Canada: Buyer Beware: Don't Forget To Address Employees' Prior Service When Purchasing A Business

A recent Ontario Superior Court decision highlights why it is important for purchasers of a business to carefully consider and address employment liability issues. In Manthadi v. ASCO Manufacturing, 2019 ONSC 5572 ("Manthadi"), the Court ordered the purchaser of a business to pay an employee damages based on a 20 month reasonable notice period, despite the fact that she had only worked for the purchaser for a six week period.

Background

Sandra Manthadi started working at Asco Manufacturing Limited (the "Vendor") on February 7, 1981. On September 28, 2017, the Vendor told Ms. Manthadi that it was selling the business and that as a result, her employment would end on November 24, 2017. In exchange for severance pay, she signed a release against the Vendor for all claims relating to the termination of her employment (the "Release"). On November 2, 2017, 2603420 Ontario Inc. (the "Purchaser") purchased the assets of the Vendor. The Purchaser hired Ms. Manthadi but did not get her to sign any written employment agreement. She started working with the Purchaser immediately following the sale. In early December of 2017, the Purchaser told Ms. Manthadi that it was shutting down the plant for a few days and that she would return to work at a new location. She was never recalled and her last day of work was December 13, 2017.

Ms. Manthadi commenced a wrongful dismissal action against the Purchaser in which she argued that the Court should consider her 36 years of service with the Vendor in determining her appropriate notice period. The Purchaser argued that she had released it from any right to wrongful dismissal damages by signing the Release.

The Court's Decision

In an asset purchase transaction, absent other arrangements, the purchaser is not automatically obligated to hire the vendor's employees.¹ The vendor is responsible for providing its employees with notice of termination (or pay in lieu) and statutory severance pay (if applicable). If those employees are then hired by the purchaser, sub-section 9(1) of the Ontario Employment Standards Act, 2000 ("ESA") is triggered. This sub-section says that where a vendor employer sells a business (either as a share or asset sale), the purchaser employer has to treat the employees as though their employment is continuous for the purpose of calculating any entitlements under the ESA that relate to an employee's length of service (e.g. vacation, notice of termination, severance pay). There are comparable provisions in the employment standards legislation in other Canadian jurisdictions.²

One of the effects of sub-section 9(1) is that a purchaser employer cannot ask an employee to waive his/her service with a vendor employer for all purposes. This means that an agreement (such as a release), which purports to do this will be seen as an attempt to contract out of the ESA and be void as a result. However, so long as the vendor employer recognizes an employee's service with the vendor for the purpose of calculating an employee's statutory entitlements under the ESA, it can still enter into an agreement with the employee whereby the employee agrees to waive his/her entitlement to common law notice based on his/her prior service with the vendor employer. This has been recognized by the Ontario Court of Appeal in Kerzner v. American Iron & Metal Company Inc., 2018 ONCA 989, and more recently in Ariss v. NORR Limited Architects & Engineers, 2019 ONCA 449.

In exchange for severance pay, vendor employers commonly get terminated employees to sign a release of claims against the vendor. However, as the purchaser employer is not party to such a release, it needs to independently address any employment-related liabilities separately with the employees it decides to hire. Manthadi shows what can happen when this is overlooked by a purchaser employer. The Release was an agreement between Ms. Manthadi and the Vendor. The Purchaser was not a party to that agreement. Further, when the Purchaser hired Ms. Manthadi, it did not require her to sign any document in which she waived her service with the Vendor. As a result, the Court treated Ms. Manthadi as a 36 year employee for both statutory and common law purposes.

The Purchaser in Manthadi could have avoided this result by entering into an employment agreement with Ms. Manthadi that required her to waive her prior service with the Vendor for common law purposes, and which made it clear that she would only receive her minimum statutory entitlements upon termination of employment.

Lessons for Purchaser Employers

A purchaser of a business must recognize an employee's length of service with a vendor for the purpose of calculating that employee's minimum statutory entitlements under the ESA. However, this does not mean that the purchaser must recognize this prior service for common law purposes. This is important because in general, an employee's common law reasonable notice will greatly exceed any statutory notice and severance pay required by the ESA.

When hiring a vendor's employees in the context of an asset purchase transaction, purchasers should consider making offers of employment which make it clear that except as may be required by the ESA, the employee's start date will be his/her start date with the purchaser and that the purchaser will not recognize the employee's service with the vendor for the purpose of calculating his/her entitlement to notice of termination or severance pay. If the transaction requires the purchaser to make offers of employment to existing employees on terms similar to those already in place, the purchaser will not be able to restrict the recognition of service.

Given that similarity between sub-section 9(1) of the ESA and the employment standards legislation in British Columbia and Alberta, businesses in those provinces should also pay attention to this decision. It is likely that a court in those provinces would reach the same conclusion.

All members of Lawson Lundell's Labour, Employment, and Human Rights Group frequently provide employment law advice to businesses in the context of both share and asset purchase transactions, including as it relates to the drafting of releases and employment agreements.

Footnotes

1There will be different considerations for unionized employees, and in Quebec.

2 See for example, Employment Standards Code (Alberta), s. 5; Employment Standards Act (British Columbia), s. 97.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.