The role of successor employers

Watch out — you might be a successor employer

Background

A recent Ontario Superior Court of Justice decision (which is headed to the Ontario Court of Appeal) should be of special interest to anyone purchasing a business from a trustee in bankruptcy as well as to receivers and trustees themselves. The message to all of them is “watch out” — they just might be “a successor employer.”

It has been generally accepted that the employment of all employees is terminated upon the bankruptcy of an employer corporation.

Where there is some doubt and confusion is over the question of whether the trustee in bankruptcy and the ultimate purchaser of the bankrupt business can become “successor employers” to the employees. Employees hired by the successor employer may be entitled to carry forward their seniority or other benefits or agreements to the new employer. Therefore, an employer who hires these employees may be taking on all kinds of unintended obligations and responsibilities.

The case: Royal Crest Lifecare Group 2003 CarswellOnt 683 (O.S.C.)

Royal Crest, together with certain affiliated companies, was in the business of operating nursing and retirement homes. It employed about 2,000 staff, the vast majority of whom were unionized.

Following Companies’ Creditors Arrangement Act proceedings, which had been initiated by Royal Crest, a trustee in bankruptcy was ultimately appointed. The trustee, without adopting the collective agreements, engaged the services of the former employees of Royal Crest on terms similar to their former employment.

In the course of the bankruptcy proceedings the trustee moved for a court order granting it the right to operate the bankrupt business prior to the first meeting of creditors, for declarations that the trustee was not a successor employer of the former employees of Royal Crest and that the trustee was not bound by or subject to the collective agreements between Royal Crest and the unions.

The Canadian Union of Public Employees, the union representing the staff, cross-moved for an order committing it to apply to the Ontario Labour Relations Board to name the trustee the successor employer of Royal Crest.

The Ontario Labour Relations Board could not exercise any powers pursuant to its exclusive jurisdiction to determine the question of whether anyone was a successor employer unless the stay of proceedings caused by the bankruptcy was lifted.

In considering the trustee’s request for a declaration that it was not a successor employer, Justice Farley first considered the accepted law, as established in Rizzo & Rizzo Shoes Ltd. which held that, upon the bankruptcy of a company, the employment of all of the employees of that company is terminated.

Justice Farley also reviewed the earlier dissenting reasons in Re: St. Mary’s Paper Inc. in which Justice Abella for the Ontario Court of Appeal stated that contracts of employment with employees, including collective agreements, terminate with the bankruptcy. Justice Abella expressed the concern that, if trustees could be liable as successor employers, then they might be reluctant to assume any pension plan continuity or other responsibilities vis-a-vis the employees of the bankrupt company with a view to selling the business as a going concern.

Fear of potential liability would ultimately result in fewer efforts by trustees in bankruptcy to engage any of the former employees of the bankrupt company or to take steps to maximize its value by operating the business and selling it as a going concern.

Justice Farley called the invariable and absolute character of such statements into question by noting that no court had ever provided an in-depth legal analysis justifying the conclusion that collective agreements terminate on a bankruptcy.

For Justice Farley the appropriate judicial exercise in such circumstances involved the balancing of the competing legislative objectives of labour law and insolvency law. The court reviewed the analysis in the Nova Scotia Court of Appeal decision in Saan Stores Ltd. Nova Scotia (Labour Relations Board) in which the court found the purpose of provincial labour legislation was to protect workers’ rights when a business was sold to an operating commercial entity and, therefore, bankruptcy did not terminate the employment and collective agreement in all respects and for all purposes.

In other words, while the bankruptcy may have resulted in the termination of the employment relationship between the former employees and the bankrupt, the rights of the employees under either an employment agreement or a collective agreement might, in some circumstances, still be asserted against the business or person who acquired the company from the trustee.

Justice Farley adopted this analysis and held the Royal Crest collective agreement was not terminated but, “rather it is put in suspended animation, to be revived ... when a purchaser with a personal economic interest in the operation of the business acquires the business.” Therefore the Ontario Labour Relations Board might still find that a purchaser acquiring the business from the trustee in bankruptcy is a successor employer.

For more information see:

Rizzo & Rizzo Shoes Ltd, [1998] 1 SCR 27

Re: St. Mary’s Paper Inc. (1994), 26 C.B.R. (3d) 273 (Ont.C.A)

Saan Stores Ltd. Nova Scotia (Labour Relations Board) (1999) 172 DLR 4th 134

Radwan v. Arteif Furniture Manufacturing Inc. [2002] A.J. No. 1031

Trustees can become successor employers

Purchasers of bankrupt companies from a trustee could be saddled with obligations to staff

What was somewhat novel in the Royal Crest decision was Justice Farley’s treatment of the trustee in bankruptcy and the consideration of whether the trustee could ever be found to be a successor employer. As the trustee is charged with realizing on the assets of the bankrupt estate for the benefit of creditors, and as the creditors naturally expect the trustee to maximize the amount realized on such a sale, trustees will often try to effect such a realization by selling the business as a going concern.

The court noted that so long as the trustee was operating the company to realize maximum value in a diligent fashion the trustee would not be found to be a successor employer. Specifically the court held that, “...where a trustee is operating the business incidental to the trustee disposing of it and realizing on the assets and there is no question or issue raised that it is pursuing a marketing and ultimately sales disposition program in a reasonable and bona fide way with due dispatch, then the question of employment of personnel is only incidental to its function of realizing on the assets... .”

But if the trustee shifted from being primarily a realizor of assets to being predominantly an employer then leave might well be granted for a stay under the bankruptcy in order to permit the Ontario Labour Relations Board to determine whether the trustee is a successor employer. While the question of successor employer status remains one within the exclusive jurisdiction of the board, the test as to whether leave will be granted is applied by the courts. Justice Farley’s conclusion flowed from his effort to balance the interests and objectives of both the labour and insolvency legislation.

Because the board has exclusive jurisdiction to determine whether there is a successor employer, the court ordered that the operation of the provincial labour legislation would be undermined if in every case the operation of the bankruptcy foreclosed the question of whether there is a successor employer.

Accordingly on the question of whether the trustee’s motion for a declaration that it not be deemed to be a successor employer of Royal Crest’s former employees, Justice Farley could only go so far as to declare that the employment of those employees was terminated by virtue of the bankruptcy and that the trustee was authorized to engage any or all of such former employees in order to ultimately market the businesses as a going concern. He would not, however, accede to the trustee’s request to immunize it absolutely from the prospect that it might at some point be susceptible to treatment as a successor employer.

That, according to Justice Farley, would be a function of the way in which the trustee actually managed the affairs of the company and operated it pending realization. Ultimately, Justice Farley recognized, that in view of this much more modest pronouncement on the effect of the bankruptcy on the employment relationship, the trustee in bankruptcy might choose not to go into possession of the business or to engage personnel.

Pending the pronouncement of the appeal court, trustees in bankruptcy will exercise particular diligence and care before going into possession of bankrupt companies and especially before hiring former employees. It should also serve as a reminder to purchasers of businesses from a trustee in bankruptcy that they may well be saddled with the obligations and liabilities of successor employers.

A recent Alberta Court of Queens Bench decision, Radwan v. Arteif Furniture Manufacturing Inc. reminds us that when an employer has purchased a going concern, whether from a trustee in bankruptcy or from the prior employer, there is an implied term in the contract of employment between the purchaser and the employees it keeps that they will be given credit for the past years of service with the seller for the purposes of salary, bonus and notice of termination.

If a purchaser wishes to be responsible to an employee in respect of that employee’s service since only the date of the sale or acquisition of the business, then it is necessary to specifically discuss such matters with the employees and to draw to the attention of those employees the fact that the new owner does not accept the implied terms.

Purchasers cannot rely on the fact of the bankruptcy nor even upon the fact the vendor of the business may have terminated the employment of the former employees to successfully avoid a declaration of successor employer.


This in-depth look at bankruptcy was provided by Peter L. Biro, a partner of Goodman and Carr LLP in Toronto practising in the areas of litigation and employment law. He can be reached at (416) 595-2341 or pbiro@goodmancarr.com.

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