Canada: Offer Of Continued Employment With Buyer Does Not Absolve Seller From Liability In M&A Transactions

A recent decision of the Ontario Superior Court of Justice, Dussault v Imperial Oil Limited, 2018 ONSC 1168 (Dussault), provides a cautionary tale to selling parties in an M&A transaction who intend to limit liability for wrongful dismissal by negotiating for its employees' continued employment with the buyer. The Dussault decision illustrates that even when continued employment is offered, the seller may still be liable if the employees are reasonable in failing to mitigate their damages by accepting employment with the buyer.

Background

As part of an asset purchase agreement between Imperial Oil Limited (Imperial) and Alimentation Couche-Tard (Mac's) wherein Imperial was selling its retail business that included multiple retail sites under the Esso brand, the parties negotiated a provision that would see particular employees being offered a position with Mac's with the view of limiting Imperial's employment-related liabilities.

The negotiated provision addressed, inter alia, two particular employees in managerial positions, with an average of 37 years of service between them (the Plaintiffs). The conditions of the continuing employment offers as they pertained to the Plaintiffs were as follows:

  • The Plaintiffs would continue in positions similar to those they held with Imperial;
  • The Plaintiffs would receive the same rate of pay for 18 months, after which they were not advised as to what their salary would be;
  • The Plaintiffs' years of service would not be recognized;
  • Imperial would provide the Plaintiffs with a lump-sum payment, the amount of which was not disclosed to them, to make up for the reduction in value of the Plaintiffs' benefit plans; and
  • The Plaintiffs would have to sign a release, renouncing their right to bring any future action against Imperial.

The Plaintiffs rejected the offer of continued employment with Mac's and brought an action for wrongful dismissal against Imperial.

Accepting offer with Buyer as part of mitigation obligation

The central question decided in this case was whether Mac's and Imperial structured the deal such that the Plaintiffs would be considered to have failed to mitigate their sustained damages by not accepting the offer of employment from Mac's. The Court answered this question in the negative, listing the following as reasons why it was not reasonable for the Plaintiffs to be required to mitigate their damages by accepting the Mac's offer:

  • Offer made before employment was terminated: In Farwell v Citair, Inc. (General Coach Canada), 2014 ONCA 177, the Court of Appeal confirmed that it is fatal to an employer's argument that an employee failed to mitigate his damages by working for his old employer where the offer of alternative employment was made before the termination. Neither Mac's nor Imperial reiterated the offers post-termination, which is when the mitigation requirements arise.
  • Mandatory release: In Filmore v Hercules SLR Inc., 2017 ONCA 280, the Ontario Court of Appeal affirmed that there is no obligation for an employee to sign a release under the guise of mitigation efforts. The Court in Dussault found that the requirement that the Plaintiffs give up any right to sue Imperial is fatal, especially in light of the fact that the Plaintiffs were not told of the specifics of the lump-sum amount, nor what their salary would be at Mac's.
  • Lack of recognition of years of service: the courts have established that in circumstances where a new employer has purchased a business as a going concern, there is an implied term that the employees' years of service will be recognized. When there is a term to the contrary, the employee has the choice to accept the offer of employment with the purchaser or sue the seller for wrongful dismissal and damages in lieu of notice.
  • Potentially hostile atmosphere: the Court took into consideration the fact that the Plaintiffs' salary would be substantially greater than employees in similar, and even higher, positions at Mac's, which could potentially create an atmosphere of resentment and hostility. Following the ruling of the Supreme Court of Canada in Evans v Teamsters, Local 31, 2008 SCC 20, the Court determined that an obligation to mitigate does not include an obligation to work in an atmosphere of hostility or embarrassment.

Ultimately, the Court in Dussault noted that the assessment of whether the Plaintiffs had an obligation to accept the offer of employment from Mac's is to be done from the perspective of a reasonable person in the Plaintiffs' position. In conducting this assessment, the Court considered the discrepancies in the salary and benefits, along with the fact that the Plaintiffs did not know how much the lump-sum offered by Imperial would be, nor the salary that they would receive after the 18-month period expired. On this basis, the Court found that it was reasonable for the Plaintiffs to forego the offers of employment from Mac's.

Length of notice and damages

In determining the length of notice that the Plaintiffs would be entitled to, the Court considered the Bardal factors, including the character of the Plaintiffs' employment, their ages and length of service, and availability of similar employment in light of their experience, training and qualifications. The Court then drew parallels to the plaintiff's circumstances in Keenan v Canac Kitchens Ltd., 2016 ONCA 79, where the Court of Appeal accepted the trial judge's findings that the circumstances in that case were exceptional and warranted a longer notice period than the usual limit of 24 months' notice. Ultimately, the Court awarded the Plaintiffs 26 months' notice from the time that they received notice letters from Imperial, and deferred to the parties to reach an agreement on the quantification of damages.

Takeaway

In order to avoid wrongful dismissal damages, employers who are the selling party in an M&A transaction would be well advised to ensure that, if an offer is made to the employees to continue employment with the buyer, that the offer is left open after any official termination, that the offer is not contingent on a release, and that the buyer recognizes the employees' years of service when the business is sold as a going concern. More generally, it is advisable that every effort is made to provide employees with reasonable employment transition conditions.

The author would like to thank Alex Kokach, Articling Student, for his assistance in preparing this legal update.


About Norton Rose Fulbright Canada LLP

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