Determining a successor employer

The difference between succession and buying up a company's assets

Tim Mitchell

Question: When one company is acquired by another company, what exactly constitutes a successor employer? What role do things like selling off the old company’s assets, occupying the same location and terminating employees and then rehiring some have in the determination?

Answer: The successorship provisions in labour relations legislation are well-litigated provisions intended to insure that bargaining rights associated with a particular business are not lost in the sale of that business.

Under the legislation, a purchaser that acquires control, management or supervision of all or part of a business or undertaking formerly operated by the previous employer may be declared to be the prior employer’s successor. Where a declaration of succession is made, the new employer acquires the bargaining relationship with the trade union certified in respect of the business or undertaking, as well as the former employer's obligations under any collective agreement binding it.

The process of determining whether a “sale of a business or undertaking” has occurred involves identifying the significant components of the business or undertaking (or part of it) in the hands of the predecessor, looking to see if those components — or a significant number of them — are in the hands of the successor and, if so, whether they were acquired in a transaction between the predecessor and the successor.

Labour boards and courts have held that a “business or undertaking” is not synonymous with any legal entity which carries it on, the work performed, the assets with which that work is performed or the employees engaged in its performance. Bargaining rights protected by a declaration of succession attach to the business or undertaking itself, described in terms of a “functional economic vehicle,” a “going concern” or a “combination of capital, management and labour.”

In one early Alberta case, a succession was found where little more was acquired by the successor company than a right to occupy commercial premises in which it proposed to carry on a similar business. In most cases, however, a successor employer will have more identifiable elements of the predecessor’s business in its own operation.

The use of a predecessor’s premises and fixed assets are factors that labour boards may find indicative of a disposition to the successor.

Other factors that increase the possibility of a company being a successor include:

• The presence of the alleged predecessor’s employees in the alleged successor’s operation
• The acquisition by the successor of assets, such as premises, equipment, customer lists or clients, contracts, accounts receivable, goodwill, proprietary information, managerial skills or “know how” in the persons of former employees of the predecessor
• Direct dealings between the predecessor and the successor
• The appearance of a non-arms’ length transaction
• Continuity of the work performed and the lack of any hiatus in its performance.

The presence of a part of the economic organization used by the predecessor in carrying on the work in the hands of the alleged successor as a consequence of the arrangement between the parties will typically result in a declaration of successor employer.

Factors which have been considered to point away from an employer becoming a successor include:

• The alleged successor having a pre-existing business together with the infrastructure, business expertise and knowledge to carry it on apart from anything acquired from the predecessor
• The absence of any pre-existing relationship between the predecessor and the successor
• The fact that the successor, although having hired some of the predecessor's employees, did so through public advertisements and not through an arrangement between the parties
• The successor maintained its own business offices
• Any assets acquired from the predecessor were of a minor nature and did not have the effect of enabling the successor to engage in the business.

The facts are determinative in any particular case and the importance of any individual factor may increase or decrease depending upon what is perceived to be the essence of the business or undertaking under scrutiny.

Successor provisions are also found in the employment standards legislation of most provinces, although the provisions themselves differ significantly in scope. They are narrower than their counterparts in labour legislation — where they exist, they are typically directed to preserving continuity of employment for the purposes of employment standards benefits upon sale of a business.

In Radwan v. Arteif Furniture Manufacturing Inc., the court suggested that the same “going concern” concept employed by the Alberta Labour Relations Board in determining successor status under the Labour Relations Code was to be applied in assessing successor status under the Employment Standards Code. In that case, a purchaser of a business from a bankruptcy trustee was found to have received the business as a “going concern” and not merely a collection of assets. As a result, the employee was entitled to credit for 25 years’ service with the prior employer.

Finally, it is noted that the common law has itself moved away from the harsh results formerly suffered by employees of a business that had been sold. In Sorel v. Tomenson Saunders Whitehead Ltd., the B.C. Court of Appeal found it was implied that seniority would carry over to employment in the hands of the transferee of a business unless that result was expressly excluded.

For more information see:

Radwan v. Arteif Furniture Manufacturing Inc., 2002 CarswellAlta 998 (Alta. Q.B.).
Sorel v. Tomenson Saunders Whitehead Ltd., 1987 CarswellBC 175 (B.C. C.A.).

Tim Mitchell is a partner with Norton Rose in Calgary. He can be reached at (403) 233-0050 or Tim.Mitchell@nortonrose.com.

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