A recent Ontario Superior Court decision has spoken to the delicate contractual mechanics of transferring an employee from a selling company to the buyer.

In this instance, the selling employer terminated the employment of a 64-year-old welder with 36 years of service. The termination took effect immediately prior to the sale. Immediately on completion of the sale, the buying company offered him “new” employment, which he accepted, and then terminated his employment a few months after the sale.

At the time of his termination by the selling company, this employer offered him the minimum statutory entitlement of 8 weeks pay for which the employee signed a general release. This release was in favour of the selling employer only. It may not be consequential but the release document was signed after the employee had commenced employment with the buyer.

New Employment vs. Seniority

In the common law claim against the buying company, the question was then whether the plaintiff was an employee of a few months standing or a long term employee with recognition given to his prior history with the seller company?

Of some critical importance was that there was no agreement signed between the buyer company and the employee. The trial judge found that in the absence of some such limiting agreement upon his hire by the new employer, there must be recognition given to the entire history of his employment. This protection arises by the operation of legislation which notes the connected employment must be recognized and also by common law considerations, in the absence of any limiting contractual terms.

The Court looked to a previous decision, Ariss v. NORR Limited Architects & Engineers, in which there was no documentation following the sale of an employing company to indicate that the new company did not intend to credit the employees with their years of service under the original employer. Further, there was nothing to indicate that in the individual contracts with each employee. In that decision, the court held that in the absence of such terms, recognition of prior service was deemed to form a part of the employee’s contract with the new employer.

Given that finding, the court in the case at hand found that the employee had in fact been wrongfully dismissed and awarded 20 months’ notice and over $65,000 in damages. The new employer was also liable for over $10,000 in costs to the employee.

Had the new employer’s payroll exceeded the $2.5 million threshold, the employee would also be entitled to severance pay on the “second” termination. In this case, had this been so, an additional 26 weeks’ severance pay would have been due.

What the Buyer Company Should Have Done to Limit Liability

The buyer company could have specifically contracted out of the common law liability for the prior connected employment. It would have been quite simple for the buyer to insist that all such “new” employees sign an agreement by which their history would not be recognized for common law purposes or alternately, set out a defined sum to be paid on termination. Of course, this would then shift the employees’ focus to the original employer, who will then be on the hook for adequate notice and termination pay.

The issue of responsibility for severance pay are also very often important decisions to be discussed upon the acquisition of a new business. The vendor is anxious to have the new buyer assume employment responsibility for what may the common law notice period and take it off the hook. The buyer is similarly eager to do the reverse and minimize its liability for the severance of employees it assumes on the purchase. These factors are often very important in the business decision to buy and sell.

Employers’ View

In this context, an offer of “new” employment with limited severance would have been prudent. Oddly enough, the sole winner here was the first employer who paid only 8 weeks termination pay.  

Employees’ Take Away

Employees need to be careful when considering “new” employment of this nature. Had the employee here accepted a limiting employment contract, in addition to signing a release in favour of employer one, she may have lost the ability to hold either party liable for damages. Employees should seek out an experienced employment lawyer in the case of a sale of their business before signing any documents, contracts or release forms.

Get Advice Before You Act

This is a delicate and tricky issue with considerable amounts at risk. If you are selling or purchasing a business with employment obligations or an employee in the middle of such a transaction, get advice. If you have questions about this issue or any employment issue, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins LLP. We regularly advise employees and employers on issues in the workplace. Contact us online or by phone at 416-364-9599 to schedule a consultation.