Takeover tensions

During a business takeover, what rights do employees have when contracts are terminated as a regular part of the deal?

Businesses that employ people are bought and sold every day. Most often, the employment status of each employee floats along on the surface during the sale of the company that employs them. Beneath the surface, however, the legal currents can be in turmoil, causing confusion and surprising results for new owners, old owners and the employees.

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 that results in a change of the legal identity of the employer, causes all existing employment contracts of the business so sold to terminate.

But in a sale of a business, what happens to the implied termination of employment upon sale?

Well, it depends on a few things.

Is your contract adopted by the purchaser or not?

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. These include constructive dismissal and outright dismissal.

In a 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.

The Employment Standards Act and the Common Law

A potential complication is set out in the Employment Standards Act. It 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.

To further complicate matters, in circumstances where there is a purchase and sale of the business, where the employee continues with the same employment, where the purchaser has done something which indicates it recognizes the past service of the employee, and where 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.

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.

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