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1. Effective date

This Employee Takeover Policy was approved on February22, 1996. It replaces the draft version of this policy dated September1993.

2. Preface

An employee takeover is a vehicle for moving from public-sector delivery of a service to private-sector delivery of the same or a similar service. The new company created by an employee takeover is responsible for delivering the service, as a small business, and typically serves a wider market that includes clients other than the government. It achieves efficiencies through the better utilization of resources.

Departments may consider various employee takeover proposals that do not conform to the requirements of this policy. For these proposals, however, departments require specific Treasury Board approval.

For the purpose of interpreting other government policies, such as the post-employment rules, an employee takeover company is considered to be an "established" company.

Definitions used in this policy, including the definition of an employee takeover, is provided in AppendixA.

3. Policy objective

Through employee takeovers, to create a more flexible and innovative program delivery environment and to deliver affordable, accessible and responsive services, while treating employees fairly and reasonably.

4. Policy statement

As a responsible manager, the government seeks to make the best possible use of the resources entrusted to it by Canadians and, at the same time, to treat its employees fairly. Thus, it allows departments to consider employee takeovers. Further, as long as a sound case can be made that an employee takeover represents value to the Crown, the employee takeover policy permits a preference for employees in the interpretation of existing rules relevant to the takeover.

5. Application

5.1 This policy applies to departments and agencies listed under Schedule I and II of the Financial Administration Act. This policy also applies to Canadian Forces personnel who are eligible or will be eligible to have a right to be released under the Queen's Regulations and Orders. Any others may also choose to adopt this policy.

5.2 This policy focuses on employee takeovers resulting in the possibility of a contract with the federal government department or agency that currently is responsible for the delivery of the services proposed to be taken over. The policy sets out authorities and a class of contracts that allow departments to make decisions in a timely manner without requiring additional Treasury Board authorities. Other types of alternative service delivery initiatives, or exceptions to this policy's requirements, may make good sense in some particular circumstances but these cases may require specific Treasury Board approval.

6. Policy requirements

6.1 Employee takeovers are one option for delivering government services or programs. This policy sets out the government-wide position with respect to employee takeovers in general. In view of the differing management challenges facing each department, departments must ensure that employee takeovers are consistent with departmental strategic plans. It is at the deputy head's discretion whether or not to permit employee takeovers as a means of delivering a given service or program. The department must clearly communicate its position on employee takeovers to all employees.

6.2 Where a department considers employee takeovers to be a possible option, the deputy head or his or her designate may solicit employee takeover proposals from employees delivering the services. Employees may also initiate such a process.

6.3 Employees who wish to pursue an employee takeover must request permission from the deputy head to develop a formal proposal for an employee takeover. The authority to proceed rests with the deputy head. The decision shall be final and shall be communicated in writing to those requesting permission to develop a proposal.

The written permission from the deputy also constitutes:

  • written consent for the purposes of the Conflict of Interest Compliance Measures section of the Conflict of Interest and Post Employment Code; and
  • the reduction of the one-year limitation period (cooling-off period) for senior managers pursuant to the Conflict of Interest and Post Employment Code.

6.4 Where the deputy head decides, in principle, to entertain an employee takeover proposal, he or she must structure the approval and negotiation process so as to avoid possible or perceived conflict of interest situations. The process may include establishing an independent panel to advise the deputy head (see Guidelines).

(a) Departments must assess the costs and benefits of an employee takeover, preferably by using a business-case approach. They must ensure that such takeovers withstand the test of public scrutiny with respect to prudence and probity.

6.5 A department considering an employee takeover must consult the affected unions at the departmental level. It is recommended that this consultation be undertaken as early in the decision-making process as is feasible.

6.6 Government contracting policy requires that, whenever practical, an equal opportunity be provided for all firms and individuals to compete for government contracts.

(a) Generally, the department should use a competitive process for letting a contract with an employee takeover company. In such cases, other potential suppliers must be advised in the bidding documents that an employee group is also eligible to bid.

(b) The department may determine that an initial non-competitive contract is the best way to ease the transition of the services in question from the public sector to the private sector. Such a contract must be of a reasonable duration (not longer than three years), after which the department must open the service requirement to competition. There may be instances when a longer term contract is required, such as to finance the purchase of assets for the company. Where the contract exceeds the three-year period, the department must obtain Treasury Board approval.

(c) If the competitive process is used, full disclosure of relevant information to all parties will put all competitors on a fair footing.

(d) Third-party participation may be necessary. Employees may partner with the private sector to ensure that the employee takeover company has access to appropriate financing and expertise. If a non-competitive contract is involved and third-party participation occurs, the employee group must be the dominant shareholder. As a minimum condition, the employee group must have significant influence over and control of the operation and management of the employee takeover company.

(e) Once the contract is signed, the written permission of the department is required to assign the contract, or any part of it, to another party.

6.7 This policy delegates to departments the authority to negotiate and approve employee takeover contracts up to $10million for competitive contracts and up to $10million for non-competitive contracts. However, each department must submit its first employee takeover case over $1million to Treasury Board for approval, to ensure that the department has established an adequate process for handling employee takeovers, which meets government wide standards.

(a) To inform the private sector, departments must place a notice of any signed non-competitive contract on the Open Bidding System.

6.8 Departments may support an employee or employee group in the development of an employee takeover proposal.

(a) Departments cannot provide employees with financial assistance or any direct or indirect benefits since this would be contrary to the Public Sector Compensation Act.

(b) The employees may incorporate an employee association. The minister may provide a contribution to this association to help it obtain professional, financial and legal advice to prepare the employee takeover proposal. Such support should be given in an arm's-length manner. If the employee takeover is successful, the contribution must be repaid during the employee takeover contract period. Contributions should be proportional to the size of the proposal and cannot exceed $100,000. Where more than one employee association is interested in the takeover and is supported through a contribution, the $100,000 maximum must be shared.

6.9 Before the effective date of the initial contract established under the employee takeover provisions, the principals of the employee takeover company must resign from the Public Service.

6.10 No employee is obligated to take part in an employee takeover.

6.11 As is the case with any contracting-out situation, the business case for an employee takeover is strengthened when the new company agrees to employ employees whose employment would otherwise be affected by the discontinuation of the internal delivery of the service. Similarly, the cost of dealing fairly with employees affected by an employee takeover must be factored into the business-case analysis.

6.12 For purposes of this policy, ministers have the authority to dispose of surplus Crown assets, for materiel property only, under the Surplus Crown Assets Act3(1)(b). Assets which would be surplus to a department's needs in the event of an employee takeover, can be treated as surplus and can be transfered to the employee takeover company. In such cases the negotiated value of the transfered assets would form part of the contractual consideration.

6.13 Departments and agencies must ensure compliance with Section25 of the Official Languages Act so that the employee takeover company continues to provide the services in both of Canada's official languages where required by the Act or its Regulations.

6.14 Departments must treat any confidential commercial information pertaining to prospective employee takeovers, such as a company's business plan, in a manner comparable to its treatment of confidential commercial information from any private-sector entity.

7. Monitoring

After sufficient application of this policy the Treasury Board Secretariat will review the effectiveness of this policy and will obtain feedback on its implementation by departments. Monitoring information will be obtained from relevant sources such as departmental annual reports on contracting, PartIII of the Estimates, Treasury Board submissions, internal audits and program evaluations. Reviews will have a holistic focus, taking into consideration the restructuring strategies of the department. Those will include human resource strategies as well as the specific economics of the employee takeover agreement. The Treasury Board Secretariat will develop a listing of case studies based on a list of employee takeovers that each department must maintain.

8. References

Relevant legislation

Financial Administration Act (PartV, Public Property).

Official Languages Act (Section25).

Patents Act.

Public Sector Compensation Act, subsection7.2(1) and Early Departure Incentive Program Order (EDI).

Public Servants Inventions Act.

Public Service Employment Act.

Special Retirement Arrangements Act, section10, subsection28(1) and the Retirement Compensation Arrangements Regulations, no.2, dealing with Early Retirement Incentive (ERI).

Surplus Crown Assets Act.

The North American Free Trade Agreement

The Agreement on Internal Trade

The Agreement establishing the World Trade Organization

Treasury Board Secretariat publications

Conflict of Interest and Post-Employment Code for the Public Service. Chapter3-1 of the "Human Resources" volume of the Treasury Board Manual.

"Executive Employment Transition Policy" volume of the Treasury Board Manual (to be published in the "Executive Group" volume of the Treasury Board Manual).

Framework for Alternative Program Delivery, 1995.

Government Contracts Regulations (Contracting Policy). "Information and Material Management" volume of the Treasury Board Manual.

Stretching the Tax Dollar: Helpful Hints on Writing an Effective Business Plan, May1994.

Stretching the Tax Dollar: Make or Buy?, January1995.

Work Force Adjustment Directive. Chapter1-2 of the "Human Resources" volume of the Treasury Board Manual.

9. Enquiries

Please direct all inquiries about the implementation and application of this policy to:

Innovative and Quality Services Division

Financial and Information Management Branch

Treasury Board Secretariat

facsimile: (613) 954-9094


February 22, 1996

Appendix A: Definitions

Other pertinent definitions can be found in the Treasury Board Secretariat document entitled Framework for Alternative Program Delivery.

Business case - outlines the strategic and economic rationale for a course of action. It includes a costing analysis of the proposed course of action, and as well as the advantages and disadvantages of such actions. It is developed by the department and serves as the background for a departmental decision to accept, or not to accept, an employee takeover proposal.

Business plan - is a document outlining the employee takeover company's market opportunities, strategies to develop those opportunities, and the resources (financial, human etc.) required for the realization of that plan, the budget and possibly, pro forma financial statements. It is developed by the employee takeover proponents and is their road map for the future.

Deputy head - means, in this policy, the deputy head or head of the agency, or his or her designate.

Department - means, in this policy, the department or agency to which this policy applies.

Employee takeover - is an agreement entered into by the Government of Canada with an employee takeover company, comprised of the former employee or group of former employees who have left the Public Service and provide for the government, from the private sector, the same or a similar service that he, she or they performed while working in the Public Service. This policy allows the employee or employee group to establish a private-sector entity to negotiate or compete for a government service-delivery contract. This contract may include a lease or license.

Employee takeover company - is a company, legally incorporated by the employee or employee group, who leave the Public Service and provide for the government, from the private sector, the same or a similar service that he, she or they performed while working in the Public Service. In this context, irrespective of whether an employee takeover company has more than one employee-owner and/or offers shares to former employees, ownership is defined in terms of control and significant influence over the operations and management structure of the corporation. This company may be the same employee association incorporated to develop proposal(s). It is possible that the employee takeover company is controlled by the former employees collectively and that it does not necessarily have a principal owner.

Principal - is a person who owns and controls the employee takeover company through significant influence. This includes officers of an incorporated company. Former employees who own 20% or less of the voting shares are not considered as principals for the purpose of the government's human resources regime or for the purposes of this Employee Takeover Policy.

Proponent - is an employee of the unit affected by the employee takeover proposal who is a signatory of the proposal.

Significant influence - is the substantive control exercised over the operations and management of an employee takeover company by its owners. In order to exercise significant influence, the former employee or employee group must own 20 % or more of the company's shares. (Canadian Institute of Chartered Accountants Handbook). If a non-competitive contract is involved and third party participation occurs, the employee group must be the dominant shareholder.

Third party - is any party other than the government department, the employee takeover proponents, principals or employees. The third party is typically a private-sector partner.


* February 22, 1996

Appendix B - Departmental Guidelines for Employee Takeovers

Context

Employee takeovers exist within the broader context of government restructuring, program review, and the search for innovative alternatives that result in better value for money for the Crown and the public.

The search for alternatives begins with a review by departments of their programs and services and an identification of those which are no longer necessary and should be cut, those which government should continue to deliver directly, and those which might best be delivered commercially.

For those programs and services that might best be delivered commercially, the next step is the examination of alternative delivery options. Departments should carefully consider the most appropriate scope or boundaries of the program or activity under review. There may be significant transition costs in moving to any alternative service delivery. All significant costs must be factored into the business case analysis.

A number of commercialization options exist, including outsourcing, privatization, and contracting. Steps for selecting program delivery alternatives are outlined in the publication entitled: Framework for Alternative Program Delivery, published by Treasury Board Secretariat. By broadening their markets outside of government, employee takeovers offer many positive attributes common to various alternative forms of service delivery, such as more efficient use of resources.

Two features distinguish employee takeovers from other modes of alternative service delivery:

1. the Crown now contracts for services; and

2. for the transition period, the employee takeover company that is doing the work under contract is run and controlled by former government employees.

The major advantages of employee takeovers derive from:

- better value for taxpayers;

- more efficient service delivery;

- promotes support to a new start-up entity;

- continued application of distinctive expertise developed in government;

- protection of value of Crown assets;

- welfare of employees; and

- potential regional economic benefits including jobs.

There are several types of employee takeovers, each of which reflect different circumstances. They include employee takeover companies owned and operated by former employees that:

1) under contract, primarily deliver services to a government department. The employee takeover company may also provide services to other departments; and

2) primarily deliver services to the public or other external groups under contract to the government. Again, the employee takeover company may offer other products or services to other markets.

Guiding Principles

The following guiding principles reflect and expand on the Employee Takeover Policy:

- employee takeovers should be considered within a department's overall restructuring strategy;

- a business case analysis is used;

- given a sound business case, pro-employee interpretation of existing rules relevant to the takeover;

- welfare of the workforce is a key consideration;

- processes for review of proposals should be transparent and meet the requirements of Access to Information and Privacy Act;

- commercial confidentiality should be respected; and

- departments should be empowered and accountable.

Definitions

Business case - outlines the strategic and economic rationale for a course of action. It includes a costing analysis of the proposed course of action, and as well as the advantages and disadvantages of such actions. It is developed by the department and serves as the background for a departmental decision to accept, or not to accept, an employee takeover proposal.

Business plan - is a document outlining the employee takeover company's market opportunities, strategies to develop those opportunities, and the resources (financial, human etc.) required for the realization of that plan, the budget and possibly, pro forma financial statements. It is developed by the employee takeover proponents and is their road map for the future.

Deputy head - means, in this policy, the deputy head or head of the agency, or his or her designate.

Department - means, in this policy, the department or agency to which this policy applies.

Employee takeover - is an agreement entered into by the Government of Canada with an employee takeover company, comprised of the former employee or group of former employees who have left the Public Service and provide for the government, from the private sector, the same or a similar service that he, she or they performed while working in the Public Service. This policy allows the employee or employee group to establish a private-sector entity to negotiate or compete for a government service-delivery contract. This contract may include a lease or license.

Employee takeover company - is a company, legally incorporated by the employee or employee group, who leave the Public Service and provide for the government, from the private sector, the same or a similar service that he, she or they performed while working in the Public Service. In this context, irrespective of whether an employee takeover company has more than one employee-owner and/or offers shares to former employees, ownership is defined in terms of control and significant influence over the operations and management structure of the corporation. This company may be the same employee association incorporated to develop proposal(s). It is possible that the employee takeover company is controlled by the former employees collectively and that it does not necessarily have a principal owner.

Principal - is a person who owns and controls the employee takeover company through significant influence. This includes officers of an incorporated company. Former employees who own 20% or less of the voting shares are not considered as principals for the purpose of the government's human resources regime or for the purposes of this Employee Takeover Policy.

Proponent - is an employee of the unit affected by the employee takeover proposal who is a signatory of the proposal.

Significant influence - is the substantive control exercised over the operations and management of an employee takeover company by its owners. In order to exercise significant influence, the former employee or employee group must own 20 % or more of the company's shares. (Canadian Institute of Chartered Accountants Handbook). If a non-competitive contract is involved and third party participation occurs, the employee group must be the dominant shareholder.

Third party - is any party other than the government department, the employee takeover proponents, principals or employees. The third party is typically a private-sector partner.

Other pertinent definitions can be found in the Treasury Board Secretariat document entitled Framework for Alternative Program Delivery.


1. Implementation Guidelines for Employee Takeovers

It is recommended that deputy heads designate someone as the focal point for consideration of employee takeover proposals.

1.1 The designate should be someone who will not be affected either positively or negatively by the outcome of a decision regarding an employee takeover. It should not be the employees' immediate supervisor.

1.2 Where the department has identified a focal point for alternative service delivery, it is suggested that this person also be responsible for the consideration of employee takeovers. The role of the designate should include the review of the agreement as well as the management of the process for the purpose of ensuring the best interest of the Crown.

1.3 Departments should disseminate information about alternative service delivery and employee takeover opportunities widely. This information should include examples of the types of services which are considered by the department as suitable for consideration and those that are not. Making this information available to employees should reduce the number of false starts and rejected proposals.

2. The Initial Steps

Where a department considers employee takeovers to be a possible option, the deputy head or his or her designate may solicit employee takeover proposals from employees delivering the services. Employees may also initiate such a process.

2.1. Once an employee or employee group initiates a possible employee takeover, the interested party should notify the deputy head in writing of its interest.

2.2 In assessing the employees' initial expression of interest, the deputy head should consider the following:

2.2.1 whether the employee takeover is consistent with departmental strategies, particularly as these pertain to alternative service delivery or commercialization;

2.2.2 whether the employee takeover affects other employees and whether strategies such as deployments can be applied to help minimize workforce adjustment situations and maximize employment opportunities;

2.2.3 whether there would be value in establishing an independent panel to provide the deputy head with advice on all expressions of interest. This panel could provide advice and review final agreements between the department and the employee takeover company before they are signed;

2.2.3.1 whether the panel should be composed of people from outside the department, from within the department or a combination of both, noting the degree of independence would differ under each alternative;

2.2.4 the general availability of comparable services in the private sector, in order to avoid a monopoly situation;

2.2.5 the desirability of establishing the function in the private sector, for economic development or technology transfer purposes;

2.2.6 the potential for the longer term development of a financially viable, competitive company; and

2.2.7 the feasibility of monitoring the deliverables of the prospective new company.

2.3 The deputy head should respond in writing within 30days, either agreeing to allow the development of an employee takeover proposal, or stating that the department will not consider a proposal. In this regard:

2.3.1 the agreement to proceed does not constitute an agreement on terms and conditions of the employee takeover;

2.3.2 the deputy head should outline the planning process to be followed and the estimated time frames which would determine proposal completion and contract negotiations; and

2.3.3 this written permission for the development of a proposal serves as a written consent by the deputy head required in the Conflict of Interest Code as outlined in Section 6.3 of the Employee Takeover Policy and Section 121(1)(c) of the Criminal Code to engage in employee takeover activities.

2.4 At this time, the deputy head or his or her designate should make a decision on the extent of support to be accorded to the employee takeover proponents in formulating their proposal. The extent of the support must be determined in the context of the business case and the public interest. This could range from:

(a) zero preference: employees receive no support to develop their proposal;

(b) support: by the employer to the employees for the development of an employee takeover proposal. Such support could be in the form of discretionary time off with or without pay, access to relevant training or, via an employee association, access to professional, financial and legal advice. No advantage would be given in the evaluation of proposals in a competitive situation;

(c) competitive advantage: support as discussed in (b), plus some added preference (first right to match the lowest bid, given percentage point advantage, etc.) in the evaluation of competitive bids. This preference must be identified for competitors in the Request for Proposal; and

(d) non-competitive contract: support as discussed in (b), and an initial negotiated non-competitive contract for a fixed period of time with no possibility of renewals or extensions. The subsequent contract must be let through the competitive process.

2.5 In determining the appropriate level of support, the department should consider the following:

2.5.1 the scope and complexity of the prospective employee takeover;

2.5.2 the potential level of long term savings to be gained through a successful employee takeover;

2.5.3 the general availability of alternative forms of commercialization; and

2.5.4 the desirability of maintaining continuity in service delivery.

2.6 The employees may create an employee association. The minister may provide a contribution to this association to help it obtain professional, financial and legal advice to prepare the employee takeover proposal.

2.7 In the case where support is given to employee takeover proponents by the department, it is recommended that:

2.7.1 support should be given in an arm's-length manner;

2.7.2 if the employee takeover is successful, the contribution must be repaid during the employee takeover contract period;

2.7.3 frugal contributions may be provided to the employee association for such matters as professional and legal advice. As further needs can be demonstrated, incremental contributions may be made. The total must be proportional to the size of the proposal and cannot exceed $100,000;

2.7.4 where more than one employee association is interested in the takeover of an activity and is supported through a contribution, the $100,000 maximum must be shared;

2.7.5 this support be clearly identified to other potential bidders in the case of a competitive contract;

2.7.6 the department ensure that the assistance provided is not contrary to the Public Sector Compensation Act; and

2.7.7 the proponents sign a waiver absolving the Crown of any responsibility for the future performance of the employee takeover company.

2.8 Paragraph 8.2.1. of the Work Force Adjustment Directive specifies that the relevant bargaining agent(s) all be advised as soon as the deputy head has decided to examine the viability of the proposal. A positive reply to the letter of interest would normally constitute this decision to examine.

2.8.1 The department must contact the affected unions at the departmental level. It is recommended that this consultation be undertaken as early in the decision-making process as feasible. With regards to notification requirements, departments should consult the relevant agreements such as PartVIII of the Workforce Adjustment Directive.

3. Proposal Development

3.1 On acceptance of the proponents' expression of interest, the deputy head should ensure no conflict of interest exists. Where there is potential for a conflict of interest, the deputy head should take steps to insulate proponents of the employee takeover during the developmental phase, and create an arm's length situation for decision makers representing the Crown. If necessary, the deputy head may wish to approve leaves of absence or the assignment of alternate duties for employees while they develop and negotiate the employee takeover.

3.1.1 Employees proposing a takeover should not represent the department in any activity related to the proposal. During this process, the deputy head may find it beneficial to consult with legal services. In finalizing the contract, the department may ask Public Works and Government Services Canada to administer all or part of awarding the contract. These safeguards are intended to help parties avoid real, potential or apparent conflicts of interest. However, it is up to the parties to the agreement to satisfy themselves that no conflict of interest exists. Where there is such a risk, the parties should act to prevent a conflict from arising.

3.1.2 Care should be taken to ensure that the new employee takeover company does not use confidential government information obtained from previous employment to conduct its business. However, under certain circumstances access to confidential government information may be permitted. This decision will be at the discretion of the deputy head(s) of each department.

4. Analysis

4.1 The analysis of the employee takeover proposal should include the two following components:

4.1.1 the viability of the proposed business plan. This analysis should include the technical, managerial and financial status and prospects of the new company. Where the business plan does not demonstrate the potential for medium or long-term success, the department should not accept the proposal;

4.1.2 the business case for the proposed employee takeover. It should be noted that value for the Crown may derive from cost savings of contracting with the employee takeover company, of achieving other program objectives (i.e. economic development, skill or technology transfer, etc.) or from the realization of new revenues (i.e. royalties). The business case analysis may consider several alternative service delivery options at one time. The business case analysis should consider:

(a) whether private sector supply of a particular service to government exists. If so, whether it is more cost-effective than public sector supply;

(b) the public interest in the continuation of the function, albeit outside government;

(c) whether the employee takeover could be used to advance the government's community and regional development agenda of job creation and economic growth;

(d) whether a full costing and assessment of the advantages and disadvantages of the employee takeover, as compared with other options such as continued in-house provision of the service, has been done and supports the decision to proceed;

(e) whether there are existing or anticipated sources of supply in the private sector to ensure, if applicable, competition after an initial non-competitive contract expires;

(f) the impact on employees and the extent to which the employee takeover company can offer job opportunities for affected employees and the terms and conditions relating to those job opportunities. The number of potential lay-offs resulting from the employee takeover, and all related workforce adjustment costs;

(g) whether the change in service delivery would affect service to the public requirements as identified in the Official Languages Act;

(h) whether the service can be described and monitored in terms of the deliverables specified in the contract; and

(i) whether the transfer or sale of assets is involved. If such assets are involved, the department should obtain legal advice to determine appropriate treatment for each of the real property, materiel assets and intellectual property assets (see also Section5.4 of the Guidelines).

4.2 Departments should assess employee takeovers against the requirements of the Government Contracting Policy, including obligations under North American Free Trade Agreement, the Agreement on Internal Trade and the Agreement establishing the World Trade Organization. An employee takeover company is normally a small business. As such, it falls under the small business set-aside exception of the North American Free Trade Agreement and the World Trade Organization. When considering justification under the Agreement on Internal Trade, the following minimum conditions apply:

(a) any new organization resulting from an employee takeover should be in a relationship that is at arm's length with the procuring company (contracting department), and no agency relationship is to be created;

(b) a business case should be made that economic evidence supports the establishment of a non-competitive contract for an initial period in order to ensure a viable start-up for the employee takeover company;

(c) the period should be reasonable in length, and in no event more than the three years allowed by this policy. Departments must also place notice of any signed non-competitive contract on the Open Bidding System;

(d) any non-competitive employee takeover contracts may be posted as an Advance Contract Award Notice to notify potential suppliers. The Advance Contract Award Notice is "notification through the open bidding methodology of the intent to award a contract without competition". After publication of this intent, and if no supplier indicates an interest or challenges the proposed award within15 days, the contracts are deemed to be competitive. The contract then may be awarded, using the open bidding competitive-contracting authorities. If there is a subsequent challenge to the proposed contract award, the deputy head must respond to the challenge; and

(e) if the three years is not deemed sufficient, departments must receive Treasury Board approval for longer initial contract periods or contract extensions.

5. Determining Value

5.1 Ideally, a competitive process should determine the price and conditions of the contract.

5.2 If this is not possible, the price negotiated should ensure that for most services, (excluding those in the science and technology field which are covered in another Treasury Board policy) the employee takeover proposal is more cost-efficient than the current approach to service delivery. A publication titled: Stretching the Tax Dollar: "Make or Buy?" developed by the Treasury Board Secretariat, is available to help managers do a costing analysis.

5.3 Departments should use current market rates in the private sector as a guide in negotiating the contract. Where similar contracts exist, these may serve as a benchmark.

5.4 Crown Assets

5.4.1 where capital equipment or intellectual property belonging to the Crown is involved, the department should take into account the market values, where this can be determined, in establishing any arrangement with the employee takeover company.

5.4.2 where the sale, transfer, or leasing of real property is involved, departments should obtain market value in accordance with Treasury Board Real Property Policy (Chapters1-4) and Section61 of the Financial Administration Act.

5.4.3 in the case of materiel assets related to employee takeovers, this policy extends to all departments the authority, under article 3(1)(b) of the Surplus Crown Assets Act, to directly dispose of surplus Crown assets at the value that is in the best public interest.

5.4.4 the equipment may be rented or leased subject to the Public Property Loan Regulations. In leasing or renting equipment, the third party liability risk should be considered.

5.4.5 where intellectual property is involved, departments should take into account the commercial value in determining the best value to the Crown.

6. Negotiations

6.1 Once the deputy head has agreed to examine the proposal, and the department has completed its business case, the proponents are free to negotiate on the terms and conditions of the employee takeover.

6.2 Negotiations should be carried out as quickly as possible. Either party may, by serving written notice on the other, terminate the negotiations at any time. In so doing, neither party has recourse against the other.

6.3 The deputy head should consult legal services while negotiating an employee takeover.

6.4 When the deputy head negotiates with the employee takeover proponents, the following should be considered:

6.4.1 the price and method of awarding the contract;

6.4.2 the value of assets being transferred;

6.4.3 the number of current employees to be employed in the new company;

6.4.4 the level of third party participation, and the need for the employees to retain control and significant influence over the operation of the new venture for the duration of the initial contract; and

6.4.5 the need for performance guarantees (including holdbacks or bonds).

7. Ensuring No Unfair Advantage

7.1 In assessing the proposal and managing any ensuing contracting process, the deputy head should ensure that the proponents to the employee takeover do not have access to, and are not involved with, the assessment. The proponents of the employee takeover must not have access to information on a possible future competitor that would give the proponents an unfair advantage over other competitors in future contract bids.

7.2 Similarly, the deputy head should ensure that no departmental official who may have an interest in an employee takeover bid has access to information concerning a competing, or potentially competing, employee takeover proposal.

7.3 Any information on the prospective employee takeover of a commercial confidential nature should be treated in a manner comparable to commercial confidential information from any private sector entity.

8. Termination benefits

8.1 Departments should inform employees of entitlements to termination benefits under the workforce adjustment directive or departure programs as they apply to their department at the time of the employee takeover proposal. AppendixC outlines the termination benefits available to employees as applied on February22, 1996.

8.2 Principals must resign from the public service and are entitled to only the termination benefits applicable at the time (see AppendixC).

9. Pensions

9.1 The government's commitment to income security should be respected in considering pension portability. Where the employee takeover is of sufficient size and scope, the department may wish to encourage the company to establish a registered pension plan and apply to the Treasury Board to enter into a reciprocal pension transfer agreement.

10. Approval

10.1 Decisions to approve an employee takeover should be made on a business case analysis and on value to the Crown. The deputy head may wish to take into consideration the following factors:

10.1.1 cost comparisons of the employee takeover with other options, including the status quo;

10.1.2 transition costs, including any departure incentives;

10.1.3 any projected revenues;

10.1.4 the capacity of the employee takeover company to meet the performance requirements; and

10.1.5 probable public perception that the decision represents better value to the Crown.

11. Post-Approval

11.1 Once the employee takeover is approved and up-and-running, the department should treat the new company as an independent business.

11.2 Departments should monitor the performance of the employee takeover in the delivery of the agreed services. Such monitoring should focus on the deliverables, the agreed performance measures and may use techniques such as client satisfaction surveys.

11.3 As in any contractual agreement, if the terms of the contract are not being met the deputy head must take appropriate actions including the possible termination of the contract.

12. Additional Guidance

12.1 For policy interpretation or guidance on a specific issue related to employee takeover proposals, departments may wish to refer to the relevant policy specialist in the Treasury Board Secretariat.

12.2 Tools, including a checklist of matters for consideration on employee takeovers, will be issued by the Treasury Board Secretariat. They are intended to help departmental managers deal with the numerous and varied issues that may be raised by employee takeover proposals. These tools will be periodically updated as required.

13. Monitoring

13.1 Monitoring information will be obtained from relevant sources such as departmental annual reports on contracting, PartIII of the Estimates, Treasury Board submissions and from internal audits and program evaluations. As well, departments should maintain records of employee takeover expressions of interest and proposals, whether successful or not.

Treasury Board Secretariat will undertake a review of the policy once there is experience with a sufficient number of cases. These reviews will have a holistic focus, taking into consideration the strategies of the department in restructuring. This will include human resource strategies, as well as the specific economics of the employee takeover agreement.


February 22, 1996

Appendix C - Human Resources - Termination Benefits

Employee Takeovers (contracting arrangements)

AppendixC is designed to help to clarify the Human Resources policies as they relate to employee takeovers. In case of an inconsistency between AppendixC and the Human Resources policies, the current Human Resources policies take precedence.

1. The policy states that, as is the case with any contracting-out situation, the business case for an employee takeover is strengthened when the new company agrees to employ employees whose employment would otherwise be affected by the discontinuation of the internal delivery of the service. Similarly, the cost of dealing fairly with employees affected by an employee takeover must be factored into the business-case analysis. Departments should ensure that the most current workforce adjustment information is provided to employees and managers. The following outlines the termination benefits available to employees as applied on February22, 1996:

1.1 Under the current workforce adjustment regime applicable to departments for whom Treasury Board is the employer, the entitlements to lump-sums and departure incentives applicable to affected employees who are "non- principals" of the employee takeover company, are as follows:

(a) surplus employees who receive and accept a job offer of contiguous employment from the employee takeover company are not entitled to the Early Retirement Incentive or Early Departure Incentive, but are entitled to a 6month lump-sum payment under the contracting-out provisions of the Workforce Adjustment Directive (applicable to all departments);

(b) surplus employees who receive and refuse a contiguous job offer from the employee takeover company are not entitled to the Early Retirement Incentive, but are entitled, according to the conditions set out in the Workforce Adjustment Directive and the departure programs, to opt for:

- the Early Departure Incentive OR resignation and the 1-year lump-sum, under contracting out, if they are employed by a most affected department; or

- resignation and the 1-year lump-sum, under contracting out, if they are employed by a least affected department;

(c) surplus employees who do not receive contiguous job offers from the employee takeover company may opt for the 1-year lump-sum payment under the contracting out provisions of the Workforce Adjustment Directive, or be eligible for the Early Departure Incentive or the Early Retirement Incentive according to the conditions established for these programs (i.e. the Early Retirement Incentive cannot be combined with the Early Departure Incentive).

(d) a surplus employee in 1.1.(a) who becomes an investor/minority shareholder (i.e. a non-principal) retains his/her individual entitlements to the 6month lump-sum payment. A surplus employee in either 1.1.(b) or (c)above who has opted for Early Departure Incentive, Early Retirement Incentive or the lump sum payment, as applicable, and becomes an investor/minority owner (a non-principal) retains his/her individual termination benefits.

(e) affected employees (non-principals) who are subject to the executive employment transition (EET) policy (eg. EXs) are to be treated in accordance with the provisions of that policy.

2. Departments must ensure that relations with former public servants in employee takeover arrangements can bear the closest scrutiny as being in accordance with the spirit as well as the letter of the post-employment rules.

2.1 Under the current post-employment regime applicable to departments for whom Treasury Board is the employer, where former public servants have received departure incentives and subsequently join an Employee Takeover company which receives either a competitive or non-competitive contract during the lump sum payment period, the following applies:

(a) a former public servant joining the new Employee Takeover company as an employee or subcontractor, need not reimburse any portion of the departure incentive where no job offer of contiguous employment had been made prior to his/her departure. As well the contract price awarded to the Employee Takeover company need not be abated;

(b) a former public servant joining the new Employee Takeover company as a principal, and has received a departure incentive, need not reimburse any portion of the departure incentive where no job offer of contiguous employment has been made prior to his/her departure. But, the contract price will be abated for the lump-sum payment period;

(c) a former public servant who has received a departure incentive, is in receipt of a pension, and becomes a principal in the Employee Takeover company which receives a competitive contract, the contract price will be abated for the length of the lump-sum period. Where the Employee Takeover company receives a non-competitive contract, the contract price will be abated for the lump-sum payment period and an additional twelve month period.