Employment law issues should be a core consideration for the parties involved in the sale of a business. Purchasers should be aware of the potential cost of taking on the employment of the vendor’s employees and the unexpected liabilities that may arise if those same employees are terminated after the transaction is completed.
Share sale or asset sale?
The most important factor for determining the obligations owed to employees in a sale of business is the nature of the transaction.
In general, a sale by way of share purchase results in no change to employees’ status, since the identity of their legal employer remains unchanged after the transaction goes through, even if the ownership of the corporate entity does not. Therefore, a purchaser in a share transaction becomes the employer of the vendor’s employees and liable for termination entitlements premised on their entire length of service if the relationship is terminated after the close of the sale.
However, when a sale is conducted via a purchase of assets, it may trigger the termination of the employment agreements between the vendor and its existing employees. This would result in the vendor taking on responsibility for its employees’ termination entitlements. This may be avoided if the purchaser offers to hire the vendor’s employees on substantially similar terms to those offered by the vendor.
In addition to the common law cases that discuss the difference between a share and an asset sale, Ontario’s Employment Standards Act, 2000 (“Act”) tells us that when a business is sold, an employee’s length of service is deemed to continue uninterrupted. This assumes that the purchaser accepts the vendor’s employees. Section 9(1) of the Act says:
If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.
For many employees, the transition to a new business owner will proceed relatively smoothly. The cases that present the largest risk of litigation are those involving long-term employees, especially when the employment relationship breaks down after the transaction closes.
That is what happened in a recent case that came before the Court of Appeal for Ontario. The decision offers some guidance on the employment law issues for everyone affected by an asset sale of a business.
Manthadi v. ASCO Manufacturing, 2020 ONCA 485
Sandra Manthadi had spent 36 years working as a welder for 63732 Ontario Limited before the company’s sale to ASCO Manufacturing (“ASCO”) in 2017. Before the deal closed, she signed a release with the numbered company vendor in exchange for eight weeks’ worth of severance and termination pay. She was then rehired by ASCO.
Ms. Manthadi was terminated one month later. She sued ASCO for wrongful dismissal and based her claim on her length of service with both the numbered company and ASCO.
ASCO claimed that it had only hired Ms. Manthadi on a fixed-term basis to assist with its move to new premises. Ms. Manthadi alleged that her employment contract was for an indefinite continuation of her welding work.
A judge hearing the case on a summary judgment motion sided with Ms. Manthadi, awarding her 20 months’ pay in lieu of notice. ASCO appealed.
The Court of Appeal did not actually rule on the merits of the parties’ arguments but sent the decision back for a full trial, ruling that the significance of the factual disputes between the parties made it inappropriate for summary judgment. However, in the process, the three-judge panel reviewed and reaffirmed that the motion judge was right to find that the release signed by Ms. Manthadi in favour of the vendor did not prevent her from making a claim against the purchaser.
The appeal court also found that the motion judge erred in simply adding up the plaintiff’s pre- and post-transaction lengths of service to calculate her notice period, finding that the judge’s decision was premised on the mistaken idea that the common law supports the same concept of “continuous employment” as the ESA.
At common law, rather than discounting an employee’s service with the predecessor employer or “stitching together” the two terms of service, the Court of Appeal ruled that judges should take a flexible approach that considers prior experience as one factor among many in its analysis for determining an employee’s reasonable notice period under the common law.
This flexibility “enables the court to deal fairly with the endless variety of circumstances in which an employee’s claim may be presented,” the decision reads. “The court is able to recognize, under the rubric of experience, the equivalent of all or some of an employee’s service with the vendor employer in order to arrive at a fair result.”
Takeaways
The case suggests that an employee’s pre-transaction service can be taken into account in some form if they are later terminated without cause, even if they cannot simply “stitch together” the two terms for the purposes of calculating their common law notice period.
The lesson for purchasing parties is that they must consider the common-law obligations to employees of the business — particularly longer-term workers who are kept on post-transaction — even if the vendor has already reached agreements with them over severance.
For long-service employees, the decision is a welcome recognition of the difficult position that they are placed in when presented with a fresh job offer by a successor employer that activates the duty to mitigate their common-law damages with the vending party.
The best advice is to seek legal counsel on the employment law issues that your deal raises.
