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Thanks But No Thanks: Can Employees of the Vendor Company Reject an Offer of Employment from a Purchaser?

Employment Contracts

There is a reason that corporate lawyers often ask for input from their employment law colleagues when a business is in the process of being sold. The issue of what happens to employees upon the sale of a company can be highly complex and  depends on the nature of the sale.

In a share purchase, the purchaser essentially steps into the shoes of the seller, acquiring all assets and liabilities, including liability for all current employment relationships. This means that from the perspective of an employee, there is no change to their employment whatsoever – there is no break in service when the sale occurs, and they continue to be employed pursuant to the existing terms of the employment relationship.

The issues become more complex in asset purchases, where the vendor and purchaser negotiate specifically which assets and liabilities, are being assumed by the purchaser. In this case, the purchaser does not step into the shoes of the vendor. Instead, the purchaser picks and chooses which aspects of the business they would like to acquire, with the remainder being left behind with the vendor.

Employees are not “assets” which can be handed over to a purchaser; employees will not automatically continue working for the purchaser the way they would in a share purchase sale. When the sale closes and the vendor ceases operations, it triggers the termination of the employment relationship. This can be a potentially huge liability for the vendor (and, unfortunately, one that the parties often do no consider until it is too late).

One of the ways in which a vendor may try to alleviate this liability is to require that the purchaser make offers of employment to all, or some, of its existing employees. Employees whose employment is terminated have a duty to mitigate their damages by taking reasonable steps to find new employment to replace the compensation and benefits that have been lost. In other words, an employee may have an obligation to accept reasonable offers of employment that will allow them to reduce or eliminate the damages they would otherwise have suffered as a result of their dismissal.

As a result, employees who refuse reasonable offers of continuing employment with the purchaser of a company may be found to have failed their duty to mitigate their damages and, as a consequence, have limited ability to recover those damages.

However, the key thing that the vendor must keep in mind is that the offer of continuing employment must be reasonable. The principle of mitigation does not require an employee to accept a job that is entirely different from the job they were performing previously, or which requires them to make substantial changes to their schedule or accept a significant reduction in pay or benefits. If the employment being offered is not comparable, the employee may not have any obligation to accept it, even if such acceptance would help to partially mitigate their damages.

An example of this type of offer can be found in the recent decision of Dussault v Imperial Oil Limited. In this case, two long service employees of Imperial Oil were offered employment by Mac’s Convenience Stores Inc. after Mac’s purchased the branch of Imperial Oil’s business in which the employees worked. The offers were rejected by both employees, as the terms were “less favourable” than those they had previously had with Imperial Oil. For example, the offers stated that the employees’ salaries would be preserved for a period of eighteen months only, after which there was some indication that their compensation would be reduced. In addition, the employees’ service with Imperial Oil, of 36 and 39 years respectively, would not be recognized by Mac’s going forward.

After rejecting the offers from Mac’s, the two employees were dismissed by Imperial Oil, and subsequently sued, alleging wrongful dismissal. Imperial Oil alleged that the employees had failed to mitigate their damages when they refused to accept the purchaser’s offers of employment. However, the court disagreed, finding that the terms of employment being offered were sufficiently different to make the rejection of the offer reasonable. In particular, the court found that it was unreasonable to expect the employees to give up their many years of service with Imperial Oil.

As a result, there was no deduction made from the damages awarded to both employees as a result of any failure to mitigate.

A Note About Reasonable Notice Periods…

The Dussault case is also remarkable for providing us with yet another example of a court awarding a reasonable notice period well in excess of the informal 24 month cap that was previously believed to limit any potential notice awards.

As a result of the incredibly long service of both employees, their ages (63 and 57), and the fact that both held senior level positions at the time of termination, the court awarded each employee a 26 month notice period.

A Final Takeaway

It is crucial for vendors to take the time to consider any potential obligations they may have to their employees prior to finalizing the terms of the sale of their business. Ideally, liability should be something that is negotiated as part of the sale, rather than something that is dealt with after the terms are already set. Similarly, purchasers should carefully consider the extent of the potential liability they are taking on before they agree to offer employment to employees from the vendor, or indemnify the vendor for costs relating to dismissal.

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