Successor Employer: Court Found Asset Purchaser Had “Going Concern”

There are two ways for a company to change hands:

1. through a share purchase, or
2. through an asset purchase.

As we have previously written, from an employee’s perspective, the main difference between the two is their relationship with the company. In a share purchase, the employee remains the employee of the company, and everything remains business as usual through the transfer of ownership. In an asset purchase, the employee’s employment terminates, unless the purchaser offers the employee employment, and the employee accepts.

The Difference Between a Share Purchase and an Asset Purchase for Employers and Employees

The difference is continuity of service. In a share purchase, the employee’s previous tenure is recognized automatically, and continues. In an asset purchase, the purchaser has the option of acknowledging the employee’s service with the previous owner when offering the employee employment for purposes of the common law (the Employment Standards Act, 2000 deems this employment continuous). 

This is not a guaranteed outcome. Sometimes, the circumstances of an asset purchase can lead to a finding that the purchaser is in fact a successor employer (referred to as a “going concern”), entitling an employee to reasonable notice, based on their previous service. In Manthadi v ASCO Manufacturing, 2023 ONSC 3499, Justice L. Shaw addressed that exact scenario.

Manthadi v ASCO Manufacturing

Here, the plaintiff had worked for the previous owner, 63732 Ontario Limited (“637”) since 1981. In November 2017, 2603420 Ontario Inc. (“260”), purchased all of 637’s tangible and intangible assets. The plaintiff claimed that 260 offered her a permanent, full-time position with it – the defendant claimed that it offered her a position for a fixed period to assist with the transition. When the transfer became effective the plaintiff signed a release with 637 in exchange for a lump sum of approximately $5,800.00, representing her entitlements on dismissal under the Employment Standards Act, 2000.

The plaintiff worked for the new owners for approximately six weeks when she was put on “layoff” and never recalled to work. The plaintiff sued for wrongful dismissal and claimed that 260 had offered her full-time employment which recognized her prior length of service.

The Court reviewed 260’s purchase to determine whether the transfer was in fact an asset purchase or whether the transition was 260 acquiring the defendant as a “going concern”. Justice Shaw relied on a test from a case in the Supreme Court of British Columbia to outline the criteria to be considered to make this determination:

1. the nature of the transaction;
2. the portion of the sale price allocated to goodwill;
3. whether the duties of the individual or the terms of the employment with the new company are similar to and of the same character to the duties the individual had performed for the vendor of the business;
4. whether the individual received a substantially reduced salary and no benefits;
5. whether the purchased company had ceased its operation prior to the purchaser and vendor entering into discussions for the purchase and sale of the company;
6. whether the vendor told their employees that the purchaser would not recognize their prior service;
7. whether the purchaser told employees that it would be “business as usual”; and
8. whether the purchaser retained all of the vendor’s employees and the right to use the vendor’s name.

Court Findings

The Court found the purchase was in fact of a “going concern”, relying on the plaintiff’s income remaining the same and that operations at the defendant were not interrupted or otherwise impacted by the purchase. Accordingly, the plaintiff:

1. was found to be entitled to reasonable notice of the dismissal by the defendant, and
2. was awarded a notice period of twelve months (after having worked under the new administration for only six weeks).

Conclusion

The concept of an asset purchase actually being a purchase of a “going concern” is not one that has been widely addressed in Ontario jurisprudence, but it has been the law for some time. An employer carrying out an asset purchase would do well to consider the lessons of this case – where there is no interruption in business and an employee’s terms and conditions of employment remain static, the purchaser may have bought more than intended, including the previous owner’s liabilities to their staff.

If you are an employer, we can assist you with dismissals as well as contracts and policies – including in the sale of a business. Similarly, if you are an employee whose employer has been purchased, we may be able to help you with understanding the transition, including your rights on dismissal.