In the purchase and sale of a business, it is essential that both seller and purchaser businesses consider the employment law implications of the transaction. Despite prior written settlement of employment-related claims, a purchaser may remain liable for significant entitlements owed to previous employees of the vendor who are hired and later dismissed by the purchaser.
A recent decision of the Ontario Court of Appeal, Manthadi v ASCO Manufacturing [Manthadi], has clarified the common law assessment of reasonable notice that may owed to employees of a purchaser. The Court has rejected the approach of simply “stitching together” an employee’s terms of service with the seller and purchaser to determine a reasonable notice period. Rather, courts must consider the value and benefit that an employee’s experience brings to the purchaser.
Sandra Manthadi, the plaintiff, was employed by 63732 Ontario Limited (the “Vendor”) for 36 years until the sale of the Vendor’s business to ASCO Manufacturing Limited (the “Purchaser”). Consequently, Ms. Manthadi was provided with and signed a Settlement and Release Agreement (the “Agreement”) that indicated her employment with the Vendor would be terminated, and that she would be provided with termination entitlements “in full satisfaction of all claims”. The Agreement also offered her continued employment with the Purchaser, although a written employment agreement with the Purchaser was never provided.
Immediately following the sale, Ms. Manthadi worked for the Purchaser for approximately one month until she was placed on layoff and never recalled. She brought an action against the Purchaser for wrongful dismissal and the Purchaser brought a third party claim against the Vendor.
The parties disagreed on whether Ms. Manthadi had been hired by the Purchaser on a temporary or indefinite basis, as well as how her previous years of employment with the Vendor should be treated in relation to her common law reasonable notice entitlement. Ms. Manthadi argued that the Court should consider her 36 years of service with the Vendor in determining a reasonable notice period, while the Vendor argued that by signing the Agreement, Ms. Manthadi had released it from any liability for wrongful dismissal.
The Decision of the Motion Judge
At a summary judgement motion, the motion judge held that Ms. Manthadi’s employment with the Purchaser was a continuation of her employment with the Vendor and consequently awarded Ms. Manthadi a 20-month reasonable notice period based on her entire length of service. The motion judge reasoned that the common law mirrored the requirements of section 9(1) of the Employment Standards Act, 2000 [ESA], which provides for continuity of employment for an employee when there is a purchase and sale of a business if the purchaser employs an employee of the seller.
The Decision of the Court of Appeal
The decision of the motion judge was set aside on appeal. The Court of Appeal found that the motion judge had erred in holding that the common law supported the same concept of continuous employment as did s. 9(1) of the ESA. The Court drew a sharp distinction regarding the treatment of employees that are retained and subsequently dismissed by a purchaser of a business under the ESA as compared to under the common law:
- Under the ESA, such employees are deemed to have been continuously employed for the purposes of ESA statutory minimum termination entitlements, including vacation, notice of termination, and severance pay.
- Under the common law, however, employees are considered constructively dismissed when their employer sells the business to a purchaser and there is a change in the identity of the employer. Under the common law, the Court confirmed that an employee’s length of service with a vendor must not be “stitched together” with the subsequent length of service with a purchaser to inflate an employee’s common law termination entitlements, which are in part a function of an employee’s length of service.
The Court also found that summary judgment was inappropriate given the material facts in dispute, and ordered that the matter proceed to trial. Because Ms. Manthadi’s employment was considered to have been terminated under the common law by constructive dismissal, it was necessary to make findings at trial about the nature of the new employment agreement between Ms. Manthadi and the Purchaser in order to determine her common law reasonable notice entitlements from the Purchaser.
The Court also commented on the difficulty faced by long-term employees dismissed as a consequence of a purchase and sale of a business. When long-term employees are dismissed by a vendor, they can usually expect to be entitled to a significant amount of damages in lieu of notice, subject to a duty to mitigate their damages—that is, those employees are obligated to take reasonable steps to find new employment. In the context of a purchase and sale of a business, an employee will often be required to mitigate their claimed damages by accepting an offer of employment with a purchaser. However, such acceptance would effectively result in the employee “mitigating out” of any cause of action against the former employer. If the employee is subsequently dismissed by the purchaser, the new start date of his or her term of service weighs in favour of a shorter notice period than had the business not been sold.
The Court resolved the unfairness of such circumstances by recognizing an employee’s service with a vendor employer in the calculation of damages for reasonable notice. While periods of employment are not to be “stitched together”, an employee’s previous service with a vendor must still be given weight with regard to the employee’s experience and the benefit that it brings to a purchaser. This consideration forms one of the many set out in Bardal v The Globe & Mail Ltd., the seminal case which sets out how to assess an employee’s common law reasonable notice entitlement. This approach, the Court noted, has the advantage of flexibility; under the “rubric of experience”, courts may recognize the equivalent of all or some of an employee’s service with the seller in order to arrive at a fair result.
Takeaways for Employers
Employers considering a sale and purchase of a business should inquire about their common law obligations to long-term employees. Despite the provision of an employee’s termination entitlements and execution of a release, an employee’s past service may still be regarded as a factor in the calculation of common law reasonable notice. A potential purchaser of a business must thus carefully consider whether to and on what terms to offer employment to any employees of the seller. Such terms should be made express in written employment contracts and work to limit or exclude consideration of employees’ past service, except as may be required under the ESA. Failure to implement a sufficiently scrupulous employment agreement may result in employers finding themselves liable to pay significant employee entitlements at common law.
This blog is provided as an information service and summary of workplace legal issues. This information is not intended as legal advice.