'That's a very strong decision for employers and probably overdue,' says employment lawyer offering tips for HR
An employer constructively dismissed a worker in an asset sale to another company, but it doesn’t have to pay damages in lieu of notice because the worker failed to mitigate his losses when he declined a job offer from the buyer, the Manitoba Court of King’s Bench has ruled.
The worker was an electrical engineer who founded an electronic design and manufacturing company for the railway industry, with General Electric (GE) Transportation as one of its largest clients.
In 2016, GE Transportation acquired the company and the worker signed an employment agreement that made him GE Transportation’s senior business manager in Oakbank, Man. He also signed a retention bonus agreement that entitled him to a pro-rated bonus if his employment was terminated involuntarily for any reason other than for cause, and a restrictive covenant agreement.
The worker also was part of GE Transportation’s VIC plan, which was a performance bonus plan. The plan required a participant to be employed when the bonus was paid out and gave GE Transportation broad discretion to change, modify, or withdraw the plan unilaterally.
In May 2018, GE Transportation’s parent company, General Electric, began negotiating an asset sale of GE Transportation to Wabtec, a US company. GE informed employees that, as part of the transaction, Wabtec would offer each of them continued employment on substantially the same terms and conditions as their employment with GE Transportation.
GE Transportation also announced that it was exercising its discretion under the VIC plan to make the 2018 bonus conditional on acceptance of Wabtec’s offer of employment.
Retention bonus concerns
On Feb. 1, 2019, the worker emailed GE Transportation’s product director asking how the sale might affect him. He was worried that if he accepted Wabtec’s offer of employment it would be considered voluntarily leaving his employment with GE Transportation and disentitle him to the retention bonus. He was also worried that accepting employment with Wabtec would breach the non-competition provision in his restrictive covenant agreement.
The director replied that he didn’t think the Wabtec transaction would be considered voluntarily leaving his employment, but referred it to more senior members of management. Before the worker received a response, Wabtec sent him an employment offer on Feb. 8 stating that his present terms and conditions of employment at GE would be substantially similar at Wabtec.
On Feb. 12, a manager told the worker that Wabtec was legally obligated under the terms of the sale agreement to assume all of its liabilities, including the worker’s retention bonus agreement. An email followed stating that “Wabtec will honour the terms in your retention agreement with GE Transportation,” as it was included in the asset sale.
“GE was upfront about what was going to be paid by Wabtec and what was happening,” says Mark Alward, an employment lawyer at Taylor McCaffrey in Winnipeg. “They were open and honest with their employees about that, and I think the judge considered that.”
On Feb. 22, GE Transportation said that it was willing to amend the offer letter to include explicit reference to the retention bonus and his eligibility for the VIC bonus, which was conditional upon his acceptance of Wabtec’s offer.
Declined job offer
The worker wasn’t satisfied that his concerns were addressed, so he formally declined Wabtec’s offer, stating that “I am not terminating my employment with GE.” However, GE Transportation considered this a resignation.
The sale closed on Feb. 25. The worker filed a wrongful dismissal lawsuit, alleging that GE Transportation dismissed him without reasonable notice. He claimed damages for pay in lieu of notice plus his pro-rated retention bonus of $133,000 because his dismissal was involuntary, and a $60,000 VIC bonus for 2018.
Alward notes that once employees were officially informed of the sale in early February, the employment offer and the sale closing followed a quick timeline.
“There's a balance of what has to happen because, obviously, you can't tell employees until everything's been negotiated and you're in the process of finalizing [the transaction],” he says. “But at the same time, it’s not a lot of time to alleviate any concerns that may come up.”
The court found that when GE sold GE Transportation to Wabtec, it no longer wanted or needed the worker’s services. Wabtec was “a separate and distinct legal entity,” so its offer of employment was separate from GE. As a result, the worker’s employment with GE ended with the sale and there was no continued employment, the court said, referring to the principal established in jurisprudence that “at common law… the sale of a business, if it results in the change of the legal identity of the employer, constitutes a constructive termination of the employment.”
No resignation
The court also found that the termination of the worker’s employment wasn’t a resignation. Although the worker didn’t accept Wabtec’s offer, he didn’t want his employment with GE to end and, “by operation of law, [the worker’s] employment was constructively terminated by the sale.” In addition, a worker’s resignation must be clear and unequivocal, and the worker clearly didn’t want to resign, said the court.
There wasn’t anything that GE could have done differently to avoid terminating the worker’s employment, says Alward.
“The only other option would be to say, ‘We're not going to terminate you, we're going to transfer you,’ but then that's an issue that the buyer of the of the business has to deal with,” he says. “In an asset sale like this, the current employer is required to terminate the employment of all of the employees because it doesn't automatically flow [to the buyer].”
However, the court agreed with GE in that the worker acted unreasonably when he declined Wabtec’s offer for the same position, salary, and benefits – not just comparable employment to his position at GE, but “practically identical,” the court said.
Although the worker was concerned about his retention bonus, both companies made reasonable efforts to assure the worker that the terms and conditions of his employment with GE would be carried over – of which the retention bonus was part, the court said, adding that “it is hard to imagine under what possible circumstances” GE Transportation would have claimed that accepting Wabtec’s offer would breach the restrictive covenant agreement.
Failure to mitigate
The court found that Wabtec and GE Transportation were willing to give the worker the assurances he sought before accepting employment, so it was unreasonable for the worker to reject Wabtec’s offer. The worker argued that the offer came before his termination, but the court “had no doubt” that had the worker asked Wabtec to reconsider, the company would have done so. As a result, the worker failed to reasonably mitigate his damages, said the court.
“[The worker] was going to be doing essentially the exact same work and paid the exact same, and all of his bonus information was going to transfer over - substantially, the only change was no longer working at GE and now working at Wabtec,” says Alward. “There was no good reason offered by the worker that this wasn’t a reasonable, comparable position that he ought to have taken - the standard in mitigation is, it's an offer that a reasonable person would have taken.”
The court agreed that the worker was entitled to the pro-rated retention bonus, as his employment with GE Transportation was involuntarily terminated. However, he wasn’t entitled to the VIC bonus because GE exercised its discretion under the plan and made the bonus conditional on acceptance of Wabtec’s offer.
“The language in the in the VIC plan allowed GE very broad discretion to do with that bonus what they wanted to, and so they tied the payment of it to acceptance of the new job offer – [the worker] didn’t accept the job offer, so he didn't get it,” says Alward. “This is why it's extremely important for a bonus plan to include language that provides the employer with power to make their own changes from time to time as they see fit.”
The court determined that the worker was entitled to 24 months’ pay in lieu of notice for his constructive dismissal, but his failure to mitigate by accepting Wabtec’s offer of employment – which would have avoided all of his damages – cancelled out that entitlement. GE Transportation was ordered to pay the worker just the pro-rated retention bonus of $133,000.
Reasonable offer of employment
A key outcome of the case for employers is that when a business is sold and an employee decides that they don’t want to accept a reasonable offer from the purchaser, that doesn’t necessarily mean that they get a full notice package, according to Alward.
“The employee has an obligation to mitigate and [when they refuse an offer of comparable employment] they have failed to do that,” he says.
“And now we have a Manitoba authority that says, ‘You didn't accept a reasonable offer, so you get nothing’ - that's a very strong decision for employers and probably overdue.”
