Purchase of a business: Beware of the possible reinstatement of employees!

December 2013

Purchase of a business: Beware of the possible reinstatement of employees!

bouton-vers-francaisRobert Potvin
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The purchaser’s obligations towards employees when a business is purchased are governed by the Civil Code of Québec (“C.C.Q.”) and the Act respecting labour standards (“L.S.A.”). Note that article 2097 C.C.Q. stipulates that:

"A contract of employment is not terminated by alienation of the enterprise or any change in its legal structure by way of amalgamation or otherwise. The contract is binding on the successor of the employer. (Art. 2097 C.C.Q.)"

In addition, section 97 L.S.A stipulates:

"The alienation or concession in whole or in part of the undertaking, or the modification of its juridical structure, namely by amalgamation, division or otherwise, does not affect the continuity of the application of the labour standards. (Art. 97 L.S.A.)"

Therefore, all employment contracts remain in effect under the same conditions for a purchaser who continues the “business”.

Positions abolished or employees dismissed prior to the acquisition

Where the purchaser wishes to abolish certain positions or to dismiss employees prior to the acquisition, the purchase agreement should provide that any termination (in particular the paid notice and costs related to terminating an employment) or dismissal-related costs shall be borne by the seller and that the terminations and dismissals must be completed prior to the transaction.

Recourses under section 124 L.S.A.

However, some employees who are dismissed or whose position is abolished and have at least two years of continuous service, may file a complaint within 45 days of the date of dismissal under section 124 L.S.A. for dismissal without good and sufficient cause. In such a case, one of the employee’s remedies is to ask to be reinstated and to be paid an indemnity for loss of salary from the date of dismissal to the date of the decision by the Commission des relations de travail (“C.R.T.”).

  • Who should bear the cost of reinstatement?
  • How to assess the cost of the purchaser’s obligation to reinstate the employee?
  • How to minimize these tangible risks?

These issues must be addressed in the purchase contract, and in particular to the proceedings filed with the C.R.T. and who will assume the payment of any compensation.

Where a former employee who has filed a complaint for dismissal without good and sufficient cause obtains an order to be reinstated, not only must the former employee be paid wages retroactively (the seller is usually responsible to pay this part under the sale contract), but the new employer is obliged to reinstate the former employee with the same functions and under the same work conditions.

Under these circumstances, there is a solution to ensure that this scenario does not occur or reduces the risks of such occurrences:

  1. The seller can terminate the employment of non-required employees and obtain, prior to the acquisition, a full and final release from said employees relating to any recourse, including reinstatement. The employer will generally be obliged to pay a higher severance than the minimum provided under the L.S.A.

  2. The seller can proceed with the lay-offs and dismissals at least 45 days prior to  the acquisition, with the acquisition conditional up on no complaint for dismissal without good and sufficient cause having been filed with the C.R.T.

  3. This last scenario is worthy of consideration, albeit in several cases, given the amount of the transaction, this impact is secondary compared to the transaction itself.

  4. In several situations, the reinstatement may be contested as undesirable and, in this case, the employee will be paid compensation for loss of employment by the seller pursuant to the sale contract.

Consequently, in order to avoid a complaint being filed before or after the acquisition that may result in a former employee being reinstated, the purchase agreement should stipulate that the seller has to obtain releases from employees who will be dismissed in order to avoid any possible reinstatement order.

This bulletin provides general comments on recent developments in the law. It does not constitute and should not be viewed as legal advice. No legal action should be taken on the basis of the information contained herein.



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