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Buyer Beware: What are your obligations to employees when purchasing a business?

The implications of continuity of employment is a vital consideration when purchasing a business with employees. Under section 9 of the Employment Standards Act, (Ontario) 2000, S.O. 200, c.41 (“ESA”), the employment of an employee is deemed not to have been terminated or severed if an employer sells a business. The employment, including the length of employment of the employee will be deemed to be with the purchaser of the business. As such, the purchaser will owe the employee all the same (and/or equivalent) obligations the employee was originally entitled to with the seller.

Exceptions

However, the ESA includes exceptions to this principle including the following:
  • “if the day on which the purchaser hires the employee is more than 13 weeks after the earlier of his or her last day of employment with the seller and the day of the sale” (ESA section 9(2);
  • if the employee was terminated prior to the close of sale of the business; and
  • if the ESA does not apply to the employer and or if the sale is per federal jurisdiction to provincial jurisdiction or vice versa. 
While this principle appears straightforward, an example of the nuances of the principle is reflected in the Ontario Superior Court of Justice’s Decision in Krishnamoorthy v. Olympus Canada Inc., 2016 ONSC 5338

Background

The plaintiff, Nadesan Krishnamoorthy (the “plaintiff”) began working for Carsen Group Inc. in 2000 as a Senior Finance Analyst. Carsen Group Inc. the exclusive Canadian distributor for Olympus. In June 2005 Olympus created the defendant, Olympus Canada Inc. (the “defendant”) and rehired 99% of Carsen Group Inc.’s employees, including the plaintiff. The plaintiff was issued a record of employment which stated the reason for termination as “sold its assets to Olympus Canada Inc. Employee transferred to OCL” (para 3).
 
The plaintiff was terminated on May 19, 2015, without cause as a result of restructuring. The defendant offered the plaintiff a compensation package in accordance with the agreement signed on November 20, 2005 (“2005 Agreement”), by the plaintiff. The 2005 Agreement included the following provision: “the employee understands the terms of the agreement that he or she was to "be treated as a new employee" without reference to the opportunity to get legal advice”. The plaintiff brought an action for wrongful dismissal.

Issues

Was the termination clause in the 2005 Agreement enforceable?

Superior CoUrt of Justice’s Decision

The Court first noted that the plaintiff’s most compelling argument was that the defendant failed to provide the plaintiff with valid consideration for waiving his right to a reasonable notice period under the ESA upon signing the 2005 Agreement. Further, the plaintiff submitted that section 9(1) of the ESA deems his continuous employment. However, the Court found that “the defendant did recognize this issue in the employer agreement but limited it to (10 years or 10 months' notice).” (para 8).
 
The Court was not persuaded by the defendant’s argument that the offer of new employment was valid consideration. The Court stated that the Court of Appeal in Hobbs v. TDI Canada Ltd., [2004] O.J. No. 4876 (Ont. C.A.) that the requirement of consideration is vital to an amended employment agreement because of the inequality of the bargaining positions between employer and employee. The defendant insisted however that the 2005 Agreement was not an amended employment agreement. The Court did not take this position, rather there were too many similar factors to distinguish it in that way.
 
Ultimately the Court found that the 2005 Agreement was not enforceable and the plaintiff was entitled to reasonable notice under common law. The plaintiff’s length of service was taken as fifteen (15) years.

Our Thoughts

Caution should be taken when purchasing a business with existing employees. It is advisable to consult with a legal professional about the possible obligations owed to employees upon purchasing a business. Likewise, employees of a business which has been or is in the process of being purchased should be aware of their possible continuous employment rights.
 
Although not discussed, considerations about what constitutes a “sale of business” or part of business, is important. Guidance has been given by the Ontario Court of Appeal in Abbott v. Bombardier Inc., 2007 ONCA 233, finding that “where there was the transfer of a specific bundle of tasks and functions performed by an identifiable group of employees”, however this is remain an area of frequent litigation. Moreover, employers should be aware that in addition to the ESA, employers may be subject to additional common law requirements that normally favour a recognition of the employee’s length of service with the seller absent clear and unequivocal representations to the contrary.'
 
The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.