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The sale of a business and some implications for employers and employees

Last month I was consulted by a woman with respect to a new employment agreement that she wanted reviewed. The employment opportunity presented to her was by a company that had purchased the software company she was currently employed with for the past 19 years. Her position was in a specialized management unit of one of the company’s IT operations, a position that seemed so complicated that I dare not try and explain.

The new employment agreement was a “Welcome to the new company” type contract that seemed to offer her the same position at the same location but under the new company’s legal identity. Her salary remained the same, as did the total of her bonus, although the bonus structure was altered to reflect seemingly unattainable goals. While the new bonus structure did in fact reflect the purchasing company’s exact bonus structure with all of its existing employees, this arrangement was originally her main concern.

Company takeovers like this one are a very common phenomenon. Our firm often offers advice to medium-sized vendor and purchasing companies, as well as employees that are simply seeking legal advice on what to do when presented with situations like this. With this woman’s case, her bonus was not my first concern. As counsel, my mind turned to more important issues than a bonus structure, which probably would have cost her too much money to challenge constructively. Instead, my main concern was reviewing how the new company was proposing to handle her 19 years of service with the vending company, and, as I predicted, the matter was dealt with from an ESA standpoint only and disregarded common law issues completely.

Reading the termination provisions in her contract was interesting. It did fulfil its obligations under statutory provisions, but it also seemed to “lock down” future termination payout to Employment Standards Act obligations. The woman’s interpretation, however, was that the company was being fair and ensuring she would be paid a severance if they cut her position. My interpretation was obviously contrary to hers. They were ignoring her past term of service, trying to deadbolt her termination to ESA payout only, and common law notice was not mentioned.

Therefore, the question for the purpose of this blog only, is what happens to an employee’s term of service when a company is sold?

The answer could be a zillion different things, but it is important to remember to bring it down to basics and ensure that we look at the issue from the perspectives of both common law and the Employment Standards Act (presuming your company is interprovincial.)

The traditional common law
Traditionally, the fundamental point of law on the sale of companies is that contracts of employment are not assignable. The purchasing company cannot assume an employment contract that exists between the vendor and its employees. An employee cannot just “show up on Monday” and start work with his or her new employer. You have to do “something.”

This traditional and harsh common law rule evolved from the case of Nokes v. Doncaster Amalgamated Collieries Ltd (1940), which stated that the rights and obligations under the contract of employment cannot be unilaterally transferred to a third party who had not signed the original contract. Employees of the vending companies do not automatically become employees of the purchasing company. In effect, the sale of a business terminates the employment relationship between the selling company and the employees of its business, unless the purchasing company agrees otherwise. Traditionally, if the employees simply continue their employment with the purchasing company, then the employment relationship would be considered under a new contract of employment without the vendor recognizing past service.

The Employment Standards Act and the sale of a business
The majority of provincial legislation does not follow the harshness of the common law on this issue and, to a certain extent, it preserves the employees’ continuity of employment if their employer business is purchased. The preservation however is for the purpose of statutory law only.

The main provision on this issues is found within S.9(1) of the Ontario Employment Standards Act:

If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

The years of service of an employee are therefore recognizable (provided he or she is offered employment within 13 weeks of the sale) and the purchaser is not able to treat the employment relation as a “new contract.” It is important to remember that the above does not protect or extend into common law notice of termination.

Recent cases and the shift of recognizing past service within implied terms
Considering the above approach to this issue by the common law and ESA, recent cases have told us that perhaps recognizing past service should really be implied within purchase and sale agreements. The most recognized and quoted case with this issue is the British Columbia Court of Appeal case of Sorel v. Tomenson Whitehead Ltd. In that case, the Court noted the following very well-quoted principles still relied on today:

We think the legal situation might be conceptualized as follows:

  1. When a purchaser acquires a business as a going concern, there is an implied term in the contract of employment between it and those employees continuing in the service of the business, that the employees will be given credit for years past service with the vendor for purposes of such incidents of employment as salaries, bonuses and notice of termination.
  2. This implied term may be negated by an express term to the contrary. In other words, the purchasing employer may, at his option, advise the employees that he does not intend to give them credit for past services to the vendor. If this is done, the employees have the option of entering into the new contract of employment on these terms or of declining to work for the purchasing company and suing the vendor for wrongful dismissal and damages in lieu of notice.
  3. Where the new employer does not advise the employees that he is unwilling to contract on the basis that the employees have credit for past years of service, the employer is deemed to have contracted with the employees on the basis that the employees will be given such credit.

Although this case is from the BC Court of Appeal, it is well-recognized across the country. The Court’s reasoning was basically that there is an implied term within business purchase agreements that employees will be given credit for their past years of service for the purposes of such incidents as employment as salaries, bonuses and notice of termination.

The way for companies to shield or avoid past years of service can be to offer express negation within the bodies of termination provisions within all the new employment agreements, or, simply to make it a condition within the agreement of purchase and sale that the employment of the vendor’s employees will be clearly terminated and all damages paid by the vendor prior to closing. Another common thing to do is a transitional contract with clear provisions stating that the purchaser’s intention is not to recognize seniority or past service. With this, or by other means, it is crucial to always ensure that employees know that termination provisions exist. Knowing that their employer has been taken over is not enough.

If the issues are not dealt with one way or another, recent case law tells us that purchasers will be deemed to have contracted with the employees on the basis that their past years of service will in fact be recognized.

In my client’s situation there were several potential issues. The contract was being provided by the purchasing software company. There was a “lockdown” termination provision within new agreement and nothing else, meaning that if the agreement was executed, our client would have not been entitled to claim any more over and above the ESA. The reason for this, as I found out, was that the company was only getting legal advice on behalf of the corporate takeover, and not for employment issues. The purchasing company’s human resources team was drafting all the new agreements, and to their credit, they did a great job in recognizing legislative requirements with respect to the purchase and sale of a business.

What they completely overlooked and disregarded were issues of common law. A side-by-side analysis with the Sorel case would tell us that perhaps an implied term of the contract of employment would be that our client would be given credit for her years of past service with the vending software company for purposes of such incidents of employment as her salary, bonus and notice of termination. There was, however, a termination provision that stated that the purchasing company did not intend to give her more notice than the ESA if they chose to terminated her; was this express notice of not recognizing past service, or simply an HR team doing their best to ensure ESA issues were covered? Was the new company deemed to have contracted with her on the basis that her past service would be recognized given that there were no express terms to the contrary? By this, were they telling her that they did not intend on recognizing anything “over and above” ESA notice? Were the vendors paying damages prior to closing by agreement within the purchase and sale? By limiting her to ESA only, were the purchasers making it clear to her that her seniority would not be recognized?

This was a situation worth looking into. There was a clear inference by the contract that the purchaser considered her a longstanding employee, and despite the simplicity of the new agreement, it was within the realm of a takeover.

There can be numerous issues to look for. This post did not even touch on the novation of employment contracts or mitigation, but rather was simply a hint as to the many landmines within the kinetics of employment law and company sales and takeovers.

Matt Lalande is a lawyer at Haber & Associates with offices in Burlington, Milton and Oakville. Matt practises predominately personal injury law with an emphasis on wrongful death and complex and catastrophic injury and how it ties into disability, employment law and human rights. Matt is also available for trial referrals. You can read his current blog at www.torontopersonalinjurylawyers.ca and older posts at www.employment-law.ca.

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Matt Lalande

Personal Injury Lawyer at Micheal L. Lamont Personal Injury Law
Matt Lalande is a lawyer at Micheal L. Lamont Personal Injury Law. Although Matt is specialized in representing those who have suffered harm by the wrongs of others. Matt has particular emphasis on wrongful death, personal injury and employment law. Matt has represented employers and employees within all facets of employment law and human rights law.Read more
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