How corporate change can result in unionization

The Supreme Court of Canada uses successorship to extend unionization.

Brian Johnston
On April 27, 2000, the Supreme Court of Canada made a decision that surprised many. After Town of Ajax vs. Charterways more questions were raised than answered regarding what constitutes a “sale of business.” This is an issue key to determining the transfer of union obligations and as such, is of great concern to employers in an increasingly service-based, “contracting-out” economy.

At one level, the judgment in Town of Ajax vs. Charterways could be said to represent nothing more than the Supreme Court’s deference to a labour board decision.

As Chief Justice Beverley McLachlin concluded in her majority decision, the Ontario Labour Board’s finding of a “sale of business” on the facts of the case was not “clearly irrational,” and hence the majority of the court did not disturb the decision.

At another level, the decision cuts a wide swath through established labour law principles. It can be seen to extend successorship, the manner in which union obligations are passed on to successive employers upon the sale of an enterprise, to cases where many would say that there is nothing remotely resembling a “sale of a business.”

Ajax is a significant decision that may extend the union obligation in three situations, namely, when an owner contracts out, when an owner takes back previously contracted work and where there is a loss of contract.

The town ends

its transit contract

Since the late 1970s, the Town of Ajax and Charterways Transportation had a contract for Charterways to operate the town’s transit system. Charterways provided and co-ordinated the drivers, mechanics and cleaners.

It provided fuel, maintained accounting, operating records and a spare parts inventory, trained employees, and so on.

At some point after they entered into this arrangement, Charterways became unionized by the Canadian Auto Workers (CAW).

In 1992, the town decided to terminate the Charterways contract and operate the system by itself. Charterways laid off all the drivers, mechanics and cleaners because it did not have enough work for them.

In turn, the town hired a number of those former employees. This resulted in former Charterways’ employees forming a substantial proportion of the town’s new transit staff. However, none of Charterways’ managerial staff, and only a few of its supervisory staff were hired by the town.

Sale of business or

mere loss of contract?

The union said that this was a sale of a business and accordingly, the town was bound by Charterways’ union obligations.

The union sought a declaration of a “sale of business” under Section 64 of the Ontario Labour Relations Act. That section provides that if a predecessor employer is bound by a collective agreement then the successor employer will also be bound.

“Business” is defined as including one or more parts of a business. A “predecessor employer” is defined as an employer that sells its business. And “sells” is defined as including a lease, transfer or any other manner of disposition.

The Supreme Court of Canada noted in the 1990 case W.W. Lester (1978) Ltd. vs. U.A., Local 740, that labour boards have interpreted “disposition” broadly to include almost any mode of transfer and have not relied on the technical legalities of business transactions. The aim was to preserve bargaining rights regardless of the legal form a particular transaction might take that puts such rights in jeopardy.

However, the Supreme Court in Lester recognized that in virtually all jurisdictions, something must be relinquished by the predecessor business on the one hand, and obtained by the successor on the other, in order to justify a successorship declaration.

Until Ajax, two principles emerged from the cases, namely: there must be some “nexus” or connection between the alleged predecessor and successor and, secondly, that a “business” must move from the predecessor to the successor.

Majority: Sale of business

However, it appears that the 6-3 majority of the Supreme Court of Canada in Ajax may have lowered the bar, or at least they were not prepared to say that “successorship made easy” was irrational.

The majority seemed satisfied that the “historical and functional connection between Charterways and the Town of Ajax” was a sufficient “nexus” between Charterways and the town.

The unanimous decision of the Ontario Court of Appeal had found that the business that Charterways carried on for Ajax was the “skilled and experienced group of employees which operated the transit system for the town.”

The “business” was both the work, the employees themselves, and the added value that came with the continuity, experience and stability of the workforce.

The “nexus” was deemed to be the commercial history between Charterways and the town, without which the town’s acquisition of the workforce would not have occurred.

Dissent: Mere loss

of contract

In Ajax, Justice Michel Bastarache, writing for the dissent, accepted for the sake of argument that Charterways’ employees were its most valuable asset and that they could constitute a business entity which could be sold or transferred.

However, the dissent did not see how there was any organizational nexus between Charterways and the town.

Furthermore, they noted that however broadly the term “sale” is interpreted, something must be relinquished by the predecessor business on the one hand and obtained by the successor on the other.

The dissent reasoned that a sale implied an agreement or transaction of some sort between the predecessor and successor.

In other words, a sale or transfer or disposition had to be to a successor employer.

In their view there must be a “mutual intent to transfer part of the business.”

Therefore, the town’s unilateral decision to hire some of Charterways’ former employees could not be considered a deemed disposition by Charterways of part of its business. Charterways simply terminated employees it no longer needed; it did not transfer them to the town.

Its employees applied to the town for employment, as did others. They underwent interviews and although most were hired, some were not. The fact that the same service continued for the customers of Ajax was simply due to the fact that the same work was performed by a new organization.

Notwithstanding the weight of the dissent’s reasoning, the majority prevailed and the labour board decision was upheld.

Decision implications

A clear implication is that when a company contracts out work and the contractor later becomes unionized, then if at some later time the company decides to “take back” the work, it runs the risk of being bound by the contractor’s union obligations.

Of course, this “risk” could be reduced if the company did not hire any of the contractors’ former workforce, especially if that workforce could be characterized as having “special value due to its continuity.”

Such an avoidance approach would present clear problems under labour legislation. Certainly, providing any hiring or employment advantages to the alleged predecessor’s workforce would work against the company.

The case becomes more troublesome as one extends it to other situations, such as in the case of a “triangular” relationship where the company contracts services to be performed by Contractor A.

Say Contractor A later becomes unionized. When the contract expires, the company goes to the market, seeks bids, and Contractor B is successful. Existing labour law suggests that this does not constitute a sale of business but rather a mere loss of contract. Accordingly, Contractor B is not the successor to any of Contractor A’s union obligations.

The Ontario Labour Relations Board decided in 1979 in C.U.P.E. vs. Metropolitan Parking Inc. that the expiry of a contract and associated requests for tender leading to a new “employer” did not trigger a successorship, even though the successful bidder hired many of the former contractor’s employees. There was no sale of business found.

A similar case was Cafas Inc. vs. IAM, a Canada Labour Relations Board 1984 review decision. The review panel held that the loss of a contract in a triangular relationship did not trigger a successorship. The board found that the alleged predecessor and alleged successor were keen rivals. The loss of a contract could not be equated with the sale or other disposition of a business; the business remained intact and only a contract is lost. Further, there was no nexus between the party allegedly selling the business and the one acquiring it.

Interestingly, just as Contractor A and Contractor B in a triangular relationship are “competitors,” similarly it could be said that the company and the contractor are competitors. Companies may decide to contract out work because they cannot achieve a return on their investment sufficient to warrant maintaining the work. The contractor, on the other hand, may have that ability.

It is not unusual for an organization when it is contemplating contracting out, to receive a “bid” from the company’s existing management group on the work. Furthermore, some collective agreements contemplate that the union representing the company’s employees are entitled to make proposals on ways to avoid contracting out. Therefore, the company and the contractor could be characterized as “keen competitors” for the work (for example, in the case of Ajax).

Therefore, in a triangular business relationship where Contractor A loses a contract to Contractor B, especially if Contractor B then hires the former’s workforce (such as drivers, cleaners and maintenance personnel of a nature that led the Ontario Court of Appeal in Ajax to say that the acquired workforce had “special value” due to its continuity), then the door could be opened to a finding that the loss of contract constituted a successorship.

The 1996 Sims Report: Seeking a Balance, A review of Part I of the Canada Labour Code, made no recommendation for a change in the code on the issue of contractor to contractor transactions.

B.C. toys with

contractor successorship

However, in June 1997, the British Columbia government proposed in Bill 44 to extend successorship rights to contractual services in the building cleaning, food and security sectors such that the loss of a contract in those sectors would trigger a successorship. The successful bidder would therefore have been bound by the predecessor’s union obligations.

Employers vigorously opposed this proposed legislation on the basis, in part, that unionization would attach to work as opposed to the business. As a result, Bill 44 was withdrawn.

The other key implication of Ajax relates to whether a contracting out of work is now more likely to be considered a successorship. Labour boards have dealt with the issue of contracting out work, and have attempted to draw the distinction between moving work and moving a business.

In Nova Scotia, if contracting out is for the purpose of defeating union obligations then it constitutes a successorship. However, if it is a mere contracting out then no union obligations flow.

In the classic case, a company that runs a manufacturing operation, which has some trucks picking up raw materials and delivering a finished product, can contract out the trucking operations without much fear that such contracting out would trigger a successorship, potentially binding the successful contractor with the company’s union obligation.

However, Ajax makes it much easier for a union to say that such contracting out is a sale of business. Obviously, in a contracting out there is a “nexus.” Further, it is possible that employees may move from the owner to the contractor.

Brian Johnston is a partner in the Halifax office of Stewart MacKelvey Stirling Scales, which has one of the largest labour and employment practices in Atlantic Canada. He can be reached at (902) 420-3373 or by e-mail at [email protected].

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