Business Law / Litigation

Employment Contracts Should be Clear When Hiring Employees of new Acquisition

When purchasing an existing business, it is tempting to hire at least some of the employees of the purchased business, to gain the benefit of their experience and avoid hiring and training new staff, which can be costly and time-consuming. However, employers that choose to do so should exercise caution with respect to the employment contracts with the carried-over staff, to avoid potential liability for termination pay for the employee’s time with the former business. A recent decision of the Ontario Court of Appeal demonstrates why failure to properly set out the terms of employment in a fresh employment contract in this scenario can be a costly mistake.

Employee With Former Employer for Over 30 Years

The issue began in 2017 when one business (ASCO) purchased the assets of an existing numbered company (637), a manufacturing business. The employee in question had been working as a braze welder for 637 since 1981. The Agreement of Purchase and Sale for the business included a clause stating that 637 had provided termination notice to all of its employees, as well as appropriate severance pay. The agreement also contained an indemnification clause, absolving ASCO from any liability stemming from a breach of 637’s warranties.

637 gave the employee a Settlement and Release document 2 months prior to the close of the sale, notifying her that the business had been sold, and saying she would be offered continued employment with ASCO. The Release terminated her employment ith 637 as of November 24, 2017, and included termination pay in the amount of $5,900. The Release stated the money “represent[ed] 8 weeks gross compensation in full satisfaction of all claims … including all severance pay, termination pay or other compensation howsoever arising”. The employee signed the Release and accepted payment.

ASCO then offered continued employment to the employee, along with 19 other 637 employees, and she stated it was her understanding that she would be employed as a braze welder, continuing her previous role without interruption and that the employment would be indefinite. She was also under the impression that ASCO would recognize her history of employment with 637. There was no written document setting out the terms of employment with ASCO. After the sale of the business, she was tasked with moving assets from one location to another, which is what she continued to do until she was laid off approximately one later.

Employee Sues New Employer for Wrongful Dismissal

The employee was never recalled back to work, and so she brought a claim against ASCO for wrongful dismissal and sought summary judgment. The judge found in the employee’s favour, pointing out that ASCO was not a party to the Release between the employee and 637, and therefore was not absolved from paying severance for the employee’s full work history. Further, the judge said the law required that the court view the employee’s employment as continuous. As a result, ASCO was ordered to pay the employee for a period of 20 months, which would be reasonable notice given the employee’s full work history.

ASCO appealed the decision. The Ontario Court of Appeal overturned the summary judgment, holding that the issues required a full trial to resolve. In particular, there is a fundamental disagreement between the parties as to the terms of the employee’s employment with ASCO. ASCO claims it hired the employee on a fixed-term basis as a general labourer, to assist with the relocation of assets, whereas the employee claims she understood she would continue her employment as a welder, and that the employment term was indefinite. She also claims she understood she would be credited with her time at 637. To property determine these issues, a trial is necessary. ASCO must establish its position unambiguously; failing that, it will fall to ASCO to refute the position that it should be liable for recognizing the employee’s history with 637 in assessing reasonable notice.

This case has already cost the parties significant legal fees and will continue to do so until the matter is resolved conclusively. The takeaway for any employers hiring staff from a purchased company is that a clear employment contract setting out the terms of the “new” employment is imperative. This way, there can be no discrepancy between the parties as to the length of employment, and how the employee’s previous work history with the purchased business will be treated in the event of termination.

If you are considering the purchase of an existing company, there are several issues to consider in addition to employment contracts. To discuss your potential purchase with experienced business and employment litigation lawyers, contact GLG LLP in downtown Toronto. Our firm will provide practical and comprehensive advice for all aspects of your commercial purchase, including potential employment issues that could trigger liability in the future. Call the firm at 416-272-7557 or contact them online to schedule a confidential consultation.