Old employer's obligation to its employees when selling the business
Question: Our Canadian subsidiary of a U.S. company has been acquired by another company. Does the selling company have a legal obligation to offer employees the option of severance if they choose not to accept the buyer package?
Answer: Since contracts of employment are not assignable without the employee’s consent, a sale of a business will constitute constructive dismissal if it results in a change of the legal identity of the employer. However, the mere sale of a corporation’s shares does not terminate all employment contracts between that employer and its employees. When the shares of a business are sold, the corporate employer continues to exist.
When the legal identity of the employer changes, if the purchaser company does not wish to employ the former employees, the selling company will have an obligation to pay its employees in lieu of notice.
However, when the purchaser offers former employees work on terms similar to their previous employment and the employees accept it, there are new contracts of service between the purchaser and employees which replace the former contracts. In such circumstances, it is wise to provide explicit notification to affected employees the former contracts have terminated.
On the other hand, when employees reject similar employment with the purchaser company, their right to compensation in lieu of notice may be reduced to nothing because of the employees’ failure to mitigate damages. The courts have often examined whether the employee was offered similar employment with the purchaser company. Where the new employer changes the terms of employment significantly, a court could conclude the employee mitigated her losses and is entitled to pay in lieu of notice from the selling company.
There is also a statutory regime in many jurisdictions that sets out the rights and obligations of the purchaser employer, the seller employer and the employees. The Canada Labour Code determines whether an employee is entitled to severance. When a business is transferred from one employer to another, the employment of the employee before and after the transfer of work is deemed to be continuous with one employer, notwithstanding the transfer. For the purposes of entitlement to termination notice, the employee will be treated as having come into the employ of the purchasing employer. This means the change from one employer to another will not alone constitute dismissal, constructive or otherwise. Only if the job with the new employer is significantly different will constructive dismissal come into play.
However, it is important to note in order for the code to apply, the employment between the two employers must be continuous. In Canem Systems Ltd. v. Felker, the employer, Canem, held a contract with the federal Department of Transport, under which it employed Felker. Upon expiration of the contract, Canem gave notice of termination to all employees, who were then hired on with the Department of Transport.
The Canada Arbitration Board noted the employment between the two employers was not “bridged” as the previous service of the employees were not recognized by the Department of Transport. The code deems employment to be continuous only when the employment relationship is kept intact over the course of a transfer of the business between two separate entities. The mere fact the employees were hired by the Department of Transport subsequent to their termination with Canem was not, in itself, sufficient to relieve Canem of its severance pay obligations.
In determining whether employment is continuous between two separate employers, courts and arbitrators often consider whether the employee’s previous years of service are recognized by the purchaser company. In Boland v. APV Canada Inc., the employer sold part of its business to Cimco Refrigeration. Boland was an employee who had worked for the original employer for years. Although Cimco offered Boland employment, he refused to work for Cimco as his seniority would not be recognized. As a result, his employment was terminated by the original employer. Pursuant to Ontario’s Employment Standards Act, 2000, which deems employment continuous in the context of a sale of a business, the court ordered the original employer to pay severance to the worker, even after he was offered employment with Cimco, the purchaser of the business.
It is important to note statutory provisions such as those in the code, which deem employment continuous between two separate entities when there is a sale or transfer of the business, differ between provinces. Furthermore, whether the statutory provisions or the common law principles apply will depend on the circumstances of each case. It is advisable to consult a lawyer before determining whether the selling company has to offer its employees the option of severance if they choose not to accept the buyer package.
For more information, see:
• Canem Systems Ltd. v. Felker, 1996 CarswellNat 3297 (Can. Arb. Bd.).
• Boland v. APV Canada Inc., 2005 CarswellOnt 532 (Ont. Div. Ct.).
Brian Kenny is a partner with MacPherson Leslie and Tyerman LLP in Regina. He can be reached at (306) 347-8421 or [email protected].
Answer: Since contracts of employment are not assignable without the employee’s consent, a sale of a business will constitute constructive dismissal if it results in a change of the legal identity of the employer. However, the mere sale of a corporation’s shares does not terminate all employment contracts between that employer and its employees. When the shares of a business are sold, the corporate employer continues to exist.
When the legal identity of the employer changes, if the purchaser company does not wish to employ the former employees, the selling company will have an obligation to pay its employees in lieu of notice.
However, when the purchaser offers former employees work on terms similar to their previous employment and the employees accept it, there are new contracts of service between the purchaser and employees which replace the former contracts. In such circumstances, it is wise to provide explicit notification to affected employees the former contracts have terminated.
On the other hand, when employees reject similar employment with the purchaser company, their right to compensation in lieu of notice may be reduced to nothing because of the employees’ failure to mitigate damages. The courts have often examined whether the employee was offered similar employment with the purchaser company. Where the new employer changes the terms of employment significantly, a court could conclude the employee mitigated her losses and is entitled to pay in lieu of notice from the selling company.
There is also a statutory regime in many jurisdictions that sets out the rights and obligations of the purchaser employer, the seller employer and the employees. The Canada Labour Code determines whether an employee is entitled to severance. When a business is transferred from one employer to another, the employment of the employee before and after the transfer of work is deemed to be continuous with one employer, notwithstanding the transfer. For the purposes of entitlement to termination notice, the employee will be treated as having come into the employ of the purchasing employer. This means the change from one employer to another will not alone constitute dismissal, constructive or otherwise. Only if the job with the new employer is significantly different will constructive dismissal come into play.
However, it is important to note in order for the code to apply, the employment between the two employers must be continuous. In Canem Systems Ltd. v. Felker, the employer, Canem, held a contract with the federal Department of Transport, under which it employed Felker. Upon expiration of the contract, Canem gave notice of termination to all employees, who were then hired on with the Department of Transport.
The Canada Arbitration Board noted the employment between the two employers was not “bridged” as the previous service of the employees were not recognized by the Department of Transport. The code deems employment to be continuous only when the employment relationship is kept intact over the course of a transfer of the business between two separate entities. The mere fact the employees were hired by the Department of Transport subsequent to their termination with Canem was not, in itself, sufficient to relieve Canem of its severance pay obligations.
In determining whether employment is continuous between two separate employers, courts and arbitrators often consider whether the employee’s previous years of service are recognized by the purchaser company. In Boland v. APV Canada Inc., the employer sold part of its business to Cimco Refrigeration. Boland was an employee who had worked for the original employer for years. Although Cimco offered Boland employment, he refused to work for Cimco as his seniority would not be recognized. As a result, his employment was terminated by the original employer. Pursuant to Ontario’s Employment Standards Act, 2000, which deems employment continuous in the context of a sale of a business, the court ordered the original employer to pay severance to the worker, even after he was offered employment with Cimco, the purchaser of the business.
It is important to note statutory provisions such as those in the code, which deem employment continuous between two separate entities when there is a sale or transfer of the business, differ between provinces. Furthermore, whether the statutory provisions or the common law principles apply will depend on the circumstances of each case. It is advisable to consult a lawyer before determining whether the selling company has to offer its employees the option of severance if they choose not to accept the buyer package.
For more information, see:
• Canem Systems Ltd. v. Felker, 1996 CarswellNat 3297 (Can. Arb. Bd.).
• Boland v. APV Canada Inc., 2005 CarswellOnt 532 (Ont. Div. Ct.).
Brian Kenny is a partner with MacPherson Leslie and Tyerman LLP in Regina. He can be reached at (306) 347-8421 or [email protected].
