contract and were therefore entitled to “reasonable” notice of termination. The school claimed the teachers had signed a one-year fixed term contract that ended on August 31, 2013 and were not entitled to any further notice of termination. The judge looked at the entire agreement and the surrounding circumstances and concluded the last contract was not a one year fixed-term contract. She stated:

“The term (of the 2012-2013 contract) is for one year, but the contract contemplates that it may operate for either a longer or shorter period… (A term in the 2000-2001, 2001-2002, 2002-2003, 2003-2004, 2004-2005 contracts) required the teacher to decline a renewal in writing 30 days before the end of the current contract…. For the first three school years referred to, these contracts also included a term that says that the Agreement would automatically expire on September 1st of the applicable year (i.e. 2000-2001 2001-2002 and 2002-2003) …For the fourth and fifth years, the clause was amended by adding additional direction: The teacher will be notified in writing by April 15th [of the applicable year] if the School does not intend to offer the teacher a full time position for the [subsequent] school year (i.e. 2003-2004 and 2004-2005)”.

 “…For the first three years, which is it? Does the contract expire or, absent a notice declining renewal, was the contract renewed? For the fourth and fifth years, the position depends on a double default. Absent a notice that the School did not intend to offer the teacher a position for the upcoming year or a notice from the teacher declining a renewal, the teacher would continue for another year. Either way, there is ambiguity.

 Lessons to be Learned

 1. Judges are unpredictable. We generally have excellent judges in Ontario who do their best to apply the law fairly. Each judge however has a unique personal, educational and professional background. I believe this background influences how they mete out justice. Two judges hearing the same facts could come to different conclusions. This is one of the reasons why lawyers try to settle cases early in the litigation process; to avoid this litigation risk.

2. Fixed-term contracts can be very costly. In this case, each of the three employees was awarded six months compensation in lieu of notice, and the employer was ordered to pay $ 42 000 in legal costs. The employer was also, of course, required to pay it’s own legal costs. In this case, the school could ill afford these costs. In this regard, the school terminated the three employees (and 2 others) because it believed it was likely facing a $300,000 shortfall in revenue for the 2013-2014 school year.

3. Employment contracts save termination costs. Under a series of one year fixed-term contracts, a teacher with 25 years service earning $ 100 000 a year could be entitled to receive as much as 24 months notice of termination (or up to $ 200 000 pay in lieu of the notice) whereas a school who uses a well-drafted employment contract can reduce this notice period to 8 weeks (or about $ 15 000 in lieu of notice).

For the past 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers and employees on all aspects of the employment relationship including employment contracts. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

 

Panorama Theme by Themocracy