When a company undergoes a change in ownership, the purchaser may opt for an asset purchase or acquire the business as a going concern. An asset purchase can interrupt employee service, requiring the new owner to offer employment to retain staff. In contrast, purchasing the business as a going concern allows for business continuity, with employees typically remaining in their current roles.

In Manthadi v ASCO Manufacturing [Manthadi], the Ontario Superior Court of Justice (“ONSC”) examined whether a company acquiring another business’s assets and name qualifies as a successor employer, with obligations toward the predecessor’s employees. The case examined whether the acquisition was a purchase of the business as a going concern and if the acquiring company had to recognize a long-serving employee’s years of service when determining their entitlement to notice of termination.

Background

Following a business transaction, Ms. Manthadi, a blaze welder with 36 years of service with the predecessor company, was offered employment by the acquiring company, ASCO Manufacturing (“ASCO”). However, shortly thereafter, she was dismissed without notice. ASCO claimed it only purchased assets from the predecessor and hired Ms. Manthadi as a fixed-term employee, such that it did not assume successor employer obligations.

The motions judge awarded damages based on Ms. Manthadi’s length of service with both the predecessor and successor employers. However, the Ontario Court of Appeal set aside this decision and ordered the matter to proceed to trial to further examine the facts of the dismissal and consider the common law approach to reasonable notice of termination by a successor employer.

Criteria for Determining Successor Employers

The ONSC considered the following factors to determine if ASCO purchased the predecessor company’s business as a going concern, thereby becoming a successor employer, or merely acquired its assets:

• the nature of the transaction;
• the portion of the sale price allocated to goodwill;
• whether the duties of the individual or the terms of the employment with the new company are similar to and of the same character to the duties the individual had performed for the vendor of the business;
• whether the individual received a substantially reduced salary and no benefits;
• whether the purchased company had ceased its operation prior to the purchaser and vendor entering into discussions for the purchase and sale of the company;
• whether the vendor told their employees that the purchaser would not recognize their prior service;
• whether the purchaser told employees that it would be “business as usual”; and
• whether the purchaser retained all of the vendor’s employees and the right to use the vendor’s name.

The court noted that the Agreement of Purchase and Sale explicitly outlines ASCO’s acquisition of assets used in connection with the predecessor employer’s business as a going concern, including goodwill and the business name, which suggests an intention to continue operations. Despite ASCO’s requirement for the predecessor employer to terminate its employees as a warranty under the agreement, the court found this not decisive in determining whether ASCO functioned as a successor employer.

The court scrutinized the evidence regarding Ms. Manthadi’s role transition and ASCO’s communications, ultimately finding that, although her duties evolved post-acquisition, ASCO’s failure to clearly communicate the limited duration of her employment as a general labourer did not negate her belief in continued employment as a welder. This confusion underscored ASCO’s responsibility to explicitly convey the terms of employment post-acquisition, impacting the court’s decision on Ms. Manthadi’s entitlement to reasonable notice based on her cumulative service. Additionally, the court considered Ms. Manthadi’s signing of a release agreement with the predecessor employer before ASCO’s acquisition, analyzing its impact on her claims for severance and the recognition of prior service, and concluded that this act alone did not bar her from asserting her rights against ASCO under the circumstances.

Key Takeaways

Manthadi highlights key considerations for employers during business transactions, including:

1. Impact of Purchasing a Business as a Going Concern: When a company purchases a business as a going concern, it may inherit the liabilities of the previous owner. Purchasers should anticipate the associated risks, such as potential liability for providing employees with reasonable notice of termination, and take steps to mitigate these risks.
2. Privity of Contract: The doctrine of privity of contract means that purchasers cannot automatically benefit from employee releases obtained by the vendor. Any release must explicitly include the purchaser to be effective. Purchasers should carefully review and, if necessary, renegotiate the terms of their agreements to ensure they are protected.
3. Clarity in Employment Contracts:  Clear and unambiguous employment contracts are crucial. If a purchaser intends to hire an employee on a fixed-term basis, this must be clearly communicated and documented. In Manthadi, the lack of a clear written agreement led to the finding that the employee was on an indefinite contract, entitling her to reasonable notice of termination.

The Manthadi decision highlights the importance of clarity in contractual agreements and communications during business acquisitions, particularly regarding employee rights and liabilities. Employers must navigate these complexities to ensure fair treatment and mitigate risks effectively.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.