Canada: Court of Appeal Confirms Purchaser Not Bound to Vendor’s Employment Contracts

By Jeremy Schwartz and Frank Portman - Stringer LLP

November 28, 2017

A particularly nuanced aspect of a sale of business involves offering employment to employees of the vendor. The determination of risk, as well as whether the vendor or purchaser takes on liability for employment obligations, is often a key feature of such transactions and price.

A recent case from the Court of Appeal, reversing a motion judge’s ruling, illustrated the advantage of ensuring that sound employment law advice is obtained prior to such transactions, and how it can limit the liability inherited by a purchaser.

Krishnamoorthy v. Olympus Canada Inc

In 2000, the Plaintiff started a job with a company (the Vendor), that provided exclusive distribution services for a manufacturer.  In 2005, the manufacturer ended its contractual relationship with the Vendor, and created its own company (the Purchaser) to perform the same work.

The Purchaser purchased some of the assets of the Vendor.  It also offered employment to various employees of the Vendor, including the Plaintiff.  The Plaintiff accepted the offer of employment provided to him by the Purchaser (the “Offer”).  That offer included a termination clause limiting the employee’s entitlements on termination. (It is important to note that the analysis and result would likely have been completely different had this been a share purchase, not an asset purchase).

The Plaintiff’s work at the Purchaser was essentially identical in role and day-to-day tasks as the role he performed at the Vendor. He continued to work for the Purchaser for 10 years until in 2015, when his employment was terminated.

The Plaintiff brought an action for wrongful dismissal against the Purchaser, claiming the Offer, which he had accepted, was not an enforceable agreement.

The Plaintiff argued that the Purchaser assumed the obligations of the Employee’s contract of employment with the Vendor.  The Plaintiff argued that the Offer was therefore an amendment to the existing contract, rather than a new contract, and fresh consideration was required to make it enforceable.

“Consideration” is a legal term that means a benefit that accrues to a party to a contract in exchange for the bargain.  Both parties must receive consideration in order for a contract to be enforceable.  In the case of a material (and disadvantageous) variation of a contract, both parties must receive consideration that they would not have received under the non-amended contract.

However, so long as the employee accepts the contract in advance, a new employment contract serves as consideration.  It provides the employee with a paying job that they would not be otherwise entitled to, and provides the employer with the benefit of that employee’s services.  In other words, if the Offer were deemed to be a new contract, independent of the prior relationship between the Vendor and the Plaintiff, its terms would be enforceable (subject to any other legal issues).

The Plaintiff relied on section 9(1) of the Employment Standards Act, 2000 (ESA), in support of his argument.  That section reads:

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 employment.

The Plaintiff argued that this section meant that, when a purchaser hires an employee from a vendor, the contract transitions, uninterrupted, from the vendor to the purchaser.  In addition, the Plaintiff suggested that the unchanged duties and day-to-day job activities of the Plaintiff as between the Vendor and the Plaintiff supported his position.

The Court of Appeal rejected that argument, and found that the new contract was not void for lack of consideration.

The Court found that section 9(1) does not bind a purchaser to a vendor’s employment contract.  Rather, it stipulates that an employee’s ESA entitlements with a purchaser are calculated by incorporating their service with a vendor.  It does not impact the ability of a purchaser to offer the vendor’s employees employment under different conditions and subject to different terms.  It also does not require the purchaser to offer employment to all or any of the vendor’s employees.

Since the Plaintiff had no right to employment with the Purchaser, the Offer constituted sufficient consideration to render the contract enforceable.

The Court of Appeal reversed the Motions Judge’s decision on that basis. The employer is not yet out of the woods.  The Plaintiff raised other alternative arguments about the validity of the contract, which questions were reverted back to the trial court to be determined.

Lessons for Employers

An employee is free to reject an offer of employment from a purchaser in an asset sale.  However, if they do so, except in rare cases, their claims for entitlements on termination (and wrongful dismissal) would only be against the vendor. 

In our experience, employment transitions in sales are too often treated as an afterthought, or as a last-minute checkbox.  Consulting with labour and employment counsel early in the process, before the deal is structured, can help vendors and purchasers to find cost savings and mitigate risk.  Moreover, properly crafted offer letters are not only important tools to ensure sufficient numbers of employees accept, but they are key to enforceability in the years that follow.