This November, Ontario’s Court of Appeal provided some well-received direction for buyers and sellers of corporations who have to manage the fickle issue of employment during a transaction.
DMC LLP has previously updated dentists on a variety of legal issues in asset sales. Fortunately for dentists, we have a new update regarding asset sales which has clarified the law on how to manage employees during this important transaction.
Ontario’s highest court has just confirmed that a buyer of dental assets (in an asset sale) can offer to continue employment for all of the dental team (using similar terms of employment) AND the buyer and seller can rely on that offer of continued employment as consideration for those changes to their employment.
The Facts of the Case
The case was called Krishnamoorthy v. Olympus Canada Inc. The Employer, Olympus Canada, is in the optical sciences business in the US. Originally, it had engaged a third party to distribute Olympus’ products in Canada.
The Employee, Mr. Krishnamoorthy, first started working with the third party since May 2000; by 2005, he became a Director of Finance.
Around 2005, Olympus decided it wanted to distribute its products in Canada itself, and so it terminated the agreement with the third party and created a new company (called Olympus Canada) for that purpose. When that deal closed in 2006, Olympus had purchased some (but not all) of the third party’s assets.
When the time came to deal with the employees before the closing, the third party told their team (including the Employee) that Olympus would offer employment to almost all of the former employees. It did exactly that when Olympus gave the Employee a new written contract with substantially similar terms as he had with the former employer.
But, there were some important terms that were different than with the former employer:
- There would be a new termination clause governing employment. It specifically limited the compensation the Employee would receive in the event of termination without cause to the greater of:
- one week of pay for every year of work with the old and new employer, up to 8 weeks (the ESA minimum), or
- four weeks of pay for every year of service with the old and new employer, up to a maximum of 10 months;
- The Employee would be treated as a new employee and his service with the former employer would not be recognized (except for the termination clause); and
- The Employee would agree to sign a Release that would say he would not sue Olympus for his employment with the former employer.
The Employee signed the employment agreement in late 2005 and, importantly, he did not receive a signing bonus or any pay in lieu of notice from his previous employer. Essentially, Olympus Canada would take up right where the former employer left off. The agreement said the new employment would begin on August 1, 2006.
On April 10, 2006, the former employer wrote a letter to the Employee and confirmed that his employment with Carsen would end on July 31, 2006; and his new employment with Olympus would begin the next day (as under the agreement he signed).
About 10 years later (May 19, 2015), Olympus Canada terminated the Employee’s employment without cause. The Employee refused to accept the amount and instead opted to sue Olympus.
The Court Decisions
In the different levels of court, the Employee argued that the termination clause (that he accepted and signed) was not enforceable because Olympus did not provide him with fresh consideration for agreeing to move his employment from the third party to Olympus, and for agreeing that the employment between the two companies was continuous (as under section 9 of the Employment Standards Act).
The Employer all the while said that its offer of continued employment was sufficient consideration for the new contract, and that it followed the acceptable termination clause in the contract.
At the lower level (Superior Court) decision, the judge agreed with the employee, found the termination clause was void, and awarded him 19 month’s pay in lieu of notice
But at the appeal court (Court of Appeal of Ontario), the learned judges there reversed the lower level decision and found that there was, in fact, consideration for the termination clause and the termination clause was valid and enforceable (giving the employee 10 months of pay in lieu of notice instead of 19 months).
The Court of Appeal clearly explained its reasoning in the following paragraphs (paras. 23-34):
“In Addison v. M. Loeb Ltd. (1986), 1986 CanLII 2474 (ON CA), 53 O.R. (2d) 602 (Ont. C.A.), Dubin J.A. (as he then was) explained the position of an employee at common law when there is a sale of a business, at pp. 603-604:
At common law, since a contract of personal services cannot be assigned to a new employer without the consent of the parties, the sale of a business, if it results in the change of the legal identity of the employer, constitutes a constructive termination of the employment. … If the employee is offered and accepts employment by his new employer, a new contract of employment is entered into.
Applying those principles in this case, Mr. Krishnamoorthy’s employment with Carsen was terminated and he entered into a new contract with Olympus Canada upon the sale of the business. At issue is whether there was consideration for that new contract.
It is well established that a promise to perform an existing contract is not consideration: Holland v. Hostopia.com Inc., 2015 ONCA 762 (CanLII), 392 D.L.R. (4th) 650, at para. 52. In other words, new or additional consideration is required to support a variation of an existing contract: Hobbs v. TDI Canada Ltd. (2004), 2004 CanLII 44783 (ON CA), 246 D.L.R. (4th) 43 (Ont. C.A.); see also Francis v. Canadian Imperial Bank of Commerce (1994), 1994 CanLII 1578 (ON CA), 21 O.R. (3d) 75 (Ont. C.A.) In this case, the motion judge, relying on Hobbs and Francis, found that Olympus Canada’s offer of employment did not constitute consideration and further concluded that Hobbs was indistinguishable.
However, that is not this case. Hobbs and Francis both involved employment with a single employer and not two different employers as is the case here. The motion judge erred in disregarding the new contract of employment with Olympus Canada, who was a new employer upon its purchase of some of Carsen’s assets. That Mr. Krishnamoorthy’s day-to-day job did not materially change after the sale does not change that fact.
Although s. 9 of the Employment Standards Act (“ESA“) deems there to be continuity of employment if certain requirements are met, it does not deem there to be continuity for all purposes. Section 9(1) of the ESA states:
If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.
In Addison, this court interpreted the substantially similar language of s. 13(2) of the [previous version of the ESA]:
Where an employer sells his business to a purchaser who employs an employee of the employer, the employment of the employee shall not be terminated by the sale, and the period of employment of the employee with the employer shall be deemed to have been employment with the purchaser for the purposes of Parts VII, VIII, XI and XII.
Dubin J.A. acknowledged in Addison, at p. 604, that this predecessor provision “was enacted to avoid, to some extent, … unfairness” to employees when the employer sells the business. However, he rejected the argument that s. 13(2) deemed there to be continuity of employment for all purposes.
Similarly in this case, if the purpose of s. 9(1) of the ESA had been to deem there to be continuity of employment for all purposes, there would have been no reason to include the words “for the purposes of this Act” in the section. These words make clear that s. 9(1) cannot be used to claim rights or entitlements on which the ESA is silent.
Section 9(1) of the ESA does not deem the employment contract between an employee and an employer to bind a subsequent purchaser of some of that employer’s assets as was the case here. Nor does s. 9(1) of the ESA require the purchaser of a business’ assets to offer employment to employees of that business on the same terms as their original contracts as claimed by Mr. Krishnamoorthy. He cannot rely on s. 9(1) to achieve either of these effects. He can only rely on s. 9(1) to claim those entitlements that are set out in the ESA itself.
This interpretation is consistent with this court’s comments in Abbott v. Bombardier Inc., 2007 ONCA 233 (CanLII), 85 O.R. (3d) 21, at para. 18:
Viewed in the context of the entire statute, in our view, the purpose of s. 9 of the ESA is to protect minimum statutory entitlements that are related to length of employment where the purchaser of a business, or part of a business, continues to employ the employees of the vendor following the sale. Such entitlements include: vacation entitlements, entitlements to pregnancy and parental leaves, as well as entitlement to notice of termination or pay in lieu of notice and severance pay. [Emphasis added by Pepall J.A.]
Thus, on my reading, Mr. Krishnamoorthy cannot rely on s. 9(1) of the ESA to support his argument that Olympus Canada’s offer of employment did not amount to consideration.
In short, Olympus Canada’s offer of employment amounted to consideration for the termination clause. The motion judge erred in concluding otherwise.”
The Court’s final decision was to direct the employer and employee to have a trial on the remaining issues in dispute.
The law in Ontario is clear: the continuation of employment is not sufficient consideration for a new employment agreement — with the same employer. That is still the law in Ontario, but for these specific facts — where it was not with the same employer — the Court of Appeal has told us that the rule does not necessarily apply.
The employee here was given a new employment contract by a new company (not his old employer) who had happened to buy some of the assets of the old employer. The new company offered a new contract with a quite generous termination clause (10 months instead of the 8 weeks that the ESA afforded him.) If the employee did not like the new terms of the employment agreement, he could have sought employment elsewhere and gone after his old employer based on his employment there. But instead, he signed the new contract (with a solid termination clause) and worked for the new company.
DMC LLP helps dentists through the minefield that is employment law during asset sales and share sales. Thanks to the Court of Appeal in this case, the law is a bit more clear: buyers of businesses with employees do not necessarily have to use the employment contracts from the seller, regardless of the type of transaction. For a new business, new employment terms can be presented and enforced on employees.
Let us know if you have more questions about this or other employment law issues – we are happy to help.