M&A transactions: Employment continuity in Quebec

This article was originally published by The Lawyer’s Daily, part of LexisNexis Canada Inc.

Labour and employment issues can be significant in the context of the sale of a company. While employment costs may be expensive to assume and some businesses may have a too large or inefficient workforce, continued employment may also prove critical to the long-term success of a business. One of the primary issues that arises in the context of a merger and acquisition (M&A) transaction is therefore whether the vendor’s employees will stay on with the purchaser.

Continuity of individual employment contracts 

The principles governing union laws in Quebec are similar to those in other Canadian provinces. Generally, the sale of a company does not invalidate any certification or collective agreement, which remains binding on the purchaser.

With respect to individual employment contracts, however, Quebec legislation is unique. The common law makes a distinction depending on the type of transaction: in an asset purchase, employees are presumed to be terminated, whereas, in a share purchase, the employment relationship is not impacted.

Conversely, under Quebec legislation, regardless of whether the transaction involves the purchase of a company’s assets or shares, individual employment contracts in effect at the time of the sale of the company are automatically continued with the purchaser provided the activities of the vendor are also continued with the purchaser.

Put differently, the sale of a company does not in itself terminate an employment contract (and, regardless, does not constitute a serious reason or a good and sufficient cause to do so). Consequently, if an employee’s employment contract is not terminated by the vendor prior to the sale of the company, then, following the sale, the purchaser takes the vendor’s place and the said employee is considered the purchaser’s employee.

Practical considerations

The continuity of individual employment contracts implies practical considerations that must not be overlooked when advising on an M&A transaction involving employees governed by Quebec legislation. The following constitute particularly significant issues in this regard:

1. The purchaser is not required to make an employment offer in order to keep the vendor’s existing employees. 

Nonetheless, it is standard practice for the purchaser to renegotiate the terms and conditions of employment of the vendor’s key existing employees in order to ensure that such employees continue to work for the company, rather than resign.

The purchaser may wish, for example, to insert carefully drafted restrictive covenants in the employees’ current employment contracts (subject to offering them appropriate consideration in exchange for substantially modifying their terms and conditions of employment) and to offer them a retention bonus or promotion. This is ideally done before the closing of the transaction in order to ensure better leverage.

2. The purchaser shall employ the vendor’s existing employees. 

Failing this, the purchaser will be solely liable for any severance pay claimed by these employees unless otherwise provided in the transaction agreement and unless a serious reason or good and sufficient cause is established.

Conversely, subject to the same restrictions and assuming that the purchaser does not hire the terminated employee following the sale, if an employee’s employment contract is terminated by the vendor prior to the sale of the company (whether at the purchaser’s request or not) the vendor, rather than the purchaser, will be solely liable for severance pay.

In both cases, employees credited with two (2) years of uninterrupted service may also file a complaint and seek to be reinstated under the new employer, namely the purchaser, unless a good and sufficient cause is established.

Notably, however, the former employer, namely the vendor, and the new employer, namely the purchaser, are bound solidarily with respect to any civil claim brought under the applicable labour standards and which has not been paid at the time of the sale of the company. Where an employee’s employment contract is not terminated by the vendor prior to the sale of the company, it is thus important for the purchaser to include indemnification provisions pertaining to such claims in the transaction agreement.

3. The purchaser shall offer substantially similar terms and conditions of employment to the vendor’s existing employees.

More specifically, in addition to essential terms and conditions of employment such as employees’ remuneration or the nature of employees’ tasks and their place of performance, the purchaser shall also, among other things, recognize employees’ accumulated vacations and years of service with the vendor.

Otherwise, unless a serious reason or good and sufficient cause is established, the purchaser may be exposed to claims of constructive dismissal.

When advising on an M&A transaction involving employees governed by Quebec legislation, lawyers should pay special attention to the unique provisions provided thereunder, especially when employees governed by the legislation of other Canadian provinces are also involved.