BUYING A BUSINESS COMES WITH OBLIGATIONS.

LEVITT, PAGE FP6

As unprecedented economic pressures force many employers to wave the white flag and sell their enterprises to new owners, all parties involved should ensure they understand the consequences of such a sale on their employment relationships — and draft their contracts accordingly.

Generally, when a business is sold through an asset sale, the vendor wants to pass on employment liabilities to the purchaser, usually asking that the purchaser hire all employees on comparable terms. Meanwhile, the purchaser wants to ensure that it inherits as little of that liability as possible, usually asking that the vendor terminate all employees and obtain releases against further claims.

Typically, an asset sale triggers a dismissal. Alternatively, the original business owner can effect a formal termination and have the employees sign a release. As noted, many purchasers insist upon this. The new business owner can then denude the financial viability of any wrongful dismissal claims by offering these employees new contracts with minimal termination provisions in accordance with employment standards legislation. Due to a drive to remain gainfully employed, most employees (just as most accepted layoffs rather than suing for constructive dismissal), will be inclined to accept, effectively mitigating their own claims out of existence.

These transactions can be a boon for purchasers. They acquire an experienced workforce without the financial obligations on termination that typically come along with that, and save on the costs of recruitment and training. The employees, on the other hand, are deprived of the ability to seek wrongful dismissal damages for a longer notice period and, it would seem, their accumulated years of service.

The Employment Standards Act seeks to rectify this unfair result by deeming an employee's service to be continuous between the original and successor businesses. If and when they are later terminated, their statutory notice entitlements are based on their combined service, to a maximum of what may only be eight weeks' pay. But that does not guarantee that they will receive their common law entitlement of, say, 24 months.

However, a timely new decision from the Ontario Court of Appeal serves as an important reminder that the purchasing employers also have obligations under the common law for employees' prior service — even where those employees have signed a release.

The case, Manthadi v. ASCO Manufacturing, involved a welder who had worked for 36 years for a numbered company, 637, until its sale to ASCO in 2017. Company 637 terminated Sandra Manthadi's employment and provided her with a meagre severance package in exchange for a release. ASCO then hired her on a new contract, only to terminate her employment one month later. She sued for wrongful dismissal, asking the court to take into account her years of service with 637 as well as with ASCO.

The Ontario Court of Appeal held that the trial judge's decision to “stitch together” Manthadi's years of service in calculating her common law reasonable notice was wrong. But it clarified that an employee's service and experience with a predecessor should still be accounted for, even where the employee has signed a release, by weighing the benefit that experience brings to the new employer. The value of any compensation the employee received in exchange for a release is also considered in determining what is a fair notice period.

The Manthadi case was remitted to the lower court to determine the notice period, so it remains to be seen exactly how much reasonable notice Manthadi is owed in the circumstances. But those thinking of purchasing a business as a going concern should not be too easily seduced by the prospect of acquiring an experienced workforce stripped of their severance entitlement.

To avoid unexpected payouts down the line, purchasing employers should not hire any of their predecessor's employees without express, written employment contracts. The contracts must stipulate that employees will not be given credit for their past service (other than for the purpose of paying employment standards minimum which is legally unavoidable) and should also contain an enforceable termination clause limiting these employees' rights to notice on termination. Even if the employees have signed a release giving up any claims against their former employer, failure to implement tightly drafted employment contracts can quickly strain a new business owner's pocketbook.

Got a question about employment law during COVID-19? Write to me

at levitt@levittllp.com.

PURCHASERS WANT AS LITTLE LIABILITY AS POSSIBLE.