'The HR law costs can be the biggest cost for a purchaser going forward'
After a recent Ontario Superior Court ruling regarding severance pay for a long-term employee after a company sale, acquiring employers may be left wondering how best to handle employment contracts in these types of deals.
Generally, when an asset sale happens in Ontario between two businesses, the employment relationships end automatically and employers are free to rehire those acquired employees — however, new agreements need to be signed.
In a share sale, the only thing that changes is ownership so the employment relationship continues.
The recent Manthadi v. ASCO Manufacturing ruling threw a new “wrinkle” into these types of transactions, says an employment lawyer.
“The new wrinkle really looks at, is this business being acquired as a going concern? And so that follows B.C. where that’s been a more relevant concept in B.C.’s case law for some time, unlike in Ontario where it’s really all about the asset and share purchase,” says Joel Smith, partner with Williams HR Law in Markham, Ont.
Long-term employee laid off after sale
The case hinged around Sandra Manthadi, who had worked as welder since 1981 for the company that eventually became ASCO Manufacturing. However, in 2017, she was told by an acquiring employer that her employment services would only be needed for a short period after the sale and then she would be laid off.
After a number of appeals, the Ontario Superior Court ruled on June 9 that Manthadi was owed 12 months’ wages, considering her long service with ASCO.
“In this case, the decision really focuses on: Was it simply an asset purchase? Or was it a purchase of the company as a going concern? And so it’s really suggested that’s the distinction,” says Smith.
“The court fully acknowledged that this was an asset sale because the purchaser did, in some way, purchase the business as a going concern by maintaining the same name of the business and maintaining some of the employees doing a lot of the same type of work; and, as a result, the prior service with the vendor is a more relevant concept to the employee’s termination entitlements.”
Important to be ‘scrupulously clear’ with employees
The ruling clearly illustrates one of the biggest mistakes made by purchasing companies, according to another employment lawyer.
“Purchasers have to be scrupulously clear about what they intend to do with the employees and then to properly paper those agreements,” says Madeleine Loewenberg, cofounder of Loewenberg Psarris Workplace Law in Toronto.
“You’ve got a purchaser who admits: ‘We didn’t really talk with Ms. Manthadi about what was going to happen but, obviously, she knew her employment was only temporary.’ Well, that won’t get an employer anywhere,” she says.
It’s crucial to answer any and all questions around future employment before the sale transaction is finalized, says Loewenberg.
“The new employment agreement has to be set out in writing clearly, and it’s got to achieve what the employer wants it to achieve. If that means working with the vendor, then that’s what they have to do. That didn’t happen in this case and that was problematic.”
HR liabilities often bigger than all others
So how big of a deal might this be for future company purchases?
“It does seem to really shift the law a little bit around how asset purchases and share purchases are dealt with in the context of employees being hired by an acquiring company, and then subsequently dismissed, and impacting what their entitlements will be upon dismissal,” says Smith.
Typically, when businesses take over another company, the attention is on the tangible assets of the company, among other business concerns. However, this focus is wrong, says Smith.
“In some cases, the HR law costs can be the biggest cost for a purchaser going forward, not only with the ongoing costs of employing those individuals and paying their salaries but taking on those years of service and therefore taking off potentially up to a couple of years of termination entitlements — if they do have to let them go if they don’t take the appropriate steps to protect themselves with employment contracts, and making clear what the intentions are.”
The way this case was handled ultimately became a huge blind spot for the new employer during the negotiation process, says Loewenberg.
“Purchasers and vendors don’t always think about the liability that comes along with the employment transaction: How many people are they taking on? What it will cost if they decide that they don’t need the number of people they initially anticipated? How easy it is or how difficult it is to release someone? That’s really the big pitfall for employers.”
And many acquiring companies fail to consult with employment lawyers, at their peril, she says.
“Sometimes the instinct is to get commercial advice because it’s a commercial transaction but you need to get some employment advice.”
In order to prevent termination clauses being ruled invalid, avoid “drafting deficiencies” when preparing those agreements, says another employment lawyer.
Common law or ESA?
The Manthadi case also shows some of the complexities employers face when dealing with Employment Standards Act (ESA) entitlements, versus common law.
This becomes much clearer when the retained employees sign new contacts, says Smith.
“That’s the general best practice as a purchasing organization because if they don’t sign those employment agreements, from an HR law standpoint, the acquiring company knows that they may be on the hook for at least some of that prior service from a common-law-notice perspective down the road if they do have to let that employee go, and then they can make the decision: ‘Is this employee important enough to us to take on that level of liability?’”
