Thursday, April 19, 2012

Buying a Business, and Employment Liabilities Too

This is an issue I've seen several times for small employers who have bought businesses, and ended up having problems with a long-service employee of that business.  They want to be rid of the employee, but probably can't meet the high threshold for just cause, and they're quite surprised to hear that the employee's "length of service" for the purpose of calculating termination entitlements includes their service before the business was bought.

With share purchase transactions (where the corporation remains intact but the shares are transferred to the purchaser), it's a really straightforward framework:  The employer is the corporation, the corporation is a legal person, and that same legal person continues to be the employer.  (There are ways of structuring the purchase to require the existing employees to be actually terminated, with holdbacks and/or indemnities for potential liabilities resulting therefrom, but barring such an arrangement, the employee's actual employment arrangement is unchanged by the transaction.)

Asset purchase transactions are a little more complicated.  I buy your facility, I buy your equipment, I buy your trademarks, intellectual property, and goodwill...what happens to your employees?

Well, I can decline to offer them jobs, in which case you're on the hook for wrongful dismissal damages.  Or I can make them offers of new employment.  But if I do so, and it doesn't work out with some of them, I don't want to have to pay them months and months of pay in lieu of notice.  So can I offer them a contract that stipulates that they won't get credit for their service with you for termination purposes?

The short answer is No.  Or at least, not usually.

The common law on the point suggests that it would be possible.  There's a common law doctrine which holds that it is an implied term of an employment contract, where a successor employer is involved, that the employee will be credited for service with the prior employer, unless the new employer advises the employee otherwise at the point of hire.  That made it possible for the new employer to start with a clean slate.

However, this had some adverse consequences from a policy perspective.  You take an employee who has been employed for decades in a given position, who would be entitled to many months of notice, except that the company changed hands a couple years ago - a transition which the employee barely even noticed, because her job remained otherwise unchanged.  So she gets shortchanged on termination for reasons which are essentially arbitrary, and completely disconnected to any of the relevant factors for calculating notice.

So, in Ontario, we now have s.9 of the Employment Standards Act, 2000:
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 notice.
Remember, the ESA sets out minimum notice periods for termination of employment, based entirely on length of service, and trumps any inconsistent terms from common law or contract.  In other words, if I enter into a contract with the employees that they won't get credit for prior service, that would be in conflict with s.9, and therefore be void.

It's commonly believed - and I've even heard this from experienced employment lawyers - that the problem can be solved by requiring the vendor to formally sever the employment relationship.  So the seller fires the employee, pays out statutory notice and severance if applicable, the buyer offers a new contract on essentially the same terms of employment to start on the next day, and the seller is protected from further common law liabilities because the employee can be expected to mitigate her loss by accepting the new job. The theory is that this is a way of 'resetting' the length of service clock.

This does not work.

In fact, unless the break in the employment relationship is at least 13 weeks (i.e. from when the transaction closed to when the employee is re-hired), s.9 will apply in full force, deeming the employment relationship not to have been severed, regardless of whether or not notice/severance was provided.

So what can I do to protect myself from major employment-related liabilities?

Well, there are always options.  The first is to simply not hire the employees.  Of course, needing to restaff (and train the new staff for) the entire business is often not a practical solution.

So another option is to accept a certain continuity in the employment relationship, and to take the more established approach for limiting your liabilities with existing employees, because liabilities can be limited to as little as the ESA minimums, if done correctly.  Unless severance pay is required, ESA minimums are usually relatively modest, maxing out at 8 weeks notice.

However, to implement such a contract in a way that maximizes its possibility of being enforced by a Court, an employer will certainly need legal assistance.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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