Continuity of Employment when Employer Changes, The Law Times (November 27, 2017 at p 7)

Employees’ right to choose their employer is a main difference between a servant and a serf. Because employment contracts are contracts of personal services, they cannot be transferred from one employer to another without the parties’ consent.

In Krishnamoorthy v. Olympus Canada Inc., 2017 ONCA 873, the Court of Appeal for Ontario considered whether an offer of a new employment by the purchase of a business to the vendor’s employees constituted sufficient consideration for amending their employment contracts to include a termination clause. The ONCA resolved that it did and, in the process, reaffirmed that, in the context of a successor-employer scenario, section 9(1) of the Employment Standards Act, 2000 deems there to be continuity of the employment relationship for the ESA purposes only.

In Krishnamoorthy, in 2000, Nadesan Krishnamoorthy, commenced his employment with Carsen Group Inc. as its senior financial analyst. In 2005, he was promoted to Director of Finance. Carsen carried on business as an exclusive distributor for Olympus America Inc.’s products in Canada. In 2005, Olympus America established a new, related company, Olympus Canada and announced that it would be its distributor in Canada.

Consequently, on July 31, 2006, Olympus America terminated its distribution agreement with Carsen, and Olympus Canada purchased some of its assets. Following the sale of assets, Olympus Canada offered employment to Krishnamoorthy pursuant to a written employment contract, which contained a new termination clause that limited his entitlements at dismissal to the statutory minimums contemplated by the ESA or, in exchange for a signed release, four weeks’ pay per year, up to a maximum of ten months. The contract also specified that Krishnamoorthy’s prior service with Carsen would not be recognized and, as such, he would be treated as a new employee.

On December 16, 2005, Krishnamoorthy signed the new employment contract for which he received no additional compensation from Olympus Canada, or pay in lieu of notice or severance pay from Carsen. His employment with Carsen terminated on July 31, 2006 and new employment with Olympus Canada commenced on August 1, 2006. On May 19, 2015, Krishnamoorthy’s employment was terminated without cause. Olympus Canada offered him compensation pursuant to the termination clause, which Krishnamoorthy refused and launched a wrongful dismissal lawsuit.

At a motion for summary judgment, Krishnamoorthy argued that, pursuant to section 9(1) of the ESA, his employment with Carsen and Olympus Canada was continuous. He also asserted the termination clause was unenforceable, because Olympus Canada failed to provide him with fresh consideration for amending his employment contract to include the clause. In response, Olympus Canada contended that its offer of employment constituted sufficient consideration and, as such, the termination clause was binding. The motions judge accepted Krishnamoorthy’s position and awarded him damages equivalent to 19 months’ pay in lieu of notice. Olympus Canada appealed.

On appeal, Olympus Canada argued that the motions judge erred by ignoring the fact that Olympus Canada had no pre-existing employment agreement with Krishnamoorthy and, as such, had no obligation to make him an offer of employment. It also asserted the ESA does not deem there to be continuity of the employment relationship upon the sale of a business for all purposes and, as such, its offer of employment amounted to sufficient consideration for the termination clause.

Having sided with Olympus Canada, the ONCA explained that the language of section 9(1) of the ESA makes it clear that employment is deemed continuous only “for the purposes of this Act.”

Therefore, section 9(1) cannot be invoked to claim rights or entitlements on which the ESA is silent, such as the employees’ common-law rights.

Relying on its previous decision, Abbot v. Bombardier Inc., 2007 ONCA 233, the ONCA reminded that the purpose of section 9(1) of the ESA is to protect minimum statutory entitlements that are related to length of employment where the purchaser of a business, or part of a business, continues to employ the employees of the vendor, following the sale. Such statutory entitlements include holiday pay, vacation pay, pregnancy leave, notice, severance pay, etc.

Krishnamoorthy reaffirms that section 9(1) of the ESA does not create a continuation of employment relationship upon the sale of a business for purposes of the common law and a wrongful dismissal action. It also clarifies that section 9(1) does not require the purchasers to offer employment to the vendor’s employees on the same terms as their original contracts. If, following the sale of business, the employee is offered and accepted employment with his new employer, a new contract of employment is formed. No fresh or additional consideration is required to support a new employment contract.

In conclusion, Krishnamoorthy serves as a reminder for purchasers of a business that they would be assuming the vendor’s statutory termination liability with respect to every employee whose employment is continued subsequent to closing.

To minimize their liability, the purchasers can offer the vendor’s employees lesser terms and, importantly, introduce a carefully drafted termination clause that would limit their entitlements at dismissal.