Impact of Labour and Employment Law on Pension and Benefits Issues
Under labour relations legislation in Canada, successor employers (i.e. purchasers) are bound to the collective agreement which applies to the acquired business. The wording of the applicable collective agreement regarding the retirement benefits must be closely examined as it may specify the type of retirement plan that is required (e.g. group RRSP, DC plan or DB plan), the level of pension benefits that must be provided (if a DB plan), or the contribution rates required of the employer (if a DC plan) and/or other specific plan benefits (e.g. indexing, bridge benefits, early retirement benefits). The purchaser will be bound by these requirements when providing a new or existing plan for the transferred employees. To change any terms and conditions of employment would constitute a breach of the collective agreement.
If the collective agreement states that the employees are entitled to participate in a specifically named pension plan (e.g. “The Pension Plan for the Employees of Company ABC”), the purchaser must assume sponsorship and administration of that particular plan from the seller. However, this may not be feasible if the seller is retaining some of the employees and is transferring only a portion of its employees to the purchaser. In that case, the purchaser will have to establish a new plan or amend its existing plan so that it is identical to “The Pension Plan for the Employees of Company ABC” (i.e. in terms of type of plan, benefit levels, enhanced benefits, options etc.). Since the purchaser cannot technically comply with the collective agreement in this situation, negotiations with the union will also be necessary. The purchaser will also have to determine whether it wishes to transfer any accrued assets and liabilities of the transferred employees from the seller’s plan to its own plan.
Purchasers may also be liable under successor employer labour legislation for pension and retiree health and welfare benefits that accrued prior to the date of purchase. This is a risk, even if the pension and retiree benefits are not described in the current collective agreement, and even if the individuals who are entitled to such benefits are retired prior to closing or otherwise never become employed by the purchaser.
It is imperative that all collective agreements are reviewed early in the due diligence process and that legal advice is obtained to determine the necessity of involving the union as part of the proposed sale process.
No Collective Agreement
If a collective agreement does not exist, it is a matter of negotiation between the parties as to the type of retirement plan or plans the purchaser will provide post-closing to the transferred employees, and how pre-closing accrued pension assets and liabilities are to be addressed. If the sale agreement is silent, the purchaser is free to do whatever it likes. In the case of a sale of assets, the transferred employees’ accrued pension assets and liabilities will remain with the seller. In the event of a sale of shares, the pension plan obligations that are in place in the target company will remain there after the sale of the shares of the target company.
In a typical asset purchase deal, the seller will try to obtain a covenant from the purchaser to offer employment to the seller’s employees on terms and conditions that are substantially similar in the aggregate to those enjoyed by these employees immediately prior to the closing date of the asset sale. Inferior offers increase the likelihood that the affected employees will not accept the purchaser’s offers and that the purchaser’s plans may not qualify as a successor pension plan as discussed above. Any resulting severance liabilities will be to the seller’s account, unless the asset purchase agreement provides otherwise.
In some cases, the seller may require the purchaser to provide pension benefits which are substantially similar to those provided by the seller to the transferred employees. If the purchaser agrees to meet this requirement, it must be careful as to how this promise is worded in the sale agreement and in its communications to the transferred employees. For example, if the seller’s plan provides members with rights to surplus in the plan and the purchaser promises to provide substantially similar pension benefits, the seller and/or transferred employees could argue that the transferred employees are entitled to the same surplus rights in the purchaser’s plan (even if the purchaser’s plan does not provide for it).
It should be noted that in Quebec, because most corporate transactions will result in the transfer of employment agreements, the purchaser will almost invariably be obligated to provide pension benefits which are substantially similar to those provided by the seller to the transferred employees, subject to constructive dismissal rules.
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