Guide to Canadian Employment Law

Guide to Canadian Employment Law

  1. Overview
  2. Canadian Employment Law
  3. Employee Protections
  4. Employee Compensation and Benefits
  5. Workplace Health and Safety
  6. Compliance Issues
  7. Restrictive Covenants
  8. Transactional Due Diligence Prior to Merger, Acquisition or Asset Transfer
  9. Employee Secondment

1Overview

The Canadian Federal System

Canada is a federation of ten provinces and three territories. Canadian citizens elect representatives to the country’s federal Parliament in Ottawa, Ontario, to enact laws and govern the country as a whole. In addition, eligible voters of each province elect representatives to their own provincial legislatures, to enact provincial laws and govern the province. The three northern territories have their own forms of local government, enact local ordinances and send representatives to the federal Parliament.

Canada’s Constitution divides legislative authority between the federal Parliament and the provincial legislatures. For example, Parliament has authority over banking, competition (antitrust) law and immigration; the provincial legislatures have authority over securities laws, property rights and employment standards. In some areas, Parliament and the provincial legislatures have overlapping legislative authority. Businesses may therefore have to deal with federal regulators and one or more provincial regulators. This overlap is most pronounced for certain financial institutions – namely, insurance companies and trust and loan companies.

Common and Civil Law

With the exception of the province of Quebec, Canada is a common law jurisdiction, like England, the United States and Australia. An extensive body of judge-made law interprets, and in any cases augments, statutes and regulations. Common law principles may impose additional rules on the manner in which business is conducted in Canada.

Quebec has a modern, European-style Civil Code that constitutes a codification of general principles of law applicable in that province.

Regulatory Bodies

Like many industrialized nations, Canada has various regulatory bodies that may affect the conduct of business. These bodies may be federal, such as the Competition Tribunal and Investment Canada, or provincial, such as the Ontario Securities Commission. They are responsible for monitoring, licensing and controlling certain types of business activities.

Dispute Resolution

The procedures that governs the civil litigation process and the administration of courts in Canada are largely established and managed by individual provinces. The most significant variations exist between Quebec (which, although considerably influenced by the common law, has a civil law system) and the other provinces (which have common law systems).

In addition to provincially administered courts, there are four federal courts:

  • The Supreme Court of Canada, which is the highest appellate court in Canada and hears, in most cases with leave, appeals of decisions made in the provincial and federal court systems;
  • The Federal Court and Federal Court of Appeal, which have jurisdiction over actions against the federal government; judicial review of federal administrative tribunals; maritime litigation, certain kinds of intellectual property litigation and proceedings relating to national security; and
  • The Tax Court of Canada, which has exclusive jurisdiction over matters arising under federal taxation law and certain related matters.

Although litigation procedures vary from province to province, litigation in Canada generally falls somewhere between the English and U.S. approaches.

Canada has seen a growing use of alternatives to the traditional lawsuit as the means of resolving disputes. In addition to binding and non-binding arbitration, Canadian disputes are frequently subject to mediation, mini-trials and combinations of these procedures. In Ontario, mediation is a mandatory step in most areas of civil litigation.

Ontario has adopted the International Commercial Arbitration Act and the provincial Arbitration Act, 1991 for domestic arbitrations. Other provinces have implemented similar legislation, based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Conciliation. Ontario has also enacted the Commercial Mediation Act, based on the UNCITRAL Model Law, which governs the mediation of commercial disputes in the province.

Additional Information: For more information on Canada’s system of government and legal environment, please download the
Torys LLP Business Law Guide, Doing Business and Raising Capital in Canada.

2 Canadian Employment Law

Canadian employment law derives from:

  • The terms of employment that are agreed to (orally or in writing), that are established by a continuing course of conduct or that are implied between an employer and an employee;
  • Legislation that imposes minimum employment standards, including minimum periods of notice (or payments in lieu of notice) that must be given to employees before terminating the employment relationship (although termination for just cause, such as theft, does not require notice to be given);
  • Legislation dealing with specific aspects of employment, such as collective bargaining, pay equity, human rights, and occupational health and safety;
  • Workplace safety and insurance legislation, pension and employment insurance legislation and related programs; and
  • The common law, which, among other things, imposes a requirement to give reasonable notice of termination, or payment in lieu of notice, for periods that are usually longer (often significantly longer) that those prescribed under the minimum employment standards legislation referred to above. The common law also imposes duties of loyalty and confidentiality on employees.

In Canada, there is no equivalent to the U.S. concept of employment at will and creating an employment contract in Canada that purports to be at will may void the contract.

Employment contracts

In the province of Ontario, employment contracts for non-unionized employees can often be oral agreements for an indefinite term of employment. Senior managers, however, are more likely to be parties to written agreements. Employment contracts can stipulate periods for notice of termination of employment that are longer or shorter than those provided by the common law. The period cannot be shorter, however, than those prescribed by minimum employment standards legislation.

Additional Information: For more information on employment contracts in Canada, please contact Lisa Talbot at ltalbot@torys.com.

3Employee Protections

Overview

All jurisdictions in Canada have minimum employment standards in place to protect workers, which entitle employees to certain types of leave and notice of termination. Employees are entitled to unionize under collective bargaining legislation. Pay equity and human rights legislation protect employees in the workplace from unfair treatment, and a number of privacy statutes are in place to govern the use of information in the employment environment.

Minimum Employment Standards Legislation

Minimum employment standards legislation varies from province to province, and federal legislation varies from provincial legislation. Generally, minimum employment standards legislation covers matters such as maximum working hours, minimum wages, overtime pay, public holidays, personal emergency leave, family medical leave and vacation pay.

This legislation also sets out entitlements to pregnancy and parental leave. For example, Ontario female employees are entitled to pregnancy leave of 17 weeks, and either parent is entitled to parental leave of 35 weeks (or 37 weeks if no pregnancy leave is taken). Both types of leave are without pay; but with entitlement to government-provided employment insurance.

This legislation also provides for minimum periods of notice or pay in lieu of notice, to employees before an employer may terminate the employment relationship. In Ontario, in addition to notice, employees with five or more years of service are entitled to severance payments in certain circumstances. The Ontario employment standards legislation also entitles employees to greater notice and severance in cases of mass termination (termination of 50 or more employees) when certain thresholds are met.

It is not possible to contract out of these minimum standards. However, not all workers are subject to employment standards legislation. Independent contractors are not considered to be employees in most jurisdictions. Some professionals, such as information technology specialists, architects, engineers, accountants and lawyers are also exempt from certain legislative provisions.

Reasonable Notice of Termination

The common law requires both the employer and the employee to give reasonable notice of termination of an employment contract (if the employment contract does not itself specify the notice required on termination and there is no just cause for termination by the employer). The common law notice period to which employees are entitled is usually significantly longer than their entitlement under minimum standards legislation. The length of the period generally depends on the age, experience, position, compensation level and length of service of the employee, and on whether the employee was induced to leave prior secure employment; however, the length of the notice period is subject to the employee’s duty to mitigate by seeking alternative employment.

Collective Bargaining Legislation (Unions)

A significant number of private sector and public sector employees in Canada are represented by a collective bargaining agent.

Under provincial collective bargaining legislation, employees are free to join a trade union of their choice and to participate in its activities. There is a prescribed process for the certification of a trade union as bargaining agent for a group of employees (which cannot include managerial and certain other employees). Generally, certification occurs when a majority of employees support unionization. A process for bargaining a collective agreement is also prescribed. Both the employer and the union are under a duty to bargain in good faith and make reasonable efforts to conclude a collective agreement. During the term of a collective agreement, no strikes or lockouts are permitted.

Collective bargaining legislation also regulates unfair employer interference with lawful trade union activities, as well as unfair behaviour of trade unions. In addition, it establishes a grievance arbitration process to resolve workplace disputes during the term of the collective agreement.

The legislation of certain provinces also restricts an employer’s ability to utilize replacement workers if there is a strike or lockout.

Pay Equity Legislation

Many provinces (and the federal government) have enacted legislation that seeks to redress systemic gender discrimination in compensation for work typically performed by women.

Ontario’s pay equity legislation applies to private sector employers with 10 or more employees. A “female job class” is one in which 60% or more of the members are female. A “male job class” is one in which 70% or more of the members are male. The legislation requires that systemic gender-based discrimination be identified by comparing each female job class with male job classes in respect of compensation and value of work performed. Pay equity is broadly achieved when the highest rate of compensation for a female job class matches the highest rate for a male job class whose members perform work of equal or comparable value. The legislation sets out other modes of analyzing female job classes when there are no comparable male job classes.

Human Rights Legislation

Certain human rights are protected by provincial and federal legislation (subject to a limited number of exceptions). In Ontario, these rights include the right of every person to equal treatment with respect to employment without discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, record of offences, marital status, family status or disability. This right extends to job advertisements and applications that directly or indirectly classify or indicate qualifications by a prohibited ground of discrimination. Alcohol and drug addiction and pregnancy are protected as disabilities under Ontario’s Human Rights Code. Sexual harassment in employment is also prohibited under the Code.

Privacy

Workplace privacy is not an absolute right for employees in Canada. The Personal Information Protection and Electronic Documents Act (PIPEDA) protects employee information only in organizations that are engaged in federal works, undertakings or businesses that fall within the legislative authority of the Parliament of Canada. Otherwise, employee privacy rights are governed by a patchwork of statutes that apply to certain categories of employees in the public and private sectors. The Privacy Act governs the use, collection and disclosure of personal information by the federal government and its agencies. PIPEDA does not apply to any government institution to which the federal Privacy Act applies.

With the exception of employment related to federal works, undertakings and businesses governed by PIPEDA, the provinces have jurisdiction over matters pertaining to employment. However, at the time of writing, only the provinces of Quebec, Alberta and British Columbia have enacted privacy legislation that applies to employee personal information. In the rest of the provinces, workplace privacy is governed by a combination of common law protections of privacy, contractual provisions and the Criminal Code provisions related to surveillance.

It is important for employers to have clear policies that minimize employees’ privacy expectations in their work-issued computers and other devices.

The following best practices are recommended:

(a) have a clear policy that expressly sets out any prohibited use of work-issued computers, laptops and other devices. The policy can be a stand-alone document or part of an employee code of conduct. For new employees, incorporate the privacy policy or code of conduct into the employment contract by explicit reference. The privacy policy should

(b) include a clear statement that use of work-issued computers, laptops and other devices for any unlawful or inappropriate purpose or for a purpose contrary to the employer’s policies is prohibited;

(c) explicitly reserve the employer’s right to broadly access, monitor, search, review, track and store any communication or information that is stored on work-issued computers, laptops and other devices, to report any unlawful use to the police and to take any and all appropriate action, including disciplinary action if a violation of the policy is found;

(d) clearly state the reasons why the employer might access, monitor, search or review any communication or information that is stored on work-issued computers, laptops and other devices, including to ensure compliance with its policies and to protect

(i) the integrity of data;

(ii) the efficient and proper operation of its systems;

(iii) the confidentiality of information and data belonging to the company, its employees, clients, suppliers, etc.;

(iv) the company’s compliance with applicable laws; and

(v) employees and the workplace environment from harassment and discrimination.

(e) expressly advise employees that as a result of the employer’s broad rights (as mentioned above) regarding communications and information stored on work-issued other devices, they should not expect their communications to be private and should use good judgment and discretion when sending or storing personal, confidential or sensitive information or messages.

(f) ensure that employees regularly acknowledge that they have read, understood and agreed to abide by the privacy policy. This can be done electronically or by initialling each page of a paper copy of the policy and signing it. Keep the employees’ acknowledgements or signed policies in their employee files.

(g) enforce the policy consistently to avoid allowing customary use to create an environment in which expectations of privacy can emerge. Do not condone breaches of the policy.

(h) review and update the policy regularly and have employees sign off on the policy every time it is revised.

Additional Information: For more information on employee protection in Canada, please download the article Employees: Canada: International Joint Ventures or contact Lisa Talbot at ltalbot@torys.com.

4 Employee Compensation and Benefits

Overview

Employees may be eligible for government benefit programs such as employment insurance or workers’ compensation if they lose their jobs or are unable to work due to illness or disability. There are also government-administered and private pension plans in place to provide for employees upon retirement. Stock option and stock purchase plans are also common forms of employee compensation.

Employment Insurance

The federal Employment Insurance Plan provides income support to employees undergoing a temporary interruption of earnings. Both employers and employees must contribute to this plan. The duration of employment insurance benefits is related to the employee’s length of service. The amount of benefits, which is subject to a maximum, varies according to the earnings of the employee. Employment insurance benefits are also available for employees who are on maternity or parental leave. Maternity leave benefits are available for up to 15 weeks, and parental leave benefits are available for up to 35 weeks.

Workers’ Compensation

Many employers in Canada are subject to workers’ compensation legislation under which claims for compensation for personal injury or accidents arising out of or in the course of employment may be made against an accident fund. This compensation replaces the right of an employee to sue the employer for damages for personal injury or accidents. Compensation from the fund may be received for a variety of matters, including loss of earnings and medical costs.

In Ontario, each employer falls within a class of employers established under the Workplace Safety and Insurance Act, based on the hazards of their business. Only employers contribute to the accident fund. The amount of contribution depends on the accident experience of the entire class of employers, the size of an employer’s payroll and, in some cases, the employer’s individual accident experience.

Pensions

Under the Canada Pension Plan, many retired employees receive a modest pension income from the federal government. Both employers and employees contribute to this plan by payroll deductions remitted to the federal government. Benefits payable to an employee on retirement are related to the employee’s earnings and the amount of contributions over the employee’s working life, and are in addition to old-age security benefits provided by the federal government to those over 65 years of age.

Employers frequently establish some form of retirement income arrangement as an employee benefit. Payments under these arrangements supplement, and often significantly exceed, benefits under the Canada Pension Plan. Ontario’s Pension Benefits Act prescribes minimum standards for pension plans in Ontario. The Act also requires the employer to periodically calculate its present and future pension liabilities for defined benefit pension plans, and to fund them on both a going-concern basis and a windup basis.

Pension plans registered under the Income Tax Act receive substantial tax-assisted treatment, and employee and employer contributions to registered pension plans receive tax-deferred advantages.

Types of Pension Plans

Generally speaking, there are three principal types of registered pension plans: defined contribution plans, defined benefit plans and multi-employer pension plans. The employer must contribute to all types of plans. Employees may also be required to make contributions, in which case the plans are known as “contributory”. In non-contributory plans, the employees are not required to contribute.

Funding

Registered pension plans must be funded in accordance with the requirements set out in the Income Tax Act and the applicable pension legislation and regulations. The two most common mechanisms for funding pension plans are trust agreements and insurance contracts. Under both arrangements, a wide array of investment options are generally available, including guaranteed investment certificates, segregated fund and specialty pooled funds that may be invested in bonds, equities, venture capital, money market instruments, mortgages or real estate.

Registration

In Ontario, pension plans must be registered with the Canada Revenue Agency under the Income Tax Act (Canada) and with the Financial Services Commission of Ontario under the Pension Benefits Act (Ontario).

Stock Option Plans

Employee share option plans are common in Ontario and several types of stock purchase plans are common in Canada. Stock purchase plans can be combinations of employee ownership and equity plans. The most well-known scheme is stock options. Restrictions on the stock option exercise price vary, and depend on whether the company is publicly traded (and bound by the requirements of a particular stock exchange) or privately held.

Specific rules govern the tax consequences for both the employee and for a corporate employer (or a company with which the employer does not deal at arm’s length) that has “agreed to sell or issue” shares of the company to the employee. Under these rules, an employee is not taxed on the grant of a stock option.

In general, when a stock option is exercised, the employee is taxed on the excess of the then fair market value of the shares over the exercise price (this difference is referred to as the Stock Option Benefit). If the exercise price of the option is not less than the fair market value of the shares at the time the option was granted, the employee is entitled to deduct from income one-half of the Stock Option Benefit, meaning that the Stock Option Benefit is in effect taxed as a capital gain because only 50% of the benefit is included as income.

Under these rules, an employer is not entitled to a deduction in respect of shares issued or transferred to an employee to satisfy stock option exercises.

Additional Information: For more information on employee compensation and pensions in Canada, please download the article Employees: Canada: International Joint Ventures or contact Lisa Talbot at ltalbot@torys.com or Mitch Frazer at mfrazer@torys.com.

5 Workplace Health and Safety

Industrial and commercial activities involving the workplace are subject to comprehensive provincial and federal regulatory controls concerning workplace health and safety issues. The Canada Labour Code applies to federally regulated workplaces and employees. Provincial occupational health and safety statutes govern the safety of employees under provincial jurisdiction.

Federal

The Canada Labour Code is the principal federal workplace health and safety legislation. It applies to federal government employees and to certain federally regulated industries such as interprovincial and international transportation, shipping, telephone and cable systems, radio and television broadcasting, banking, grain elevators and uranium mining and processing. Approximately 10% of the Canadian workforce is covered by the Canada Labour Code.

Contraventions of the Canada Labour Code may result in the imposition of fines, imprisonment or both. Under the Criminal Code, in certain circumstances, corporations and individuals, including officers or directors, may also be prosecuted for criminal negligence causing bodily harm or death, and certain persons are also responsible for taking reasonable steps to prevent bodily harm to persons who work under their authority. In addition, officers and directors of a corporation who directed, authorized, assented to, acquiesced in or participated in the commission of the offence under the Canada Labour Code may be found guilty of that offence, regardless of whether the corporation was also prosecuted or convicted.

Provincial

All the provinces have workplace health and safety legislation. Although aspects of their legislation are similar, there are also some important differences. For example, under Ontario’s Occupational Health and Safety Act, the following key requirements apply:

  • Employers with 20 or more employees must establish a joint health and safety committee, at least half of whose members are employees who are not employed in a managerial function. At least one representative of the employer and one of the employees on the committee must be certified as having received specified training on workplace health and safety. At workplaces with between 5 and 20 employees, a health and safety representative must be identified. Both the health and safety committee and the health and safety representatives must conduct regular reviews of health and safety issues at the workplace, must be consulted about these issues and must have the power to obtain information on them.
  • Employers, supervisors, owners, suppliers and officers and directors must carry out various duties related to workplace health and safety. In the case of employers, this includes preparing and reviewing at least annually a written workplace health and safety policy and developing and maintaining a program to implement the policy. Directors and officers are obligated to take all reasonable care to ensure that the corporation complies with the legislation and any regulations and orders made thereunder.
  • Employees are entitled to refuse to work if they have reason to believe that they are likely to be endangered. Further, a certified member of a joint health and safety committee may order a work stoppage if dangerous circumstances are found to exist.
  • Legislation establishes the Workplace Hazardous Materials Information System, which is intended to provide employees with information on hazardous materials in the workplace and with training in handling these materials and related preventive measures and emergency treatment.
  • Provincial inspectors may issue orders to persons in charge of a workplace to remedy non-compliance with the legislation. Convictions for noncompliance may also result in fines, imprisonment or both.

Common Law

While historically the common law played an important role in the development of workplace health and safety law, it has now been replaced almost entirely by the federal and provincial statutory regimes.

Additional Information: For more information workplace health and safety in Canada, please contact Lisa Talbot at ltalbot@torys.com.

6 Compliance Issues

Overview

When establishing a business in Canada or employing foreign workers, it is important to be mindful of various issues relating to health taxes, temporary admission to Canada and applicable immigration categories.

Employer Health Tax

Each province participates in a health insurance plan (such as the Ontario Health Insurance Plan, or OHIP, in Ontario). As a funding mechanism, certain provinces, including Ontario, impose a payroll tax on employers carrying on business in that province. (In Ontario, the tax paid is a sliding percentage of the total remuneration paid by the employer in Ontario, ranging from 0.98% to 1.95%.)

Immigration

(a) Temporary Admission to Canada

Employees transferred to Canada on a temporary basis are generally required to obtain a work permit. There are some limited exceptions to this requirement. For example, the following people do not need employment authorization: trainees or trainers with a Canadian parent company or subsidiary organization; business representatives purchasing Canadian goods or services; and permanent employees of a company outside Canada coming to Canada to consult with employees in Canada or with employees of a Canadian parent company or subsidiary organization.

People may also visit Canada for temporary periods without a work permit to attend conferences, to search for suitable accommodation or schooling and for other non–work-related activities.

Senior managers or executives or employees working in a “specialized knowledge” capacity for multinational organizations transferred to a Canadian affiliate, parent or subsidiary organization may obtain work permits that are initially valid for a maximum of three years. Extensions are generally granted in two-year increments to a maximum aggregate duration of seven years in the case of senior managers and executives and five years in the case of specialized knowledge employees. Special provisions exist for certain types of employees in the information technology sector. They may qualify for an initial work permit valid for one year, as well as for extensions in one-year increments, depending on their qualifications, their experience and the nature of the work they will be performing.

Canadian companies that wish to hire foreign workers who are not employees of a foreign parent or subsidiary company or who do not qualify on any alternative basis must obtain a Labour Market Opinion from Service Canada (the Canadian government’s one-stop service delivery network that provides access to its programs and services, through telephone, Internet, mail, in-person, outreach and mobile services). They must demonstrate that the employment will not adversely affect employment opportunities for Canadians, that the foreign worker’s admission to Canada will result in a transfer of skills or knowledge to Canadians or that it will result in job retention or creation for Canadians.

Accompanying spouses may generally obtain open work permits, and children may attend school.

(b) Permanent Residents

Canadian companies that wish to transfer or hire employees from a foreign jurisdiction on a permanent basis may assist in obtaining permanent status for these employees and their families. Permanent residents have rights equivalent to those of Canadian citizens, except that they cannot vote. Permanent residents may lose their status, however, if they are not physically present in Canada for at least 730 days in any five-year period. There are some limited exceptions to this requirement – for example, for those permanent residents who are employed abroad by a “Canadian business,” those in the Canadian foreign service or military and those who are accompanying Canadian-citizen spouses abroad.

(c) Skilled Workers

Canada maintains a selection system for skilled workers who intend to work permanently in Canada. The immigration authorities consider various factors (such as intended occupation, education, experience, age, proficiency in English or French and “adaptability”). A period of many months – and for those from certain countries, several years – is usually required to complete the permanent resident application process. Applicants may be able to obtain a temporary authorization pending the acquisition of permanent resident status.

Certain provinces have entered into accords with the federal government to expedite the processing of permanent resident applications from those destined for these provinces under the Provincial Nominee Programs. Each province has different eligibility requirements and application procedures, and professional advice is strongly recommended.

Under criteria that apply to all Skilled Worker applications received on or after February 27, 2008, visa officers must follow ongoing directives from the Minister of Citizenship and Immigration concerning which pending applications are to be prioritized, retained or returned with a refund of the application processing fee. These directives will arguably allow the Minister to “cherry-pick” the most desirable immigrants. These changes do not apply to applications filed under the Provincial Nominee, Quebec Skilled Worker and Family Classes.

It is also likely that provisions relating to the new Canadian Experience Class (CEC) will be promulgated in 2008 or 2009. The CEC is a proposed new avenue for immigration for certain temporary foreign workers and foreign student graduates who are already in Canada and who already possess Canadian work experience.

(d) Business Immigrants

Canada also permits business immigrants to acquire permanent resident status. This category includes entrepreneurs who establish their own businesses in Canada that create employment for Canadians and in which they actively participate. These entrepreneurs must have business management experience and are expected to make a C$400,000 investment or to own and manage businesses in Canada. Generally, these applications require a minimum net worth, which varies depending on whether the application is made under the Investor, Entrepreneur or Self-employed stream of the Business Immigration Program.

Additional Information: For more information on employment-related compliance issues, please contact Mitch Frazer at mfrazer@torys.com.

7 Restrictive Covenants

Generally, an employee who has terminated his or her employment is “free to compete against the former employer” during the notice period. The employer is limited to recovering damages for the failure to give reasonable notice, but cannot claim damages for losses arising from the early competition. Exceptions are available to this general rule if the employee commits a specific wrong during the notice period, such as by improperly using confidential information or breaching a restrictive covenant.

Non-competition clauses and other restrictive covenants in employment contracts will be unenforceable if any of their key terms are ambiguous. These covenants are presumptively unenforceable unless their scope is reasonably limited in duration, in geographic coverage and in the nature of the prohibited business activity. Canadian courts have generally been reluctant to enforce lengthy post-employment non-competition clauses, particularly covenants lasting more than two years following the end of employment. Moreover, in the employment context these three limitations must be expressed in clear, unambiguous language, or a court will decline to enforce the covenant, without assessing its reasonableness. Canadian courts refuse to rewrite restrictive covenants which are drafted in unclear or unreasonable terms.

8 Labour and Employment Due Diligence Prior to Merger, Acquisition or Asset Transfer

Mergers and acquisitions can bring a host of pension and benefits issues to the surface. To minimize the risks associated with acquiring or divesting pension liabilities, each party to a corporate transaction must be aware of its options as well as the consequences that flow from each. Specifically, both the buyer and seller must consider how the transaction will affect the rights and interests of the beneficiaries of the pension plans. The transacting parties should also know the types of pension plans available to the affected employees, the manner in which those pension plans are funded and administered and where the plans are registered.

Due diligence

Acquiring or dispensing of pension plans and their associated liabilities in the context of corporate transactions can have a significant impact on a company’s financial viability as well as on employee morale and productivity. Accordingly, it is important for both the buyer and the seller to conduct due diligence before entering into any business deal. Although the type and level of due diligence required will vary depending on the nature of the transaction and the party’s role in the transaction, some type of review must be performed so that both parties fully comprehend their obligations.

The following outline of the due diligence process is relevant in a share-purchase transaction, a merger or an asset-purchaser transaction in which the buyer is assuming pension liabilities:

(i) Sign a Confidentiality Agreement

(ii) Value the Pension Plan

(iii) Ensure the Seller Understands its Obligations

(iv) Ensure the Buyer Understands its Obligations

(v) Sign a Letter of Intent

(vi) Retain Pension Counsel at an Early Stage

(vii) Negotiate Representations and Warranties

Additional Information: For more information on employment issues in mergers and acquisitions, please download the article Distressed Merges and Acquisitions and Restructuring: Your Guide to Managing Pension Risks in Corporate Transactions, or contact Mitch Frazer at mfrazer@torys.com.

9 Employee Secondment

A secondment is a temporary transfer of an employee from his or her employer to another organization, branch or department. An issue that may arise in the secondment context is whether the seconding employer remains the employer or transfers employment responsibilities to the employer receiving a seconded employee. This consideration is especially important in determining whether an employee seconded from a foreign office is eligible for employment entitlements under Canadian law.

While there is no clear cut rule as to whether a seconded employee becomes an employee of the receiving employer, Canadian courts generally look to how closely the secondment mirrors a typical employee-employer relationship, as well as the intention of the parties to enter into an employee-employer relationship. Canadian courts have outlined several important considerations in determining who is considered a seconded employee’s employer, including:

  1. who issues directives to the employee;
  2. the existence and content of a contract of secondment;
  3. whether the parties have acted in such a way as to denounce their intention of secondment;
  4. who pays, disciplines and evaluates the employee;
  5. who represents itself as the employer to third parties;
  6. whether a pension plan covering the seconded employee is maintained, and if so, by whom; and
  7. who decides upon salary increases for the employee.

In cases where the seconding employer retains a degree of control over the employee, or there is a clearly defined expiry of the seconded employee’s term with the receiving employer upon which the seconded employee will return to the seconding employer, the relationship between the receiving employer and seconded employee is less likely to be construed as an employment relationship. This means that the receiving employer will not be responsible for meeting Canadian employment entitlements in respect of the seconded employee. Where a secondment becomes indefinite, the receiving organization is more likely to be considered the employer of the seconded employee.

Additional Information: For more information on secondments in Canada, please contact Lisa Talbot at ltalbot@torys.com.


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