The Latest on Employees and the Sale of an Employer’s Business

Written by litigator and mediator Irvin Schein and originally published at irvinschein.com.

An employee is notified that the business he works for has been sold. The purchaser asks the employee to stay on and continue working. What is the position of the employee at common law?

The recent decision of the Court of Appeal for Ontario in Krishnamoorthy v. Olympus Canada Inc. provides useful guidance on this question.

In this case, the plaintiff worked for Carsen Group Inc., a Canadian distributor for Olympus America Inc. He had worked for Carsen for five years until 2005 when Olympus America Inc. decided to terminate its distribution agreement with Carsen and continue distributing its products in Canada through a new related company, called Olympus Canada Inc. (“Olympus Canada”).

The plaintiff received an offer of employment from Olympus Canada under the terms of a written agreement. The terms of this agreement were substantially similar to the terms of his agreement with Carsen except for a termination provision that limited the amount of compensation the plaintiff would receive in the event of termination without cause. The new limit consisted of the greater of the minimum notice set out in the Employment Standards Act or four weeks’ pay per year of service with either Olympus Canada or Carsen up to a maximum of ten months.

The agreement also provided that the plaintiff would be treated as a new employee and that except for the reference to his employment with Carsen in the termination provision, his service with Carsen would not be recognized.

The plaintiff signed the agreement. He received no signing bonus or any additional compensation for doing so. He also received no pay in lieu of notice from Carsen.

The plaintiff continued to work as an employee of Olympus Canada until May, 2015 when his employment was terminated without cause. He was offered compensation in accordance with the termination provisions of the agreement. He refused the offer, sued Olympus Canada for damages for wrongful dismissal, and moved for summary judgment.

The plaintiff argued that the termination clause in the agreement was unenforceable because Olympus Canada had failed to provide him with consideration for amending his employment agreement to include the termination clause. He also argued that for the purpose of calculating his entitlement to notice, his employment with Carsen and Olympus Canada had been continuous.

The motion judge accepted the plaintiff’s argument, implicitly concluding that the offer of new employment by Olympus Canada did not amount to sufficient consideration and as a result, the termination clause was invalid. The plaintiff was awarded about $310,000 in damages.

Olympus Canada appealed to the Ontario Court of Appeal.

The Court of Appeal pointed out that at common law, if a sale of a business results in a change in the legal identity of the employer, there is a constructive termination of the existing employment. If the employee accepts employment by the purchaser of the business, he thereby enters into a new contract of employment.

Accordingly, the plaintiff’s employment with Carsen was terminated and he entered into a new contract with Olympus Canada. The only issue is as to whether or not there was consideration for the new contract.

The Court pointed out that it is well established that a promise to perform obligations under an existing contract is not consideration. There would have to be new or additional consideration to support a variation of an existing contract. In this case, however, the plaintiff did not agree to a variation of an existing contract but rather entered into an entirely new contract with a new employer. The fact that his day to day job did not materially change after the sale was not relevant.

The Employment Standards Act does provide that where there is a sale of a business and the employee becomes employed by the purchaser, the previous employment is deemed not to have been terminated for the purposes of the legislation and the employee will be deemed to have been employed continuously for the purpose of any subsequent calculation of the employee’s length or period of employment.

The Court pointed out that this provision related only to the calculation of the employee’s statutory benefits under the Act. That was not the issue in this case. The issue in this case was as to whether or not there was consideration for the new contract, so that the termination clause was valid. That is the finding that the Court made. The Court allowed the appeal and ordered that the matter proceed to trial.

The position of an employee where a business has been sold is not simple. As this case points out, the question of the extent to which the employee’s previous employment will be relevant to any future developments will vary with the issue at hand. If the employee signs a new employment agreement, by and large it is the provisions of that agreement that will determine the significance of the employee’s tenure with the previous employer.