Selling a business with employees in Ontario does not erase your obligations to those employees. In most cases the sale transfers or crystallizes those obligations, and the seller needs to know which before signing anything. Under section 9 of the Employment Standards Act, 2000, employment is deemed continuous when a business changes hands, so years of accrued service can follow your staff to the buyer, or land back on you as a termination bill.
At Hadri Law, we advise business owners on the intersection of M&A and employment law, and this is one of the most under-planned parts of a sale. The tension is simple to state and expensive to ignore: the Employment Standards Act protects the employee, but the purchase agreement decides who actually pays. This guide is written for the seller. Every section answers one question. What are you on the hook for, and how do you limit it?
Why Deal Structure Decides Everything for Your Staff
Before you think about severance, indemnities, or holdbacks, you need to settle one structural question, because it governs almost every employee consequence in the transaction. Are you selling shares or assets?
In a share sale, the corporation that employs your staff does not change. Only its shareholders do. The employer on every employment contract stays exactly the same legal entity, so employees carry on with no gap in service, no termination, and no new offer of employment required. From an employment standpoint, the transaction is largely invisible to your team. Their contracts, seniority, and accrued entitlements continue automatically because, in law, nothing about their employer has changed.
An asset sale works very differently. Your corporation continues to exist, but the business itself, the equipment, contracts, goodwill, and operations, moves to a new legal entity owned by the buyer. Even if every employee shows up to the same desk the next morning doing the same job, in law the buyer is a new employer. Your staff are technically being severed from the selling corporation, and the buyer decides, employee by employee, who receives an offer to continue.
Buyers frequently prefer asset sales precisely because they want to choose which liabilities they take on. That preference is legitimate, but it has direct employment consequences you must anticipate. This is the single most important structural decision affecting employee risk when selling a business with employees in Ontario, and it should be flagged by your lawyer at the letter of intent stage, not discovered after signing. If you are weighing the two structures, our breakdown of a share purchase versus an asset purchase explains the wider trade-offs, and settling the point early is one reason to get the letter of intent right before momentum takes over.
ESA Section 9: The Successor Employer Rule in Ontario
The starting point for employee rights when a business is sold in Ontario is section 9 of the Employment Standards Act, 2000. It sets out what is often called the successor employer rule, though the Act frames it as continuity of employment.
Section 9(1) provides that if a purchaser of a business employs an employee of the seller, the employment is deemed not to have been terminated by the sale, and the employee's length of service with the seller counts as service with the purchaser. In plain terms, when the buyer hires your employee, the service clock does not reset. All those years of tenure carry over for the purposes of the Act, including vacation entitlement, notice of termination, statutory severance eligibility, and various job-protected leaves. (ESA s. 9)
The definition of "sale" here is deliberately broad. Section 9(3) defines "sells" to include leases, transfers, and dispositions of a business in any other manner, and the Ministry of Labour's interpretation guidance applies that broad definition consistently, so you cannot sidestep continuity by dressing the deal up differently. (ESA Policy and Interpretation Manual, Part IV)
There is one important exception. Under section 9(2), continuity does not apply if the purchaser employs the individual more than 13 weeks after the earlier of the employee's last day of work for the seller and the day the sale closed. This 13-week window is a genuine planning date. If a buyer intentionally waits out that period before rehiring, the prior service does not transfer. For most sellers, though, the practical effect of section 9 is that the buyer inherits the service history of every employee it keeps.
Note what section 9 does and does not do. It carries service forward for entitlements under the Act. It does not, on its own, decide who ultimately pays for those entitlements. That is a separate negotiation, covered below. And it does not extend to common-law reasonable notice, a gap we return to shortly because sellers consistently underestimate it.
What Happens to Employees the Buyer Does Not Want
Here is the moment where seller exposure becomes real. In an asset sale, the buyer is under no legal obligation to hire any of your employees. The buyer picks who receives an offer, and it is free to leave the rest behind.
For any employee the buyer does not offer a comparable position, that employee's employment with your corporation ends at closing. And because your corporation is the terminating employer, you are the one responsible for the resulting costs. That means Employment Standards Act termination pay, up to eight weeks depending on length of service, and, where the thresholds are met, statutory severance pay on top. It can also mean common-law wrongful dismissal exposure, which we discuss below and which is frequently the largest number of all. (ESA termination guide)
Say that plainly to yourself before you negotiate: if your purchase agreement does not require the buyer to make offers of employment, you could be writing termination and severance cheques for staff you no longer control, while the buyer walks away clean with the business. That is exactly the outcome to negotiate against. Sellers should push for deal terms that require the buyer to offer employment, on substantially comparable terms, to some or all staff as a condition of closing. Doing so is the cleanest way to move that liability off your books, and it sets up the risk-allocation tools discussed later.
One caution about the buyer's freedom to choose. A buyer can select its workforce, but it cannot refuse to hire someone on the basis of a protected ground such as disability, age, or family status under the Human Rights Code. That is primarily the buyer's risk, but it is worth a line in your planning if your buyer is not legally sophisticated.
Not every seller faces a statutory severance bill, and it is worth being precise. Statutory severance pay under section 64 applies only where the employee has five or more years of service and the employer either has a payroll of $2.5 million or more, or is severing 50 or more employees within a six-month period because of a permanent discontinuance of business. (ESA severance pay) Many smaller business sales will trigger termination pay but not statutory severance. Do not assume severance always applies, and do not assume it never does.
The Gap Sellers Underestimate: ESA Minimums vs. Common-Law Notice
This is the point that separates careful sellers from surprised ones. When an employee is terminated in connection with a sale, two separate legal regimes can apply, and they produce very different numbers.
The first is the Employment Standards Act minimum: capped, formulaic, and based on length of service, running up to eight weeks of termination pay plus statutory severance where it applies. The second is common-law reasonable notice. It is uncapped, fact-specific, and assessed using the well-known Bardal factors: the employee's age, position, length of service, and the availability of similar employment. For a long-tenured or senior manager, common-law notice can amount to many months of pay, far exceeding the statutory floor. As a rough practitioner rule of thumb, some describe it as loosely one month per year of service with a soft ceiling near 24 months, but there is no fixed formula and no statutory cap, and outcomes vary case by case.
Here is the nuance that trips people up. Section 9 continuity applies for Employment Standards Act purposes only. It does not automatically hand the buyer the employee's full length of service for common-law reasonable notice. The Ontario Court of Appeal addressed this in Manthadi v. ASCO Manufacturing Ltd., 2020 ONCA 485, holding that prior service with a predecessor employer is not automatically tacked on for common-law notice after an asset sale. Instead, that prior experience is one factor a court may weigh, not a guaranteed inherited entitlement. (Manthadi v. ASCO Manufacturing, 2020 ONCA 485)
Why does this matter to you as the seller? Because if you terminate an employee outright rather than arranging for the buyer to make an offer, your common-law exposure is calculated on that employee's full history with your business. For a manager who has been with you for 15 years, that number can dwarf the Employment Standards Act minimum. This is precisely why a "quiet" termination tied to a sale is so expensive, and why arranging buyer offers of comparable employment is your best protection. These calculations sit at the crossroads of deal law and employment law, which is why sellers benefit from involving employment counsel alongside their M&A team.
Constructive Dismissal Risk When Terms Change
Even when the buyer does make offers, the risk is not gone. If the buyer changes material terms at the point of transfer, cutting pay, downgrading the role, relocating the job, or stripping benefits, that can amount to constructive dismissal, which carries its own liability.
That is mostly the buyer's post-closing problem, but it can wash back onto you. If the purchase agreement never defines what "comparable employment" means, an employee who rejects a watered-down offer may argue no genuine offer was made. Disputes like that can return to the seller through indemnity claims, with the buyer alleging you breached the employee-related representations in the agreement. The fix is drafting discipline: define an offer of employment with real specificity, the same or better pay, benefits, and duties, so there is little room for downstream argument about whether the offer was adequate.
Allocating Employee Liability When Selling a Business With Staff
None of the protection above happens automatically. It is drafted into the deal, and this is your actual risk-management toolkit.
Start from the defaults. In a share sale, because the employer entity does not change, the buyer inherits existing employee liabilities, including accrued vacation, unpaid bonuses, and potential claims, unless the agreement carves specific items back to you. In an asset sale, the reverse is true: you keep employee liabilities unless the agreement obliges the buyer to make employment offers and spells out what happens if it does not.
The purchase agreement should include seller representations and warranties confirming that employee records are accurate, covering service dates, compensation, accrued entitlements, and any pending Employment Standards Act or human rights complaints. Inaccurate reps here are a common trigger for post-closing disputes. Layered on top, negotiate indemnities that address employment liabilities directly: who pays if a terminated employee sues, who covers a post-closing constructive dismissal claim, and how long those indemnity obligations survive closing.
A holdback or escrow gives those indemnities teeth. A portion of the purchase price, sometimes in the range of 10 percent, can be held for a defined period such as 12 to 18 months specifically to fund employee-related claims that surface after closing. If none arise, the funds release to you. Finally, the agreement should identify which employees transfer, by name or role, on what terms, and by what deadline. Vague "reasonable efforts" language leaves you guessing about your exposure, which is the opposite of what a seller wants.
These are standard deal terms, but they are also the ones that get rushed when a transaction is moving fast. Getting them drafted properly is exactly the kind of work our M&A lawyers do alongside employment counsel, and it is why the two disciplines should sit at the same table.
A Practical Pre-Sale Checklist for Sellers
- Inventory every employee: hire dates, current pay, accrued vacation and bonus obligations, and any outstanding Employment Standards Act or human rights complaints.
- Decide before the letter of intent whether the deal is a share sale or an asset sale, and understand the employee consequences of that choice.
- If it is an asset sale, negotiate for the buyer to offer comparable employment to some or all staff as a closing condition.
- Build in specific employee-related indemnities and a holdback tied to those claims.
- Get "keeping everyone on" in writing. Verbal assurances from a buyer are worth nothing after closing.
- Bring in employment counsel alongside your M&A lawyer. The two areas intersect constantly in a business sale and are easy to under-resource.
Frequently Asked Questions
If a business is sold, what are employees' rights in Ontario?
Under section 9 of the Employment Standards Act, employment is deemed continuous when a buyer hires the seller's employee, so length of service carries over for termination pay, severance, and vacation entitlement. Common-law reasonable notice does not automatically carry over the same way. The buyer must also hire within 13 weeks of the sale for continuity to apply.
Who pays severance when a business is sold, the buyer or the seller?
It depends on structure and drafting. In a share sale the employer does not change, so liabilities generally stay with the business the buyer now owns. In an asset sale, employees the buyer does not hire are terminated by the seller, so the seller pays their termination and any severance unless the agreement shifts that cost.
Can an employee refuse a job offer from the new owner and still get severance?
Possibly. If the new owner's offer materially reduces pay, role, or benefits, an employee may treat it as no reasonable offer and pursue termination entitlements. If the offer is genuinely comparable and the employee declines anyway, their claim is much weaker. Clear "comparable employment" wording in the agreement reduces this ambiguity.
Is a new employer required to keep the same employment terms after a business sale?
No. In an asset sale the buyer sets the terms of any offer it makes. Changing material terms can create constructive dismissal risk, which is one reason purchase agreements should define what a comparable offer must include.
Sources & Official Resources
Ontario Statutes Cited
- Employment Standards Act, 2000, s. 9 - Continuity of Employment on Sale of a Business
- Employment Standards Act, 2000, s. 64-65 - Severance Pay
- Employment Standards Act, 2000, s. 54-57 - Termination of Employment
- Human Rights Code, R.S.O. 1990, c. H.19
Government Guidance 5. ESA Policy and Interpretation Manual, Part IV - Continuity of Employment
Case Law 6. Manthadi v. ASCO Manufacturing Ltd., 2020 ONCA 485 (CanLII)
Helpful Resources 7. Law Society of Ontario - Find a Lawyer
Contact Hadri Law
Selling a business with employees means navigating two overlapping legal frameworks at once, corporate and M&A law on one side, employment law on the other. Getting the purchase agreement wrong can leave you exposed to termination and severance costs long after the deal has closed.
Hadri Law brings both sides of that equation under one roof. Our team includes M&A depth, with 90-plus asset and share sale transactions behind us, and employment law capability, which is exactly the intersection this article is about. We help business owners across Toronto and the GTA structure sales that allocate employee risk deliberately rather than by accident.
Call (437) 974-2374 for a free consultation. We serve clients in English, French, Spanish, and Catalan.
This article provides general information and is not legal advice. Every situation is different. Contact a lawyer to discuss your specific circumstances.
