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Terminating Employees after the Sale of a Business
Workwise Newsletter

When a business is sold, it is common that its employees will continue working for the purchaser after the sale. If the purchaser later decides to terminate their employment, complex issues around determining their entitlement to reasonable notice may arise. A recent decision from the Ontario Court of Appeal, Manthadi v ASCO Manufacturing, 2020 ONCA 485 is illustrative.

Manthadi worked as a welder for a corporation, 63732 Ontario Ltd. (“637”), from February 1981 until November 2017, when the corporation’s assets and name were sold to a new company (“ASCO”). Part of the sale agreement required 637 to terminate its employees and pay them severance.

Shortly before 637’s assets were sold, Manthadi signed a settlement agreement and release in which she accepted eight weeks’ severance in exchange for releasing 637 from liability relating to her employment. She began working for ASCO, but the nature of this relationship was unclear. Manthadi said that she was given an offer of indefinite employment as a welder with ASCO, but ASCO said that she was only hired on a temporary contract to help move 637’s assets to a new location. No written contract was prepared.

In December 2017, Manthadi was laid off by ASCO and never recalled. She sued ASCO for wrongful dismissal, and ASCO brought a claim against 637 for not paying Manthadi’s severance.

Manthadi successfully applied for summary judgment against ASCO. The judge held that she was required under the law to treat Manthadi’s experience with 637 as continuous with her experience with ASCO, and it was irrelevant that she had signed a release with 637 because ASCO was a separate company that was not party to the release. The judge awarded damages for 20 months of reasonable notice.

The Court of Appeal overturned the summary judgment decision because there were significant issues relating to the nature of Manthadi’s employment that could not be resolved without a trial, and the judge had misunderstood how the law for determining reasonable notice after the sale of a business applied.

The first problem was that the judge had mistakenly confused how continuous employment is treated under employment standards legislation with how it works at common law. Under Ontario’s employment standards legislation, an employee’s employment is deemed continuous for the purpose of the legislation if a business is sold and the purchaser continues to employ the employee. (A similar provision is found in section 5 of Alberta’s Employment Standards Code.) However, the common law is different: when a business is sold, its employees are constructively dismissed unless the purchaser enters into new employment contracts with them.

The second problem was that the law did not require that reasonable notice be calculated on the basis that Manthadi’s employment was continuous. Length of service is one of the Bardal factors used to determine what amount of reasonable notice is appropriate for a terminated employee, but it is not the most significant or determinative one. The appropriate amount of reasonable notice requires consideration of all of the factors, including an employee’s experience with a predecessor company, but it does not require that a judge “[stitch] together the employee’s two terms of service” (at para 66). It is only when a business is purchased as a “going concern,” and the “employee’s relationship to the ongoing business remains continuous despite the change in the identity of their employer” (at para 72) that it will be treated as continuous for the purpose of determining reasonable notice.

For Manthadi, this meant that her employment might not be continuous at common law, depending on whether she was only hired temporarily to help move assets rather than continue her job as a welder. It also meant that the settlement agreement she signed with 637 could be relevant to determining a fair and reasonable remedy. These issues could not be resolved without a trial.

Takeaways for Employers

Determining reasonable notice for employees who continue working for a business after it is sold will depend on all of the facts. It is not necessarily the case that an employee will get credit for their entire length of service with the vendor company—but arriving at that outcome might incur the cost of a full trial. Purchasers of a business who want to continue employing some or all of the vendor’s employees should expressly address continuity of service in a written contract with those employees in the course of the sale to avoid headaches if the purchaser later wants to terminate their employment. As with many legal issues, an ounce of prevention is worth a pound of cure, and Field Law’s Labour + Employment Group is available to assist.