Where Does The Buck Stop?

Column: "Employment Issues" - Legal Matters Issue 918

Written by: R. Yeager

Businesses that employ people are bought and sold every day. Most often, the employments of the employees float along on the surface carrying on past a sale of the business that employs them, and yet underneath the surface, the legal currents can be in turmoil causing confusion and surprising results for new owner, old owner and the employee.

What makes an employment contract different from other contracts is that an employment contract is a contract for personal services and as such it cannot be assigned to a new employer without the consent of the parties. At common law the sale of a business where it resulted in the change of the legal identity of the employer, caused all existing employment contracts of the business so sold to terminate.

However, in a sale of a business, what happens to the implied termination of employment upon sale mentioned above?

It depends on a few things.

Employee Dismissal From The Sale of A Business

In the case where an employee’s employment is terminated by the sale of the business as a going concern and not adopted or continued by the purchaser, that employee has a claim for notice against the selling employer based on the normal principles of employment law, including constructive dismissal and outright dismissal.

In the case where the employee’s employment continues with the purchaser of the business past the sale of the business, things get more complicated.

The initial presumption is that the employment with the selling employer was terminated with the sale. That presumption can be supported by the contents of the purchase and sale agreements between the seller of the business and the purchaser of the business. For instance, there may be an explicit term in the purchase and sale documents stating that the employments of the employees be terminated by the employer who is selling the business. If the selling employer has entered into agreements that indicate it has not consented to the assignment of the employment contract to the new business owner and employer, and the selling employer has done the usual things an employer does to reflect an ending of employment, then there may be a break in the employment regardless of its de facto continuation. If the new owner acts in a way consistent with this break in employment and creates and maintains conditions reflecting a new employment, then the initial presumption at law that the employment with the selling employer was terminated with the sale probably prevails.

Where employment continues with the new employer and it can be shown that the employee accepted the new employer as the party solely responsible for all employment obligations owed arising out of the total employment with old and new employer, then any employee claim against the old selling employer is extinguished.

Complications Arising From The Sale

A potential complication is set out in the Employment Standards Act, which states that where all or part of a business is sold, the employment of an employee of the business is deemed, for the purposes of the Act, to be continuous and uninterrupted by the sale. However, the common law courts have ruled that the Act in this regard is inconsistent with the common law and does not supplant or overwrite the common law, because the Act is only intended to apply for the purposes described in the Act. In this way, the Act can potentially supplement the common law, but it does not replace common law rights. As an example of the operation of the Act, a purchaser of a business may find itself liable to pay vacation pay or overtime or other pay elements to an employee owed under the Act and accrued from before the sale.

To further complicate matters, in circumstances where there is a purchase and sale of the business, the employee continues with the same employment, the purchaser has done something which indicates it recognizes the past service of the employee, and the vendor has not obtained sufficient closure as against the rights of the employee, the employee may be entitled to claim damages against the old employer for notice owed arising from a premature dismissal by the new employer. This was the case in a recent Court of Appeal decision. The rule that arises from the decision is that there is not a presumption at law of the extinguishment of employee rights against the selling employer unless that is specifically bargained for. In other words, the acceptance of new employment with the purchasing employer does not mean the employee gives up his or her rights against the selling employer, unless it can be clearly shown to have been explicitly agreed.

Reality For The Employee's Employment

In the real world, the paperwork and the actual conduct of the parties often do not match up. New employers do many things administratively that are consistent with a continuation of employment, not a new employment. Old employers in selling their businesses need to beware these pitfalls.

The law of wrongful dismissal and employment sources from earlier times, from the notion of master and servant. The idea of master and servant invokes submission and dominance and is offensive to our modern outlook. However, general rules developed in antiquated concepts such as master and servant are still in use today in wrongful dismissal cases.

For example, the question how great is the master’s control over the life of the servant is alive and well. Certainly the employer’s control should be greatest and strongest during the actual times where employment services are being rendered by the employee, in other words, during the work day and during working hours. But is the reach of the employer broader than merely the work day? The general principal derived down from antiquity is this: if the servant does anything incompatible with the due or faithful discharge of his duty to his master, the master has the right to dismiss him. The misconduct need not be misconduct in the carrying out of the employment services. If the misconduct is prejudicial or likely to be prejudicial to the interests or reputation of the master, the master will be justified in dismissing the servant.

The General Rule From Antiquity Has Two Parts

The first part of the rule gives the employer the right to dismiss if the employee does anything incompatible. In the modern context, the employer no longer has this unchecked power to dismiss summarily for anything incompatible. A quick look at modern just cause cases will confirm the many tests the employer is now put to by the law in order to prove that the employee has done something incompatible with due and faithful discharge of duty that would justify summary dismissal.
The second part of the general rule from antiquity introduces the concept of employee behaviour outside of working hours, during the employee’s own time. It seems anachronistic that employee’s private lives can come under the scrutiny of the employer. For evidence that this actually occurs in the workplace today, recall my column from February 2007 about employees getting “dooced” by blogging after hours and from home about their employers in a way that affected the employer’s business. Recall also a column from March 2007 about romantic liaisons, where an employee who had multiple affairs with fellow employees after hours was justifiably dismissed because of the sexualized work environment created in the workplace by that employee’s after-hours activities. The sexualized work environment displaced the affected employees devotion to work, and thereby caused prejudice to the employer in the conduct of its business. In both the dooced and romantic liaisons situations, what the court looked at was whether the conduct in question, outside the workplace, was prejudicial or likely to be prejudicial to the interests or reputation of the employer. In other words, the second part of the general rule from antiquity is alive and well in modern employment law.

Under the second part of the general rule from antiquity, the key test relates not necessarily to the conduct itself, but to what that conduct does to the workplace or the reputation of the employer. Where the beyond workplace conduct in question has insufficient destructive effect to the workplace or reputation, it will not lead to justification for summary dismissal. Examples of insufficient grounds for summary dismissal involve a case with a hockey team, made up of employees from the same employer, funding their own team and during a hockey tournament, where one employee got involved in shenanigans and destroyed hotel property. Another example involves a company Christmas party held away from the company’s premises and outside of normal working hours, where an employee drank heavily and got involved in a drunken brawl. Neither of these cases were found to create sufficient detrimental conduct to the workplace or reputation of the employer to justify summary dismissal.

Conduct Beyond The Workplace

In general, the areas of employee conduct beyond the workplace that have led to sufficient destructive effect to the workplace or reputation fall into romantic liaisons, harm to minors in the care of the employer, and criminal behaviour. The harm to minors cases typically involve educational employers and non-classroom conduct, such as where a teacher publishes views or conducts activities outside the classroom contrary to the best interests of the children under his or her care. The criminality cases typically involve a criminal offence by the employee outside the workplace and its effect on the workplace and reputation of the employer. The B.C. Human Rights Code does contain a prohibition against employers dismissing employees on the sole basis of criminal conviction where the offence is unrelated to the employment.

The irony of employment law today is that the employer is left with less power to regulate the employee through just cause dismissal during working hours, but retains significant power to regulate the conduct of employees in non-working hours.