The Trouble With Tribbles (And Sale Of Business Pension Transfer Rules)

Ontario has had new sale of business pension transfer rules (the Transfer Rules) since January 1, 2014. The Transfer Rules are found in section 80 of the Pension Benefits Act (Ontario) (the PBA) and the Asset Transfers under Sections 80 and 81 of the Act regulation (the Transfer Regulation).[1]

The Transfer Rules were meant to facilitate the transfer of assets and liabilities from a vendor's to a purchaser's pension plan within a sale of business context by being more prescriptive as to what the Superintendent of Financial Services (the Superintendent) requires in order to consent to such a transfer.[2] Prior to 2014, the Superintendent had greater latitude as he or she could refuse consent if, in his or her view, the transfer failed to protect pension and other benefits. However, as with any regime which depends on a set of rules rather than the exercise of discretion, the Transfer Rules' lack of flexibility may frustrate employment law and reasonable commercial considerations.

The Case of Plan Members on Leave

In a typical sale of business assets, during the due diligence phase and in order to negotiate the asset purchase agreement, the purchaser will want to know a number of particulars about the business's employees, including how many of them are on approved leaves such as maternity, paternity, short and long term disability leaves. The purchaser may not be inclined to hire immediately employees on such leaves (Inactive Employees), particularly long term disability leaves, since these individuals are not and may never be in a position to provide it services.[3]

In addition, such individuals will typically be in receipt of disability benefits under the vendor's group benefits program, as well as benefiting from coverage for other group benefits, and may do so without need for further premiums (in which case they are said to qualify for waiver of premium benefits.) Where they so qualify, they are the vendor's insurer's liability. Beyond the fact that, absent a collective bargaining obligation, no employer would hire someone who is not available for work, in many circumstances it would also make no sense for the vendor to terminate their employment in order that they be hired by the purchaser since that may disentitle this group of employees from continuing to receive disability benefits and other benefit coverage under the vendor's group benefits program, and it may not be possible for the purchaser to provide them with equivalent benefits and coverage under its group benefits program.

However, the purchaser may be agreeable to hiring such an employee if and when he or she was to become able to provide services within a certain period of time after the transaction closes. Typically, the period negotiated by the vendor and purchaser for the transfer of Inactive Employees is between twelve and twenty-four months (the Final Hire Date). This allows the purchaser access to valuable employees who, although initially incapable of providing services, may be able to do so within a reasonable period and protects the vendor from the risks associated with having to terminate such employees' employment, upon their return, for lack of available work or having to provide statutory entitlements to employees whose employment contract may become frustrated due to disability.

Thus, the agreement to hire Inactive Employees who become ready to work within a period of time after the sale of the business, as agreed to by the vendor and purchaser, is beneficial for the vendor, the purchaser and...