Sale of Business and the Effect on Employees

business sold

If a business is sold and the new owner keeps the employees, have they entered into a new contract of employment? This is a question that we are asked all the time and the answer, as it often is, is that “it depends”. The primary factor in the analysis will be the nature of the sale; was it a share purchase or an asset purchase.

If the company was sold in a share purchase, then the employer continues to be the same entity, and there is no termination or new contract of employment. There may be new shareholders, but that does not change the relationship between the employee and employee(s).

Conversely, if there is an asset sale, the issue becomes more complex. Employment standards legislation, such as the Employment Standards Act, 2000 in Ontario, will generally provide that employment is deemed to continue if certain criteria are met, but that only applies for the purpose of the legislation; it does not impact the common law analysis.

This was the issue facing the Ontario Court of Appeal recently in Krishnamoorthy v. Olympus Canada Inc. The facts in that case were fairly simple and the scenario was common:

  • Mr. Krishnamoorthy was employed by Carsen Group, which was a distributor of Olympus America.
  • Olympus America terminated the distributor arrangement and a new corporate entity, Olympus Canada, purchased some of the assets of Carsen Group.
  • Olympus  Canada made an  offer of employment  to Mr. Krishnamoorthy which included terms substantially similar  to those he had with Carsen.
  • However, the offer included a termination clause which limited the compensation Mr. Krishnamoorthy would  receive in the event of termination without cause to the greater of (1) notice or pay in lieu of  notice and severance pay under the Employment Standards Act, 2000, S.O. 2000, c. 41 (the “ESA”), or (2) four weeks’ pay  per year of service with Olympus Canada or Carsen, up to a maximum of 10 months, if Mr. Krishnamoorthy signed a release.
  • The offer also stated that Mr. Krishnamoorthy’s service with Carsen would not be recognized other than as required by law.
  • Mr. Krishnamoorthy accepted.
  • Subsequently, Olympus Canada dismissed Mr. Krishnamoorthy in accordance with the termination clause.
  • Mr. Krishnamoorthy commenced an action for wrongful dismissal, alleging that the termination clause was unenforceable as the contract was void for lack of consideration.

On a motion for summary judgment, Mr. Krishnamoorthy was successful. However, Olympus Canada appealed, and the Court of Appeal found that the  motion judge erred in concluding that there was no consideration for the termination clause and that therefore the clause was invalid.

The Court of Appeal referred to its own 1986 decision in Addison v. M. Loeb Ltd., in which it held that

the sale of a business, if it results in  the change of the legal identity of the  employer, constitutes a constructive termination of the employment…If  the employee is offered and accepts employment by his new employer,  a new contract of employment is entered into.

The Court of Appeal confirmed that “[a]lthough s.  9 of the ESA deems there to be continuity of  employment if certain requirements are met, it does not  deem there to be continuity for all purposes”. Ultimately, they confirmed that

In short, Olympus Canada’s offer of employment amounted to consideration for the termination clause.  The motion judge erred in concluding otherwise.

Takeaway

This is a fairly common scenario, yet there is almost always confusion and uncertainty. This decision of Ontario’s highest court is authority for the proposition that if the purchasing company offers employment to an employee of the selling company, that will constitute consideration in exchange for the employee’s agreement to be bound by the contract.

As always, we strongly recommend that organizations in this situation seek advice from an Employment Lawyer. We work with vendor and purchaser companies to ensure that their rights are protected, both in the context of the sale of the business and vis-a-vis the employees.

We also work with individuals, and encourage them to consult an Employment Lawyer  before signing any offer.

Stuart Rudner

I am the founder of Rudner Law. In 2016, 2017 and 2018, I was selected by my peers for inclusion in ‘The Best Lawyers in Canada’ in the area of Employment Law and have been repeatedly named in Canadian HR Reporter’s Employment Lawyers Directory (a comprehensive directory of the top employment law and immigration law practitioners in Canada), and was also named one of Canada’s top Legal Social Media Influencers.