Saturday, March 5, 2016

The Rule Against Assignment of Employment Contracts

There's an old doctrine in the common law that an employment contract cannot be assigned without consent - i.e. an employer can't tell you, "From now on, you work for that guy."

It is actually quite a complicated doctrine, particularly in the modern world of complex corporate structures.  The legal personality of the employer is often a flexible concept, and moreover isn't generally significant to the employee:  The identity of the person to whom my boss reports is of little or no importance to me.  As long as the employer respects the core terms of the employment contract (for instance, relating to compensation, working conditions, and duties), the employee doesn't care what name is on his pay cheques.

The underlying policy rationale is that workers should not be treated as chattel, to be bought, sold, or traded between employers.

Further, the courts have regularly held that the purpose of the rule is to protect employees from unilateral changes to their employment contracts.

The trouble is that it doesn't provide much meaningful protection in that way, and in fact has the potential to yield counter-productive results.  Moreover, its purpose has been largely subsumed by other doctrines.

Asset Purchase versus Share Purchase

There are a couple of different types of ways that businesses get bought.  One is by way of 'asset purchase', involving a different business purchasing all the assets (equipment, inventory, receivables, intellectual property, good will, etc.) of an existing business.

The other is by way of 'share purchase', involving the new business buying the corporate shares from the existing shareholders.

In a share purchase, the original employer is left intact.  It remains a party to all the contracts, including employment contracts, it previously entered into.  The 'buyer' is just a shareholder; the 'employer' remains the same corporate entity.  In an asset purchase, on the other hand, existing contracts must be assigned, or new contracts entered into, because the buyer is the new employer, and isn't a party to any of those existing contracts.  (So if I sell the assets of my business, the buyer will need to either get an assignment of my commercial lease, or alternatively will need to enter into a new lease.)

Thus, in a share purchase, while ownership of the employer has shifted, the identity of the employer - that is, the corporation - has not changed.  Thus, the employees remain with the existing employer, subject to the same terms and conditions as before.  From a legal perspective, there has been no change in their employment contract.

By contrast, in an asset purchase, if the purchaser wants to retain the existing employees, the purchaser must offer them new contracts of employment.  NB:  This needs to be done with competent legal advice.  By operation of the Employment Standards Act, 2000, the employees will typically be deemed to have their service with the previous employer factor into certain entitlements.  Likewise, the buyer will typically be regarded as a 'successor employer' at common law, with all the results that entails.

But this doesn't always happen.  In many asset transactions, the employees are left out of the loop.  They don't necessarily know what's going on, and don't really care - they come to work day after day, do the same job, the front-line employees report to the same managers, etc.  They may be aware that there's some high-level restructuring going on, but as long as they don't get told "Don't come into work tomorrow", they'll continue to come into work, and expect to get paid, and as long as that happens, they're satisfied.

At law, the implication of the rule against assignments of employment contracts is that the old employment contract will be terminated, and an unwritten employment contract will have formed between the employee and the new employer.

And, again, 19 times out of 20, the employee won't care.  It's a fairly rare case to begin with where a buyer who doesn't use employment contracts will buy a business from an employer who has integrated written employment contracts with express terms beyond the most fundamental (like compensation, nature of the work, etc.), and most of the time, other express terms in a written contract are to the disadvantage of the employee.  So an incidental voiding of existing written terms doesn't hurt the employee.

But, perhaps more importantly, the employee will not even know.  The only visible change to the employee in such a case will often be that there's a different name on the pay cheque, and that doesn't necessarily mean anything:  Even without an asset transaction, and quite often following a share transaction, there are frequently high-level corporate restructures which result in a different corporate entity processing the payroll.  The 'common employer' doctrine being what it is, that doesn't actually signify any change in the employee's status.  (The case law on point suggests that the rule against assignment doesn't apply to transitions between 'common employers':  See, for example, Yellow Pages Group v. Anderson.)

There are, however, rare cases where a written employment contract contains unusual perks to the employee's advantage - for instance, a golden parachute clause which grants the employee more significant termination entitlements than usual.  In such cases, a 'deemed termination' of the original contract, where the employee is not even aware of the facts giving rise to this deemed termination, ostensibly for the purpose of 'protecting an employee against changes in his employment contract'...makes no sense at all.

The Purpose is Largely Obsolete

In recent decades, we have developed a very elaborate doctrine to protect employees from substantial and unilateral changes in the terms and conditions of employment:  Constructive dismissal.

If my employer 'sells' me to another employer, who insists on changing the terms of my employment relationship in fundamental ways, then - without resorting to my old employer's inability to sell me, without treating my old employer as having terminated my contract, I can claim to have been constructively dismissed simply by virtue of the changes themselves.  This is true whether the transition was an asset transaction, a share transaction, or the exact same management making structural changes to the workplace.

The mitigation doctrine also factors importantly into the common law analysis of the rule against assignment as it presently stands:  Suppose in an asset transaction, my old employer terminates my employment, and the purchaser offers me a new position.  Could I turn down the new offer, and sue my old employer for wrongful dismissal?  Maybe, but in practice, 'mitigation' will often be a significant obstacle to such an approach.  If the new position is on similar terms and conditions to my previous employment, then in most circumstances a Court would regard my refusal of the new offer as a 'failure to mitigate'.

Thus, in most such transactions, caution is (or should be) used by the employers to ensure that the new offer of employment is closely aligned with the existing terms and conditions of employment, to put the employees into a position where they basically have to take the new position.

In light of the constructive dismissal doctrine, we don't need the rule against assignments to protect employees against changes in their employment relationship.  In light of the mitigation doctrine, it doesn't effectively protect against the 'trading' of employees anyways.

Case in Point:  Dundee Securities Ltd.

In December, the Rule arose in the context of a procedural decision in the case of Dundee Securities Ltd. v. Atul (Al) Verma, following a motion by Verma to require the plaintiff to answer certain questions.

Mr. Verma was hired as an investment advisor by Macquarie Canada Services Ltd.  Under the terms of the contract, Macquarie provided Verma with the sum of $505,000, apparently repayable upon resignation - Verma says that this was a signing bonus, structured as a 'forgivable loan' for tax purposes, not to be repaid if Verma was terminated without cause.

Three months later, Macquarie was acquired by Richardson GMP.

Shortly thereafter, Richardson GMP entered into an arrangement with Dundee to assign certain agreements (including Verma's) to Dundee...and the way they structured it was a little complicated:  Richardson GMP incorporated a numbered holding company, and then transferred the shares to Dundee. which then amalgamated with the numbered company.  (Immediately thereafter, Verma left, claiming that his contract was effectively terminated by the change.  Dundee is suing on the 'loan'; Verma is counterclaiming in constructive dismissal, among other things.)

Remember what I said earlier about the Rule against assignment not applying to common employers?  This whole structure looks like an end run around the Rule.  Technically, it's actually kind of clean:  The numbered holding company was a wholly owned subsidiary of Richardson GMP when it became the nominal employer - thus, it was a permissible assignment under the common employer doctrine.  Then because the transition to Dundee was accomplished by way of a share transfer, the Rule is still not triggered.

In the real world of employment law, that kind of technicality tends not to carry the day, and there would be compelling policy reasons to treat a share transfer of a wholly-owned subsidiary as an asset purchase, for the purposes of the Rule.

On the other hand, it's a very technical rule to begin with.  Which is, in large measure, my point:  It's absurd to treat Verma's employment status as substantively different because the corporate lawyers wagged their fingers in a particular way as opposed to another means of attaining the same goal.

Likewise, one can certainly imagine scenarios where an individual in Verma's shoes might reasonably feel that they've been wronged by having their employment relationship shifted in such a way.  And other scenarios where that feeling would be unreasonable.  And the reasonableness of Verma's perception has nothing to do with the corporate prestidigitation that occurred behind the scenes.

In other words, whether or not Verma should be regarded as having resigned or as having been terminated should be a contextual question of fact within the constructive dismissal framework - was it reasonable for him to regard the transition to Dundee as a fundamental change to the terms and conditions of employment?

The Future of the Rule

There's little question that the Rule is, in broad terms, still good law, even though it comes up very seldom.

As is much of employment law, the Rule is asymmetrical in its purpose:  It seeks to protect employees.  As a result, one can expect that it will probably be applied in the rare case where a successor employer tries to rely on a termination clause in the original employment contract, etc., but that it will probably not be applied where an employee is seeking to enforce a term of the original employment contract against a successor employer following an asset sale.

And there are certainly important questions that arise following a transition of an employer, in terms of the substantive rights and remedies of employees.  But I think we seriously need to question whether "Was it an asset transaction or a share transaction?" should really be one of them.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

1 comment:

  1. Successor employers want to have it both ways, retain the acquired employee to help with the transition of the business to the new owner and then dismiss them with minimal costs when the transition phase is over.