published on 27 October 2022 @ 9:34 am · COMMENT
Are You Missing Something? Immigration Liabilities in Mergers and Acquisitions
There is nothing more frustrating than completing a long and complex project, only to discover that you have overlooked a key component in making that project a success. In mergers and acquisitions, corporate lawyers, in-house counsel, tax experts, and many others spend countless hours conducting due diligence, pouring over details of contracts, sales numbers, capital, patents, customer base, litigation, IT, marketing, and so many others. With such an exhaustive list, it can be easy to overlook a key component that should factor into any M&A due diligence process – immigration issues.
Any changes to an organization’s structure, ownership, or even name can create potential issues for employees working in Canada under work permits, as well as open up the organization to significant liabilities under Canada’s immigration compliance regime. Immigration issues should therefore form an integral part of any M&A due diligence process.
Canada’s Compliance Regime
Canada’s Immigration and Refugee Protection Regulations, SOR/2002-227 (“IRPR”), provide a robust system for ensuring employers’ compliance with the terms and conditions outlined in an immigration application for the entry of a foreign worker. Employers of temporary foreign workers are expected to comply with a number of conditions. Some conditions are specific to the employee, such as ensuring the employee is provided with the proper title, job duties, remuneration, benefits, and hours of work and demonstrating that a job offer is genuine, while other conditions are more general, such as abiding by federal and provincial laws that regulate employment, making reasonable efforts to provide a workplace free of abuse, and remaining actively engaged in the business in respect of which an offer of employment was made. If temporary foreign workers are employed based on a Labour Market Impact Assessment (“LMIA”), employers will also need to ensure that the employment of the foreign national will result in benefits to the Canadian job market outlined in an application for a LMIA, including job creation or retention, development or transfer of skills to Canadians, or hiring or training of Canadians. Employers must also maintain all documentation confirming the above conditions for a period of six (6) years from the date that the foreign national began employment.
An employer who is found non-compliant with any of the above conditions may defend their actions in an effort to mitigate liability; however, the justifications for non-compliance are very limited and are prescribed by law in the IRPR. Justifications include: changes in federal or provincial law; changes to collective agreements; a dramatic change in economic conditions; a good faith error of interpretation of the employer’s obligations; an unintentional accounting or administrative error; force majeure; or similar circumstances.
Findings of non-compliance can incur significant penalties, both financial and practical. From a financial perspective, employers can be subject to administrative monetary penalties for non-compliance, ranging from $500 to $100,000 per violation, to a maximum of $1 million per year per employer. Calculations of these penalties are based on a complex formula that is based on the type of violation and whether it is committed by an individual or small business, or a large business, factoring in the compliance history of the employer, the severity of the violation, and whether there was voluntary disclosure of the non-compliance.
In addition to administrative monetary penalties, employers can face a period of ineligibility on future LMIA and work permit applications, for a period of one, two, five or ten years, or permanently for more serious situations of non-compliance, as well as the revocation or cancellation of current and pending LMIA and work permits and the publication of the employer’s name on a public government website for an indefinite period of time.
Employers can also be liable for offences under the Immigration and Refugee Protection Act, S.C. 2001, c. 27 (“IRPA”), such as employing a foreign national in a capacity in which the foreign national is not authorized under the IRPA, or offences of misrepresentation or counselling misrepresentation, the penalties for which can include both fines and jail terms.
Factors to Consider in an M&A Transaction
Given the significant financial and practical impact a finding of non-compliance can have on an employer, it is therefore essential that factors related to immigration be considered at the due diligence stage to ensure that the new organization has a full understanding of the impact of a corporate restructuring from an immigration perspective.
The first important consideration in any M&A transaction is the compliance history of the targeted company. Without verifying this history, a successor in interest may unwittingly open themselves up to liability under the IRPR compliance regime.
The obligations of employers with respect to their temporary foreign workers do not cease when a corporate restructuring occurs. If the new organization can be considered to be a “successor in interest” to the previous employer, that organization becomes responsible for ensuring that all of the conditions outlined in the IRPR are met. As noted above, an employer must maintain documentation to confirm immigration compliance for a period of six (6) years, so it is important to have a clear and documented history of the targeted company’s compliance with all conditions under the IRPR. Acceptable justifications for non-compliance are delineated in the IRPR, and failure to conduct due diligence in an M&A transaction is not included and therefore cannot excuse a finding non-compliance, even when the non-compliance occurred before the transaction.
The exception is where an organization sells or otherwise transfers their business to a new organization, the original organization is still responsible for ensuring that conditions were met until the time of transfer. The new organization will then be responsible for continuing the compliance if they are the successor in interest.
The second important consideration in any M&A transaction is whether the restructuring will have an impact on the authorization of temporary foreign workers to continue to work in Canada.
Temporary foreign workers fall into two major categories: those employed under the Temporary Foreign Worker Program (“TFWP”), pursuant to an LMIA; and those employed under the International Mobility Program (“IMP”), exempt from the requirement to obtain an LMIA. The latter category includes several categories under which work permits can be issued, including NAFTA professionals, intra-company transferees, and certain youth employment programs.
For workers under the TFWP, the employer who first applied for the LMIA must contact ESDC/SC to inform them of the change in the corporate structure. This is essential, as LMIAs are issued for a specific position with a specific employer. As a result, after a corporate restructuring, a new LMIA may be required by the new organization, and the temporary foreign worker would require a new work permit.
For workers under the IMP, the impact of a corporate restructuring on the temporary foreign worker’s authorization to work in Canada will depend in part on the specific category under which the work permit was issued. For example, a temporary foreign worker who obtained a work permit as an intra-company transfer must demonstrate that there is a qualifying corporate relationship between their foreign employer and the Canadian employer. If the intra-company relationship upon which the work permit is based is severed because of a corporate restructuring, that worker may no longer work as an intra-company transferee.
In addition, temporary foreign workers under both the TFWP and IMP typically hold employer-specific work permits. Corporate changes may therefore require that temporary foreign workers cease employment until new work permits can be issued for the new organization. Organizations that fail to verify whether temporary foreign workers will require new work permits to continue working after a restructuring risk liability for Canadian immigration offences.
In light of the above, it is clear that no M&A due diligence is complete without retaining Canadian immigration counsel to assess the existing entity’s compliance history and the impact of the proposed restructuring on a temporary foreign worker’s ability to continue working in Canada. Those who neglect this important area do so at their peril, leaving the resulting entity open to not only financial liabilities, but to penalties such as jail terms or bans from utilizing Canada’s immigration programs to employ key talent. Such an oversight may ultimately undermine the original purpose of the M&A transaction.
Beyond this, however, is the impact that may be experienced by temporary foreign workers. When immigration due diligence is not performed, temporary foreign workers can find themselves unauthorized to work in Canada, impacting long term plans for permanent residence and, if an M&A transaction is handled incorrectly, could result in penalties issued against the foreign worker for unauthorized work in Canada. The cost is simply far too high to allow immigration considerations to be ignored on any M&A due diligence checklist.
This article by Jacqueline Bart, Managing Partner and Carrie Wright, Partner, of BARTLAW LLP was published in The Lawyer’s Daily as set out below in the PDF links: