Severance for Employee After Company Sale

A recent Ontario Superior Court decision shows some of the complexities employers face when dealing with Employment Standards Act (ESA) entitlements versus common law. In this case, the employee was seeking damages from the successor employer for an alleged wrongful dismissal from her continued employment.

What happened?

On November 1, 2017, the successor employer acquired the former employer as a going concern by purchasing all of the former employer’s tangible and intangible assets and the name of the company, excluding accounts payable and accounts receivable. The transaction closed on November 3, 2017. The successor employer also continued doing business under the same name.

It is important to note:

Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company’s ability to make enough money to stay afloat or to avoid bankruptcy. A going concern is often good as it means a company is more likely than not to survive for the next year. When a company does not meet the going concern criteria, it means that the company may not have the resources needed to operate over the next 12 months. Therefore, when a company is sold as a going concern it means the business is predicted to be able to operate for the following 12 months with no threat of liquidation or closure. Going concern is important because it is a signal of trust about the longevity and future of a company. Without it, businesses would not offer nearly as much credit sales as suppliers, vendors and other companies may not pay the company if there is little belief these companies will survive.

An asset purchase is an option available to an individual or business entity, known as the buyer, to acquire the assets of a business corporation. In this type of transaction, the buyer agrees to purchase, and the seller agrees to sell specific assets and liabilities of the business. The assets could be tangible such as real estate properties, facilities, vehicles, equipment and inventory, or intangible, such as goodwill or intellectual property. Note that an asset purchase differs from a share purchase in that, in a share purchase, the buyer purchases the ownership of the corporation by buying its shares, while in an asset purchase, the buyer purchases the assets of the business.

(The above descriptions derive from several articles read on the topic from Investopedia, Rabideau Law, Graphene Business Law and Minhas Lawyers)

The employee alleges she received money and signed a release with the former employer, and was offered and accepted continued employment with the successor employer on November 6, 2017.

She seeks damages for her wrongful termination as she was not given any notice when she was terminated on December 13, 2017, by the successor employer. The employee was 69 years of age when she was terminated and had worked for her former employer and subsequent successor employer as a welder since 1981.

The successor employer denies these assertions and says that it only purchased the assets and offered the employee temporary employment with the newly acquired business on a fixed-term contract to work as a general labourer to assist with moving the assets it purchased to its new place of business. Her employment ended when that work was completed.

On June 26, 2019, Justice Fowler Byrne heard the employee’s summary judgment motion. Justice Fowler Byrne relied on s. 9(1) of the Employment Standards Act, 2000, and found that the employee’s employment was continuous, that she was entitled to notice and that her 36 years of service with the former employer should be considered when assessing damages. The successor employer was ordered to pay damages of $66,391.40 for her wrongful dismissal (this decision was rendered under 2019 ONSC 5572.)

The successor employer successfully appealed and on July 29, 2020, the Court of Appeal for Ontario set aside the summary judgment and ordered the matter to proceed to trial. The Court found that the motions judge erred in applying s. 9(1) of the ESA and discussed the common law’s approach to reasonable notice by a successor employer. (See 2020 ONCA 485.)

This blog post is on the trial decision where on June 9, 2023, after a trial was ordered and heard, the Ontario Superior Court ruled that the employee was owed 12 months’ wages, considering her long service with the successor employer.

June 9, 2023 new trial OSC decision

Is asset purchase or an ongoing concern?

One of the focus of the case and question posed is was it simply an asset purchase or was it a purchase of the company as a going concern? (See the description above on a going concern vs an asset purchase.) The fact that the sale of the business is regarded as a going concern is an important issue, particularly if the company has been struggling financially.

The court fully acknowledged that this was an asset sale because the purchaser did, in some way, purchase the business as a going concern by maintaining the same name of the business and maintaining some of the employees doing a lot of the same type of work; and, as a result, the prior service with the vendor is a more relevant concept to the employee’s termination entitlements.

It is not disputed that after the transaction closed, 20 of the former employer’s employees, including the employee in this case, became employees of the successor employer.

Release agreement

There was an evidentiary dispute regarding the release agreement regarding two issues that required a trial. The first is in determining the length of the notice period assessed against the successor employer and the second is in determining the employee’s understanding of how she would be treated on the sale of the former employer’s business and the terms on which she entered the employ of the successor employer.

At trial, it was found that the employee did receive $5,900 from her former employer and signed a release agreement after she accepted employment with the successor employer and that when she signed the release agreement, she believed that her prior 36 years of service would be recognized by the successor employer. She agreed that when she accepted $5,900 from her former employer, it was compensation for her years of service with the former employer. She also said that she was offered and accepted continued employment as a blaze welder with the successor employer on an indefinite basis. However, the trial judge was satisfied that the Court of Appeal’s finding that the release agreement does not bar the employee from seeking damages from the successor employer was a binding final determination of law. The Court of Appeal was clear that a trial was required to deal with the relevancy of the release agreement in relation to other issues but not with respect to whether it was a bar to this proceeding against the successor employer.

The successor employer argues that the release agreement must be considered in context with the purchase agreement and that the interplay between the two creates this agency relationship. The successor argues that this agency was created from the terms of the purchase agreement that required the former employer to provide notice of termination to all employees, pay them severance, and indemnify and save the successor employer from any claims arising from a breach of this warranty.

The trial court found that while the purchase agreement required the former employer to pay severance to its employees and indemnify and save the successor harmless, it did not require the former employer to secure releases from the employees. Had the successor employer wanted that protection, it could have included a term that in addition to paying severance, the former employer was to obtain signed releases from the employees on behalf of the successor employer also.

The employee only agreed to release the former employer from any claims arising from the cessation of her employment with the former employer. She did not release the successor employer from any future claims should the successor employer terminate her employment.

Even when considering the interplay between the purchase agreement and release agreement., the successor employer’s arguments could not hold ground.

Employment with successor employer: Fixed term or indefinite

The Court of Appeal and the trial court found that the employee’s employment with the former employer ended when it sold its assets and business name to the successor employer and that as a result, it was necessary to determine the nature of her new employment agreement with the successor employer. Specifically, the issue of whether the employee was employed by the successor employer on a fixed term or indefinite contract must be resolved to determine if she was entitled to notice when she was terminated by the successor employer.

There was no selection and hiring process involved and no written agreement between the parties regarding her employment with the successor employer.

According to the court transcript, [the employee] deposed in her affidavit that she was not told that her employment with [the successor employer] was temporary or that her years of service with [the former employer] would not be recognized by [the successor employer]. Her evidence was that she understood that her employment with the former employer would continue with [the successor employer] and that her years of service would be recognized. The successor denies such a statement was ever uttered.

However, the employee deposed that she worked continuously for the successor employer as a welder, working the same number of hours and earning the same hourly rate of pay, until she was terminated on December 13, 2017.

There is no evidence of an oral agreement between the successor employer and the employee that her employment would end when the move was completed. Any such agreement with the former employer on behalf of the successor employer is hearsay and cannot be tabled as evidence as the former employer was not called to testify on what he said or not.

The trial judge stated,

[106] If [the successor employer]’s intention was to hire [the employee] on a fixed-term contract to do a specific task for a limited period, it had an obligation to communicate that offer to her. Based on the successor employer’s own evidence, it did not do so. Had the fixed-term nature of the offer of employment been communicated to the employee, she then could have decided whether to accept that employment or refuse to sign the release agreement and seek damages from the [former employer] for wrongful dismissal.

[107] While [the successor employer] may have believed that [it] was hiring [the employee] on a temporary basis for a specific fixed job, he did not communicate that to her.

[108] I accept [the employee’s] evidence that she understood that her termination on December 13, 2017, was a temporary layoff. This is corroborated by the texts she sent to [staff of the successor employer] asking when she would be returning to work.

Accordingly, the trial judge found that the employee’s employment with the successor employer was indefinite and not fixed.

Notice period

Having found that the successor employer hired the employee on an indefinite basis, she was therefore entitled to notice when she was terminated by the successor employer. The next issue is whether the employee’s 36 years of service with the former employer must be considered in determining what that notice ought to have been.

The new business owner (referred to in this case as the successor employer) argues that it only purchased the assets of the business and did not purchase it as a going concern. As a result, it argues that it is not a successor employer and the employee’s prior years of service should not be considered in determining reasonable notice.

It is important to note that the Court of Appeal did not agree with the employee’s argument that there is an implied term in an employment contract with a successor company that an employee will be given credit for their years of service with the predecessor company unless the successor company advise or makes an agreement with the employee to the contrary.

However, the trial judge based on a precedent-setting case did not agree and found that the employee’s new employer after the sale was a successor employer, therefore, the court can consider the employee’s prior years of service with the former employer in determining what notice she ought to have been given by the successor employer.

Based on the totality of the evidence and weighing all the factors, the trial judge concluded that the successor employer purchased the business as a going concern. While the place of business changed, the successor employer’s evidence was that it was going to continue to manufacture the same products as the business purchased. The employee was not privy to the terms of the purchase agreement. From her perspective, and in the absence of having been told anything by the successor employer, she was going to continue to work as a blaze welder making the same products, but at a different location, being paid the same hourly rate. It was the successor’s responsibility to tell her clearly and unequivocally that her employment was for a limited purpose and would end at a particular time—when the move was completed—which it failed to do.

As a result, the trial judge, in reaching its decision, concluded that this is not a case where it is appropriate for the length of notice to be as long as it would have been if the former employer had not been sold. Given the unique circumstances of this case, it found that the appropriate notice period is 12 months. The trial judge considered, based on the Bardal factors, the employee’s age, the nature of her employment, the failure of the successor employer to communicate its intentions to her when she was hired, her years of service with her former employer and the modest benefit her skills provided to the successor employer.

Based on the employee’s 2016 earnings of $39,834.44, she is therefore entitled to $39,834.44.

According to the trial judge, neither party made submissions about the $5,900 that the employee was paid by the former employer. The trial judge agreed with the summary motions judge that it should not be deducted from the 12-month notice period. The employee was terminated by the successor employer on December 13, 2017. The 12-month notice is to compensate the employee for the notice that the successor employer ought to have given her that day. Accordingly, any amount paid to the employee by the employer is not to be considered in determining the successor’s obligation to her.

Takeaway

When purchasing a company, the purchaser has to be thoroughly clear about what they intend to do with the employees of the company they are purchasing, and evidence of that intent in the purchase agreement, no matter what type of purchase scheme they are using (i.e., ongoing concern or an asset purchase).

It is crucial that employees know and understand what will happen with their employment before the sale is finalized.

Depending on the type of purchase, an end of employment with the former employer and a new employment agreement may be necessary for each employee with the successor employer even if the position is temporary to help with the transfer of assets. It should be clear in the new agreements if the years of service with the former employer will or will not be recognized by the successor employer. But it is important to note that this new employment contract must be executed before the employees start work for the successor employer or it is assumed that their employment continue on the same terms as with the former employer. If there is continuity of employment, when a person’s length of employment is attributed to a new employer, the new employer has to recognize the time the person worked for the previous employer. This “earned” time must be credited toward any rights the employee has that are based on their length of employment.

If the successor employer wants to change the existing employment agreement after the employees have started working for him or her on the same terms and conditions, he or she must offer consideration. A legally binding contract needs three main elements: an offer, consideration, and acceptance. While the terms “offer” and “acceptance” are fairly straightforward—an offer is made, and either rejected or accepted—”consideration” refers to something of value that is being gained through the contract (i.e., more money, a signing bonus, a better position with more money, better or more benefits, etc.). If there is no consideration, then it casts a shadow over the legitimacy of the contract.

If all or some of the employee’s employment is being terminated by the former employer, the release agreement should be clear that it includes a term that in addition to paying severance, the former employer must obtain the signed releases from the employees on behalf of the successor employer also and hold the successor employer harmless.