Changes in corporate ownership

Status of employment contracts when an employer is bought out by another company

Colin Gibson

Question: Is an offer letter of employment considered an employment contract? Does a change in company ownership between the date of the contract and the job start date affect its validity?

Answer: A contract of employment may be oral, written or both. A written employment contract may take a number of forms, ranging from a simple offer letter signed by the employee to confirm acceptance to a detailed form of agreement containing comprehensive terms describing the rights and obligations of the parties.

It is a basic principle of contract law that for a contract to be enforceable, there must be an offer, a corresponding acceptance and consideration (something of value) flowing to each of the contracting parties. In the employment context, these requirements will be satisfied where the employer presents the employee with a job offer (accompanied by, or in the form of, an employment contract) and the employee accepts the offer before she starts work. In such circumstances, the consideration flowing to the employee is the employment itself.

The situation is different, however, if the employer seeks to introduce or amend a written employment contract after the employee has already been hired and begun working. Here, the employment relationship cannot constitute consideration because it already exists. If the employer wants the contract or amendment to be enforceable, it must be prepared to provide the employee with something of tangible value — a salary increase or bonus, for example — in return for agreeing to it. If the employer fails to do so, then even if the employee signs the new agreement without protest, the employer may later find a court will not enforce it because there was no consideration.

An offer letter will normally be considered an employment contract if it is accepted by the employee. However, that contract may have other oral or written terms arising from negotiations, practices or ancillary documents. Also, if the offer letter says nothing about termination of employment there will be an implied obligation on the part of the employer to provide the employee with reasonable notice in the event of a dismissal without cause. To avoid surprises, it is good practice to ensure all key terms of the employment relationship are set out in the contract, and the contract includes a provision stating that it represents the entire agreement between the parties, and the employer has not made any representations to the employee aside from the terms specifically described in the contract.

If company ownership changes after an employment contract has been signed, the effect on the employment relationship will depend on the circumstances. If the transaction is structured as a share purchase, the company’s employment contracts will remain in place because the identity of the employer will not have changed.

If the purchaser has bought the company’s assets, the result may be different. At common law, the sale of the assets of a business terminates the employment contracts of the vendor’s employees by operation of law, because a contract of employment cannot be assigned without the consent of all parties. Where there is no such consent, the affected employees are entitled to sue the vendor for wrongful dismissal damages, as in the New Brunswick case of Stone v. H.J. Hotels Ltd. Partnership and the British Columbia case of Major v. Philips Electronics Ltd.

In many situations, however, the purchaser of the assets of a business hires some or all of the vendor’s employees. In Sorel v. Tomenson Saunders Whitehead Ltd., the B.C. Court of Appeal set out the following principles.

•Where a purchaser acquires a business as a going concern, there is an implied term in the contracts of employment with employees continuing in the service of the business, that the employees will be given credit for past service with the vendor for the purpose of salaries, bonuses and notice of termination.

•This implied term may be negated by an express term to the contrary. The purchasing employer may advise the employees it does not intend to give them credit for past service. If this is done, the employees have the option of entering into the new contract of employment on these terms or of declining to work for the purchasing company and suing the vendor for wrongful dismissal and damages in lieu of notice.

•Where the new employer does not advise the employees that it is unwilling to give credit for past service, the purchaser is deemed to have contracted with the employees on the basis that the employees will be given such credit.

Employment standards legislation may also alter the impact of a change in company ownership on employment agreements. For example, B.C.’s Employment Standards Act states that if all or part of a business or a substantial part of the assets of a business is disposed of, the employment of the employees of the business is deemed to be continuous and uninterrupted. The effect is that for the purposes of the act, the sale of a business or a substantial part of its assets does not terminate the employment of employees of the business. Rather, such employment is deemed to be continuous and the purchasing employer assumes liability for the vendor’s liabilities and obligations under the act. This includes an obligation to recognize the employees’ years of service with the vendor, as well as an obligation to pay any and all wages outstanding on the date the business is purchased or taken over, including overtime pay, annual vacation pay, statutory holiday pay and termination pay.

For more information see:

Stone v. H.J. Hotels Ltd. Partnership, 2001 CarswellNB 380 (N.B. C.A.).
Major v. Philips Electronics Ltd., 2004 CarswellBC 690 (B.C. S.C.).
Sorel v. Tomenson Saunders Whitehead Ltd., 1987 CarswellBC 175 (B.C. C.A.).

Colin G.M. Gibson is a partner with Harris & Company in Vancouver. He can be reached at (604) 891-2212 or cgibson@harrisco.com.

Latest stories