Employment Law Considerations in an Asset Sale

*Written by Hannah Goranson, Student-at-Law at Lee Workplace Law

An important aspect of an employment agreement is that it only binds the parties to the agreement. Employees agree to personally provide their services and, in return, employers are unable to make employees work for a different business without the employees' permission.

The personal nature of employment agreements poses certain challenges where an employer sells the assets of its business as a going concern. If the purchaser steps into the shoes of the employer, does the purchaser also inherit all of the seller's obligations with respect to the employees?

The Court of Appeal of Ontario addressed this question in the recent decision of Manthadi v. ASCO Manufacturing, 2020 ONCA 485 ("Manthadi v. ASCO Manufacuring").

In this case, Ms. Manthadi had worked for 63732 Ontario Ltd. ("637") for approximately 17 years. In November 2016, 637 sold its assets to ASCO. Following the sale, Ms. Manthadi worked for ASCO for one month before she was terminated. Ms. Manthadi sued ASCO for wrongful dismissal, claiming that she was entitled to reasonable notice of termination based on her combined 17 years of employment with 637 and ASCO.

The motion judge ruled in favour of Ms. Manthadi, concluding that her employment with ASCO was a continuation of her employment with 637 and thus Ms. Manthadi was entitled to reasonable notice of 20 months.

ASCO appealed. The Court of Appeal allowed the appeal.

In granting the appeal, the Court of Appeal took the opportunity to review and restate the law in Ontario governing an employee's right to reasonable notice from the purchaser of an ongoing business.

Firstly, the Court of Appeal drew a sharp distinction between the termination of employment by a purchaser under the Ontario Employment Standards Act ("ESA") and under the judge-made common law. The ESA is clear that where there is a sale of a business and the employee continues to work for the purchaser, the employee's employment is not considered to be terminated. The employee's employment with the original employer and the purchaser are considered one continuous period of employment for the purposes of the ESA termination entitlements.

In contrast, under the common law, such employees are considered to be terminated. Since an employment agreement cannot be assigned to a purchaser, the sale of the business means that the employee is deemed to have been dismissed. This is the case even if the employee is immediately rehired by the purchaser and continues his or her employment without interruption. As a result, the employee's term of service with the original employer and the purchaser are not stitched together to form one continuous period of employment.

This has important implications for an employee's common law termination entitlements. If the employee is subsequently terminated by the purchaser, the employee's start date will be the day the employee started to work for the purchaser, rather than the date the employee initially started work for the original employer. This shorter length of service could result in the employee having a reduced entitlement to reasonable notice of termination.

The Court of Appeal acknowledged the detrimental effect that a shorter length of service could have on an employee's common law termination entitlements. To overcome this predicament, the Court of Appeal emphasized that length of service is but one factor used to assess reasonable notice, and that weight should be given to the employee's "experience" when determining reasonable notice. For example, consideration should be given to the fact the purchaser automatically received the services of an experienced employee.

It important to note that this decision addresses the sale of a business as a result of an asset sale. Different considerations arise where a business's ownership changes through a sale of shares.


Conclusion:

The Court of Appeal in Manthadi v. ASCO Manufacturing clarifies a number of key points about purchasers' employment obligations on the sale of a business:

  • (i)Under the ESA, an employee is not considered to be terminated on the sale of a business. The purchaser may be liable for the employee's entitlements under the ESA based on their combined length of service with the original employer and the purchaser;
  • (ii)Under the common law, an employee is considered to be terminated on the sale of the business. The employee's length of service with the original employer will not be taken into account when determining the employee's common law termination entitlements; and
  • (iii)Notwithstanding, if an employee is terminated after the sale of a business, the employee's experience with the original employer should be taken into account when determining the employee's common law entitlements.

This decision serves as an important reminder of the complex employment considerations that arise on the asset sale of a business. Failure to properly account for such matters may result in unpleasant surprises for both the seller and purchases. Similarly, there are a multitude of employment law considerations for the employees who are impacted. Parties affected by an asset sale of business are encouraged to seek assistance from an experienced employment lawyer. Lee Workplace Law can help.