When a company changes hands, the purchaser may complete an asset or share purchase. The difference between these two sales is the continuity or interruption of service. For instance, in an asset purchase, an employee’s employment may be terminated unless the company purchaser offers employment to the employee and they accept the offer. However, in a share purchase, the company’s business can continue as normal, and an employee will remain an employee.

In a recent decision from Ontario’s Superior Court of Justice, the Court addressed the issue of whether the purchaser of a company is considered a successor employer. This finding could result in an employee being entitled to reasonable notice for termination based on their previous service to the company.

Employee seeks damages arising from wrongful dismissal claim

In the case of Manthadi v. ASCO Manufacturing, the plaintiff employee sought damages from the defendant resulting from the alleged wrongful dismissal of her employment. She commenced this action under a simplified procedure pursuant to Rule 76 of Ontario’s Rules of Civil Procedure.

The plaintiff was 69 years old and began working for 63732 Ontario Limited (also known as o/a ASCO Manufacturing Limited) as a blaze welder in February 1981. On November 1, 2017, 2603420 Ontario Inc. purchased all of the company’s assets, including accounts payable and receivable and the name “ASCO” (hereinafter referred to as “ASCO”). The employee claimed that on November 6, 2017, she was offered continued employment with ASCO as a blaze welder when it purchased the previous company as a going concern. She claimed that she accepted the offer of continued employment. However, she claimed she was not notified when ASCO terminated her employment on December 13, 2017.

ASCO denied these claims and argued that it purchased only the assets of the previous company. ASCO stated that it offered the employee temporary employment on a fixed-term contract as a general labourer to help move the purchased assets to their place of business and that her employment ended once this work was complete.

Motions Judge awards damages to employee: order successfully appealed

On June 26, 2019, the Court heard the employee’s summary judgment motion. At this hearing, Justice Fowler Byrne relied on section 9(1) of the Employment Standards Act and found that the employee’s employment was continuous and she was entitled to notice concerning termination. It was also noted that the employee’s prior 36 years of service with the previous company should be considered damages. The Court found that the employee had been wrongfully dismissed and ordered ASCO to pay damages to the employee for $66,391.40.

However, ASCO appealed the decision to the Ontario Court of Appeal on July 29, 2020. Based on a finding that the motions judge erred in applying the Employment Standards Act and instead commented on the common law’s approach to a successor employer and reasonable notice. The Court of Appeal determined that the summary judgment should be set aside and ordered the matter to proceed to trial.

Parties rely on inadmissible hearsay evidence

The parties each filed affidavits and were cross-examined. However, no additional evidence was provided by other witnesses, which became problematic, as inadmissible hearsay evidence was relied upon for core issues of the dispute.

The employee’s affidavit stated that she was “offered continued employment with the purchaser”; however, she did not identify who told her this, and there was no evidence to suggest that anyone from the company told her this. Therefore, it was considered hearsay evidence.

The owner and manager of ASCO also filed an affidavit which contained several paragraphs that commenced with “the deponent submits…” and the Court found these to be “a good indication that what follows is not evidence.” The Court also found that this affidavit contained improper legal argument and evidence which was not direct knowledge.

Was the transfer an asset purchase or an acquisition as a “going concern”?

At trial, the Court found that the plaintiff worked for the company’s new owners for approximately six weeks before she was laid off and was never recalled to work. The Court reviewed the Purchase Agreement between ASCO and 63732 Ontario Limited to determine whether the company transfer was an asset purchase, as claimed by ASCO, or if the transition was really 2603420 Ontario Inc. acquiring the defendant as a “going concern.”

Referring to the decision in Frederiks v Executive TFN Waterpark Limited Partnership from the Supreme Court of British Columbia, the Court outlined various criteria to be considered when determining the outcome of the company transfer, which included:

  • 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.

Employee entitled to 12 months’ notice

Upon considering the evidence against the listed criteria, the Court found that, among other things, ASCO benefited from the employee’s welding skills for approximately one week. While she worked as a general labourer, they retained the benefit of her corporate knowledge of the purchased assets instead of bringing in outside workers. As the Court of Appeal stated,

“Purchaser of an ongoing business who takes on the vendor’s employees avoids the burden, cost, and time of having to recruit a new employment force that is unfamiliar with the work, the working environment, and one another.”

The Court acknowledged that it would not be appropriate to award the same length of notice that would have been awarded had 63732 Ontario Limited not been sold. Nonetheless, the Court held that the employee was entitled to 12 months notice upon consideration of the following:

  • her age;
  • the nature of her employment;
  • her years of service with the company;
  • The modest benefit that her skills provided to ASCO; and
  • ASCO failed to communicate its intentions to the employee when it hired her.

Takeaway for asset purchases

Based on the employee’s 2016 earnings of $39,834.44, the Court held that she was entitled to $39,834.44 as payment in lieu of notice.

Employers must understand that an asset purchase is a purchase of “going concern,” despite the lack of contemplation of this issue in Ontario’s jurisprudence. When an employer completes an asset purchase, they must understand that if there is no interruption to the company’s business and an employee’s employment terms remain unchanged, the asset purchaser can also acquire the previous employer’s staff liabilities. It is also important for employees to understand their rights and entitlements if another company purchases their employer.

Get Trusted Advice on Termination Entitlements and Wrongful Termination Claims From the Employment Lawyers at Grosman Gale Fletcher Hopkins LLP in Toronto

The skilled employment lawyers at Grosman Gale Fletcher Hopkins LLP in Toronto regularly advise employers and employees on their rights and obligations throughout the termination process. We provide guidance on severance package entitlements and wrongful dismissal claims, which can be critical when a new employer purchases a company. Contact us online or call us at 416.364.9599 to schedule a confidential consultation with a member of our team and learn how we can help you.