Anonymised, illustrative composite. Five of a target's most senior staff had worked there for a decade or more on a handshake — and the buyer's diligence team had to price a liability with no fixed formula attached to it.
At a glance
A specialty manufacturer being acquired had five senior operating staff — a plant manager, two department heads and two long-serving technical leads — with an average tenure of fourteen years. None had a written employment agreement; all had been hired informally by the founder decades earlier and had simply continued on an unwritten, evolving understanding of role and pay. The seller's HR file for each of them was a personnel record, not a contract.
The buyer's integration plan assumed that if any of the five needed to be let go post-close for role redundancy, statutory ESA notice — capped, per the same guide's own termination table, at eight weeks for anyone with eight or more years of service — would set the cost. The buyer's employment counsel corrected that assumption twice over. First, the table the plan had used was not the whole statutory floor. ESA s.57(h) does cap notice at eight weeks once service reaches eight years — but s.64(1) adds a separate entitlement to severance pay for any employee with five or more years’ service where the employer’s payroll is $2.5 million or more, calculated under s.65(1) as one week’s regular wages for each completed year (plus part-years) and capped by s.65(5) at 26 weeks. The Ministry’s own guide is blunt about it: “Severance pay is not the same as termination pay, which is given in place of the required notice”. Nobody on the integration team had asked whether the manufacturer’s payroll cleared $2.5 million. Second, and separately: “The Employment Standards Act sets the floor. The common law is frequently several times higher, and the gap is what the claim is worth.” Without an enforceable termination clause limiting notice to the ESA minimum, a dismissed long-service employee is entitled to common law reasonable notice — a standard that, on the same source's own framing, runs “usually more, sometimes far more” than the statutory floor.
The ESA-only exposure for the five, at eight weeks' pay each, came to roughly $184,000 in the buyer's original model — and that number was wrong, because it counted notice and nothing else. On the roughly $4,600-a-week average that $184,000 implies, five employees averaging fourteen completed years also carry about fourteen weeks of statutory severance each under s.65(1), if the payroll test in s.64(1)(b) is met: some $322,000 more, for a statutory floor nearer $506,000 than $184,000. Common law reasonable notice does not run to a fixed multiple of that figure — and the buyer's counsel was explicit that the widely repeated shortcut for estimating it does not exist as a rule: “a month per year of service” is folklore, not law. Instead, counsel modelled a plausible common law range for the group, using comparable dismissal outcomes for employees in similar roles, tenure and age, landing on an estimated $410,000 to $650,000. Measured against the plan’s mistaken $184,000 that looks like a two- to three-and-a-half-fold gap; measured against the corrected statutory floor of roughly $506,000 it is a much narrower one. That is the more useful finding, because it means most of what the integration plan had missed was statutory and near-certain, not common law and contestable.
The factors that actually set common law notice, per the same source, are “the character of the employment, length of service, age, and the availability of similar work given the person's experience, training and qualifications” — the Bardal factors, applied case by case rather than through a formula. Senior, specialized, harder-to-replace roles at an advanced career stage generally command notice toward the higher end of what courts have awarded for comparable dismissals; a junior generalist role does not carry the same weight even at the same tenure. The buyer's model reflected that directly: the plant manager, the most senior and most specialized of the five, anchored the top of the range, while the more junior of the two technical leads anchored the bottom despite similar years of service.
The buyer priced a post-close severance reserve at the midpoint of counsel's modelled range, roughly $530,000, and separately recommended that any of the five retained post-close be offered a written employment agreement with a properly drafted termination clause going forward — not to reduce what was already owed for past service, but to cap exposure on any future termination at the ESA minimum rather than leaving it open to common law notice indefinitely. The reserve was folded into the deal's indemnity basket as a disclosed, quantified item, and treated as part of the same category of tax-adjacent severance exposure covered by the retiring allowance rules that apply once any of the five is actually let go. For the related diligence pattern of a workforce cost structure that looks cleaner on paper than it is in practice, see how a target's contractor roster hid a similar unbudgeted liability.
The signal to check for directly is any senior or long-tenured employee with no written agreement, or with an agreement that is silent on termination entirely. A missing or unenforceable termination clause does not reduce exposure to the ESA minimum — it removes the cap altogether and defaults to common law notice, which for a senior, long-service employee is very often materially higher than whatever the statutory table alone would suggest.
The reason this exposure is routinely underpriced is that it never shows up as a line item anywhere the seller is required to disclose it. A balance sheet does not carry a reserve for “employees we might one day dismiss without a valid termination clause,” and a seller's own management, having never actually terminated any of the five, may genuinely not know the gap exists. Diligence teams that ask only “are there any pending employment disputes” miss this entirely; the question that surfaces it is “does every employee, especially the senior ones, have a written agreement with an enforceable termination clause,” asked directly and confirmed against the actual documents rather than a verbal assurance.
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