When a business is sold and employees continue to work for the new owners, how would severance be handled?
by Stuart Rudner and Anique Dublin
When a business is sold and employees continue to work for the new owners, does their entitlement to severance continue to accrue?
That is a question that we are asked all the time, and the answer, as is often the case, “It depends.” People who buy or sell a business without advice from an employment lawyer often end up with an unexpected surprise.
In Manthadi v. ASCO Manufacturing, the Ontario Court of Appeal addressed a scenario like this and noted that it was important not to “stitch together the employee’s terms of service with the vendor and the purchaser of the business and consider them one continuous period of employment.” Instead, the employee’s service with the vendor should be recognized by appropriately weighing the benefits of the employee’s experience to the purchaser.
Sandra Manthadi was initially employed as a welder by a numbered company, 63732 Ontario Limited (637) in 1981. In 2017, 637 was sold to ASCO Manufacturing through an asset purchase.
The Agreement of Purchase and Sale stated that 637 had provided notice of termination and paid severance to all employees, including Manthadi, who also signed a release in favour of 637.
Manthadi was subsequently hired by ASCO. There was no written agreement governing this new employment. She worked for ASCO for about one month before she was placed on layoff and never recalled. As a result, she brought an action against ASCO for wrongful dismissal and subsequently brought a successful motion for summary judgment.
Motion for summary judgment
At the hearing, Manthadi argued that ASCO hired her as an indefinite employee with the understanding that she would be credited for her years of service with 637. Conversely, ASCO argued that Manthadi was hired on a temporary basis, for a specific task.
The motion judge concluded that Manthadi “had been continually employed from 1981 to 2017, a period of 36 years.” As a result, the motion judge awarded Manthadi 20 months’ notice under the common law.
The motion judge held that the common law approach to assessing a successor employer’s obligation to provide reasonable notice at common law should mirror the ESA (Employment Standards Act, 2000) obligations.
ASCO appealed arguing, amongst other things, that the motion judge erred by holding that summary judgment was appropriate when there were material facts in dispute, including whether Manthadi was a fixed-term employee.
Court of Appeal decision
The court agreed with ASCO that summary judgment was inappropriate in this case.
The court found that the motion judge did not resolve the dispute about the basis on which Manthadi was hired by ASCO. As a fixed-term employee, Manthadi would not be entitled to reasonable notice at common law upon the expiration of the fixed term, since the employment agreement would simply terminate in accordance with the agreement. If, however, Manthadi was hired on an indefinite basis, she would be entitled to reasonable notice at common law.
In Ontario, the ESA provides that an employee is deemed to have continued employment with the successor employer if certain criteria is met. However, this only applies for the purposes of the ESA and it does not apply to the common law analysis.
The court found that the motion judge erroneously concluded that summary judgment was appropriate because “she proceeded on an incorrect understanding of the common law that governs an employee’s rights to reasonable notice from the purchaser of an ongoing business.”
The court noted that there must be “a sharp distinction” drawn between the termination of employment by a successor employer under the ESA and under the common law. Under the ESA, employees of a vendor who are subsequently employed by the purchaser are deemed not to be terminated for the purposes of the ESA. However, the common law states that such employees are terminated when the business is sold and there is a change in the identity of the employer.
The court recognized that long-term employees are placed in a difficult position when their employer sells the business as a going concern and the purchaser offers to employ them on an indefinite basis. That’s because terminated employees have a duty to mitigate their damages, so by rejecting an offer of employment from the purchaser, they may be deemed not to have mitigated their damages.
If the employee accepts employment with the purchaser, a new contract of employment is formed. If that employee is “subsequently terminated by the purchaser, the new start date of their term of service weighs in favour of a shorter notice period than had the business not been sold.”
Following its decision in Addison v. M. Loeb Ltd, the court recognized that these difficult circumstances can be resolved by giving “some recognition” to the employee’s period of “employment with the predecessor employer when determining the length of the notice period, unless there is an express understanding to the contrary.” The court noted that this is done by “attaching appropriate weight to the employee’s experience” rather than “stitching together the employee’s two terms of service.”
The court held that summary judgment was inappropriate in this case. The judgment was set aside and the matter was ordered to proceed to trial.
This case highlights the importance of managing employment relationships during the sale of a business. In this case, there was no written agreement governing the terms of Manthadi’s employment with ASCO, which created an issue as to whether she was hired on an indefinite contract or a fixed-term contract.
If the former, she would be entitled to reasonable notice at common law and the appropriate notice period would be assessed by applying the factors set out in Bardal v. Global & Mail Ltd., as well as weighing how her previous experience with 637 benefited ASCO. However, if the latter, Manthadi would not be entitled to any notice if her employment ended at the end of the fixed term.
This case also highlights that the mere fact that an employee agreed to a settlement and release with the predecessor employer does not mean that the purchaser can disregard the employee’s period of service with the predecessor when assessing the employee’s without cause notice entitlements.