Selling a Business: Successor Employer’s Unexpected Liability, The Lawyer’s Daily (August 17, 2020)

(this article originally appeared in the Lawyer’s Daily on August 17, 2020)

By Nikolay Y. Chsherbinin

Employment contracts are contracts of personal services. They cannot be transferred from one employer to another without the parties’ consent. If an employer sells its business and a purchaser hires its employees there is a risk that the employees’ periods of employment with the vendor and purchaser could be stitched and, consequently, augment the successor employer’s financial liability.

An employment case in point is Manthadi v ASCO Manufacturing, 2020 ONCA 485, where the Ontario Court of Appeal reviewed a slew of employment law concepts that get engaged during the sale of a business and offered helpful practice-related insights for lawyers.

In Manthadi, from Feb. 7, 1981, until Nov. 2, 2017, Sandra Manthadi worked at 63732 Ontario Limited (637) as a braze welder. On Nov. 1, 2017, 637 sold its assets to ASCO Manufacturing Limited (ASCO), which resulted in termination of Manthadi’s employment. ASCO rehired Manthadi pursuant to a verbal agreement, without requiring her to apply or attend an interview. Manthadi continued to work similar hours at a similar pay until Dec. 13, 2017, when ASCO laid her off, citing “shortage of work.” When she was not recalled, Manthadi sued ASCO for wrongful dismissal. Her civil action was advanced by simplified procedure rules and adjudicated by way of a motion for summary judgment.

At the motion, ASCO argued that it hired Manthadi as a general labourer on a temporary basis to help move the purchased equipment to its new location. Manthadi contended that she was hired as an indefinite employee to continue her duties as a welder. The parties also disagreed as to whether there was an express understanding that Manthadi would be credited with her years of service with 637. Despite these significant, factual disputes the motion judge concluded that summary judgment was the appropriate means by which to adjudicate the action. She resolved that Manthadi had been continually employed for 36 years and awarded her $66,391 in lieu of 20 months’ reasonable notice period.

ASCO appealed. It successfully argued that given the nature of the parties’ factual disputes summary judgment was inappropriate. It also asserted that the motion judge erred, inter alia, in that Manthadi’s employment with ASCO was a continuation of her employment with 637.

The simplified procedure regime is designed to reduce legal costs and to limit the extent of pretrial proceedings. While the simplified procedure rules allow the matter to be determined in an expedited fashion, they also constrain the parties’ ability to marshal evidence on a summary judgment motion. The drawback is that discoveries are restricted and cross-examinations on affidavits and examinations of witnesses on motions are not allowed.

On appeal, ASCO argued that its case was hampered because it could neither cross-examine Manthadi on her affidavit supporting the motion nor could it examine the third party, 637. In response, the Court of Appeal observed that summary judgment motions should be discouraged where they would simply require the parties to prepare for and deal with additional procedures, expending resources and time, which would have enabled them to proceed to a summary trial.

Having granted the motion in Manthadi’s favour, the motion judge did not resolve the central dispute vis-à-vis the basis on which ASCO hired Manthadi. In this regard, the Court of Appeal observed that, if accepted at trial, ASCO’s argument that it hired Manthadi on a temporary basis for the specific task could support finding that she was a fixed term employee who is not entitled to notice of dismissal at common law. A fixed term employment may be defined not only by a definite period of time, but also the duration of a specific task, or by reference to the happening of a specified event. In a fixed term employment setting, an employer is not required to provide notice of dismissal at common law when the term expires, because the employment agreement simply terminates in accordance with the contract.

The motion judge proceeded on the erroneous view that the common law supported the same “concept of continuous employment” as did s. 9(1) of the Employment Standards Act, 2000 (ESA). However, in its earlier decision, Krishnamoorthy v. Olympus Canada Inc. 2017 ONCA 873, the Court of Appeal reaffirmed that s. 9(1) of the ESA does not create a continuation of employment relationship upon the sale of a business for the common law purposes. The language of s. 9(1) makes it clear that employment is deemed continuous only “for the purposes of this Act.” On this point, in Manthadi, the appellate court emphasized that: “A sharp distinction must be drawn between termination of employment by a successor employer under the Employment Standards Act and under the common law.” It explained that while the ESA is clear that the employment of employees of the vendor of a business who are employed by the purchaser is deemed not to be terminated for the purposes of the ESA , the common law is equally clear that such employees are terminated (by constructive dismissal) when their employer sells the business and there is a change in the identity of the employer.

There is a significant distinction between the sale of shares and sale of assets. Only the latter results in a sale of business. At law, a corporation is an artificial person that is distinct from its shareholders. A share purchase amounts to merely a change in shareholders within the same legal entity, while the asset purchase results in conveyance of assets to a completely unrelated entity. The resultant change in the legal identity of the employer brings about a constructive termination of employment, since an employment contract cannot be assigned to a new employer without the parties’ consent.

Manthadi serves as a reminder for both corporate employers and employees that there are specific employment law concepts at play during a sale of business. Unless the successor employer is able to unambiguously establish that an employee was a fixed term employee or that the parties expressly agreed that no credit will be given for the employee’s prior years of service, it will be burdened with displacing the presumption that the employee’s prior service should be recognized in the assessment of reasonable notice. This said, even without stitching together the employee’s two terms of service, in the right circumstances, a court could give sufficient weight to the employee’s prior experience and the benefit of that experience to the successor employer without giving unnecessary prominence to the employee’s length of service with the predecessor employer, in order to arrive at a fair result.

Prudent corporate employers should consult an employment lawyer when negotiating the purchase of a business and making offers of employment to the vendor’s employees. Failure to do so could substantially increase the successor employer’s wrongful dismissal damages.