Business Sale Where the Purchaser Rehires Employees: Will the Employee's Length of Service Carry Over?

Business Sale Where the Purchaser Rehires Employees: Will the Employee's Length of Service Carry Over?

When purchasing a business in British Columbia, one critical question for buyers and sellers alike is whether rehired employees’ length of service will carry over to the new employer. This issue is significant because the longer an employee has worked for a company, the greater their entitlement to notice or severance pay upon termination without cause under both common law and the Employment Standards Act of British Columbia. Court awards for common law severance pay can potentially require the employer to compensate the employee for up to 24 months of the terminated employee's pay.

Understanding whether an employee’s service is considered continuous or reset upon a business transfer determines who—the buyer or seller—is responsible for severance obligations.
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Employment Standards Act: Successor Employer Rules

Under Section 97 of the Employment Standards Act (BC):

If all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition. (Employment Standards Act, RSBC 1996, c 113)

This means that if employees continue working for the buyer without interruption, their service is deemed continuous, and the buyer assumes all related liabilities. However, if the employee is terminated by the seller, and there is a break in employment, and the employee is rehired by the buyer, the length of their service may be considered reset to "zero", essentially, as if it were that employee's first working day, thus limiting severance pay obligations to the seller.
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Case Example: A Tribunal Decision on Service Reset

In a BC tribunal case concerning the purchase of a restaurant, employees were terminated by seller six days before the closing date of the sale. However, the buyer hired those same employees three days before the transfer of ownership. Those same employees were terminated by the buyer around two weeks later, and the terminated employees then filed a tribunal claim seeking severance pay based on their length of employment with the seller.

The tribunal ruled that because the employees were not working for the seller at the exact moment ownership transferred, their length of service had reset to zero. This meant:

• The seller was liable for severance pay for the terminated employee's full tenure prior to termination.
• The buyer started with a “clean slate,” without inheriting past service obligations.

Key takeaways: Employees must be employed by the seller on the date of ownership transfer for their service to be considered continuous. (Reconsideration of BC EST # D466/99)
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Practical Tips for Sellers and Buyers in a Share Sale with Non-Unionized Employees

For Sellers:

1. Assess and address employment liabilities: Ensure long-term responsibilities for vacation pay, unpaid wages, and potential disputes are resolved before the sale.
2. Negotiate severance obligations: You may negotiate a lower sale price in exchange for the buyer assuming severance obligations.
3. Ensure records are up to date: Provide accurate employment records, including contracts, benefits, and outstanding compensation.
4. If employees are not rehired, settle outstanding obligations, including:
    
   • Accrued vacation pay
    
   • Unpaid bonuses or commissions
    
   • Pension or benefit entitlement
5. Consider reputational impact – Poor handling of terminations can harm your business’s value and expose you to legal risks.
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For Buyers:

1. Conduct thorough due diligence:
    
   • Obtain a full list of employees, roles, tenure, benefits, and agreements.
    
   • Review outstanding employment disputes, wrongful dismissal claims, or WorkSafeBC issues.
    
   • Verify unpaid wages, vacation pay, and liabilities that could transfer to you.
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2. Plan for employee retention:
    
   • Decide which employees to retain and under what terms.
    
   • Communicate strategically to maintain morale and ensure a smooth transition.
    
   • Offer retention bonuses or incentives to retain key employees.
    
   • Identify critical employees and assess the risk of turnover.

For Buyers and Sellers: Consult a Corporate Lawyer and Accountant First

Buying or selling a business comes with significant financial, legal, and employment risks—don’t navigate it alone. A corporate lawyer and accountant can help you:

✅Identify and mitigate risks related to employee liabilities, contracts, and severance costs
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✅Ensure compliance with BC employment laws and tax regulations
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✅Structure the deal to minimize expenses and avoid hidden liabilities
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Before you sign anything, consult with your corporate lawyer and accountant to safeguard your investment and ensure a smooth transition.

Contact Us for Expert Legal Advice

Serving Vancouver Island – Parksville, Port Alberni, Nanaimo, Cowichan Valley, Duncan, Mill Bay, and Victoria

Andrew Reed @ Johnston Franklin Bishop Lawyers
ar@jfblaw.ca
250-756-3823

Protect your business and your bottom line—call us today!

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