A target's balance sheet does not show what its payroll owes employees for unused vacation and banked overtime, and a deal that closes without sizing that number is closing with an undisclosed, calculable liability still attached to the business.
Key takeaways
None of these appear as a line item on a standard balance sheet. They live inside the payroll register, calculated employee by employee, and a diligence process that pulls only the financial statements will miss all three — the same blind spot that leaves an incoming buyer's checklist incomplete if payroll never makes the list. Each is governed by a specific, quotable Ontario Employment Standards Act rule, which means each is also sizeable before closing, not just discoverable after.
Ontario's ESA guide to vacation sets both the time and the pay separately. Employees with less than five years of employment are entitled to two weeks of vacation time, with vacation pay of “at least four per cent of the gross wages (excluding any vacation pay) earned in the 12-month vacation entitlement year.” At five or more years, entitlement rises to three weeks of vacation time and “at least six per cent of the gross wages earned in the 12-month vacation entitlement year.” The default payment rule is a lump sum before the vacation is taken, though an employee can agree in writing to have it paid on each cheque as it accrues, and periods under one week can be paid on the regular payday for that pay period instead.
Ontario's ESA guide to overtime pay confirms overtime begins “after they have worked 44 hours in a work week” for most employees, at “1½ times the employee's regular rate of pay.” An employee can agree, in writing or electronically, to receive paid time off instead of cash: “1½ hours of paid time off work, at the applicable regular rate, for each hour of overtime worked.” That banked time has a clock on it — “paid time off must be taken within three months of the week in which the overtime was earned or, if the employee agrees electronically or in writing, it can be taken within 12 months.” Every hour still sitting in an employee's bank past that window is not a scheduling problem; it is a cash liability the employer still owes, whether or not the time is ever actually taken.
A deal-driven termination crystallizes both liabilities on the same schedule. For banked overtime, if employment ends before the accumulated time is used, “the employee must receive overtime pay for the overtime hours that were worked”, due “not later than the later of: seven days after the date the employment ended and on what would have been the employee's next pay day.” Unpaid vacation pay follows the identical rule — due “within seven days of the employment ending or on what would have been the employee's next pay day, whichever is later.” Whatever balance a payroll register shows on the day a termination happens is, within days, a real cash obligation, not a rolling accrual anyone can defer.
A sale of the business does not itself wipe out either liability if the employee keeps working for the new owner. Ontario's continuity-of-employment rule provides that a person's length of employment with the seller “is attributed, or 'flows through' to the purchaser” where the employee continues working after the transfer — the guide's own example is an employee with 10 years at the seller, terminated one year after the sale, who “will be entitled to eight weeks' notice rather than just one week.” The same continuity logic underlies why vacation and overtime entitlements tied to tenure carry through a transaction rather than resetting at closing — the new owner inherits the clock, not a fresh start.
The diligence request list this points to is specific and pullable directly from payroll: the current accrued, unpaid vacation pay balance for every employee; every written time-off-in-lieu agreement in force, and the outstanding banked hours under each one; and which employees, if any, are already past the 3-month window and heading toward the 12-month deadline on hours they have not yet used. That last group is the highest-risk line item, since it converts from a scheduling flexibility into an unavoidable cash payout the closer it gets to the outer deadline. The same payroll pull should also flag any employee with no written employment contract at all, since that is the input the buyer's much larger, uncapped notice exposure runs on.
Forty employees, one accrual, one bank of overtime
A target has 40 employees. Payroll records show an average accrued, unused vacation balance worth 5% of one payroll period's gross wages across the workforce — an illustrative average used to make the point, not a published benchmark — plus 260 banked overtime hours across 6 employees who signed time-off-in-lieu agreements, some already past the 3-month window and heading toward the 12-month one.
On a share deal, the corporation's payroll obligations survive the transaction unchanged — both balances remain liabilities of the same legal employer, continuity clock and all. On an asset deal where the employees are terminated by the seller and rehired by the buyer, the same vacation and banked-overtime amounts fall due from the seller within 7 days of the termination date or the next payday, whichever is later — a cash outlay the seller either funds at close, or the buyer prices into the purchase price if the seller does not.
No. If employees are terminated as part of an asset deal, their unpaid vacation pay becomes due from the employer of record within 7 days of the termination date or the next regular payday, whichever is later -- the liability is paid out, not erased, and someone in the transaction has to fund it.
No. If banked time off is not taken within the 3-month window (or 12 months with a written agreement) and employment later ends, the ESA requires the employer to pay out the overtime hours in cash -- the time-off arrangement changes how the entitlement is delivered, not whether it is owed.
It is a percentage -- 4% or 6% -- of gross wages actually earned in the entitlement year, not a flat number of hours' pay, so the dollar liability scales directly with what the employee was paid during that year rather than a static hourly rate.
Not automatically. Where an employee continues working for the new owner after a sale or transfer, Ontario's continuity-of-employment rule attributes their prior length of service to the purchaser -- so entitlements and liabilities that are calculated by tenure keep accruing on the same clock the seller started, rather than resetting to zero at closing.
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