The Impact of a Sale of a Business on the Obligation to Provide Reasonable Notice
The sale of a business can have a significant, multifaceted impact on a business’ relationship with its employees. A number of complex issues arise when an organization goes through a change in ownership, particularly if the purchaser of the business wishes to hire some or all employees of the vendor’s business without a break in service.Where employees are not subject to any form of termination clause limiting their entitlement to notice or pay in lieu of notice (severance) upon a without cause dismissal by their employer, their potential reasonable notice entitlements under Canadian common law may be quite substantial. Therefore, where there is an asset sale of a business, it is important for not only the vendor, but also the purchaser to be aware of their legal obligations and liabilities related to the transfer of long-service employees to the purchaser’s business, particularly when that employee is not subject to an employment contract limiting severance or notice upon termination.
Change of Ownership: The Legal Principles
The leading decision in British Columbia with respect to the presumption of continuous service at common law is Sorel v. Tomenson Saunders Whitehead Ltd. (“Sorel“).
In Sorel, the plaintiff employee had worked for 26 years when the company he worked for was acquired. Mr. Sorel simply continued his employment with the new legal entity as though there had not been any change in ownership at all. After 37 years, and two mergers, Mr. Sorel’s employment was terminated without cause. The Court in Sorel specifically addressed the question of whether Mr. Sorel’s entire service of 37 years with the preceding organizations should be recognized for the purpose of calculating reasonable notice. In rendering its decision in favour of recognizing Mr. Sorel’s full 37 years of service, the Court of Appeal stated the following legal principles:
- When a purchaser acquires a business as a going concern, there is an implied term in the contract of employment between it and those employees continuing in the service of the business, that the employees will be given credit for years past service with the vendor for purposes of such incidents of employment as salaries, bonuses and notice of termination.
- This implied term may be negated by an express term to the contrary. In other words, the purchasing employer may, at his option, advise the employees that he does not intend to give them credit for past services to the vendor. If this is done, the employees have the option of entering into the new contract of employment on these terms or of declining to work for the purchasing company and suing the vendor for wrongful dismissal and damages in lieu of notice.
- Where the new employer does not advise the employees that he is unwilling to contract on the basis that the employees have credit for past years of service, the employer is deemed to have contracted with the employees on the basis that the employees will be given such credit. [emphasis added].
While the law appears to be settled on with respect to the above principles, a recent Court of Appeal case demonstrates the continuing need for purchasers to pay particular attention to how they address the issue of prior service when it chooses to hire employees from the vendor’s business. Specifically, if the purchaser of a business does not wish to recognize a new employee’s prior service with the predecessor, it should not simply rely on the vendor’s assurances that the employee has agreed to terms of a severance package, but should be diligent in advising the newly hired employee that it does not intend to give credit for past services to the vendor. This non-recognition of past service should certainly be in writing.
Severance Payment or Retention Bonus?
In the recent case of Hall v. Quicksilver Resources Canada Inc. (“Hall“), the purchaser, Quicksilver, found itself on the receiving end of a wrongful dismissal lawsuit by an employee who had been employed at the previous owner’s pulp mill for over 24 years prior to his joining Quicksilver. At the time that the pulp mill was sold to Quicksilver, the Plaintiff’s employer, Catalyst, advised the Plaintiff that his employment would be coming to an end upon the completion of the sale. Mr. Hall was offered a settlement package equivalent to 14 months’ salary and benefits; however, the lump sum payment Mr. Hall ultimately accepted was not referred to specifically as a severance payment in the final written agreement with Catalyst, even though the parties referred to it as such during negotiations.
Post-sale, Mr. Hall continued employment with Quicksilver for approximately nine months before his employment was terminated without cause. Mr. Hall sued Quicksilver for wrongful dismissal and argued that for the purpose of calculating his reasonable notice entitlement, his entire prior length of service with Catalyst should be recognized for the purpose of calculating his reasonable notice entitlement. He argued that the lump sum payment he received from Catalyst prior to the continuation of his services with Quicksilver was a “retention bonus” and not a severance payment.
In a summary trial, the judge found in favour of Mr. Hall, and agreed that the lump sum payment was properly characterized as a “retention bonus.” Given the principles laid out in Sorel, Mr. Hall was entitled to reasonable notice based on his continuous employment by both Catalyst and Quicksilver. The judge awarded him 18 months’ pay in lieu of notice for his total 25 years of service. Quicksilver appealed.
Fortunately for Quicksilver, the Court of Appeal disagreed with the trial judge’s assessment of the nature of the lump sum payment, and overturned the decision. The Court of Appeal found that even though the payment had not been explicitly described as a severance payment in the written settlement agreement, it was clear that the payment to Mr. Hall had been made in recognition of the employee’s 24 years of service with Catalyst prior to change in ownership; further, the payment was “obviously in line with what would normally be payable on a dismissal.” There was no reason in law or principle why Mr. Hall could not have agreed to employment with the new owner and accept 14 months’ pay in lieu of notice for the termination of his employment from Catalyst, in one written contract. Therefore, the facts presented in this case were distinguishable from those in Sorel where the employee had continued his employment under new management without having received notice or severance for his years of service accrued prior to each of the mergers with his new employers.
Because the Court of Appeal found that Mr. Hall had already been fully compensated for his 24 years of service with Catalyst prior to his hiring by Quicksilver, his reasonable notice period was decreased substantially to three months.
The Application of Hall to Would-Be Purchasers
While the Court of Appeal found in favour of the purchaser in this instance, the case of Hall certainly demonstrates that regardless of assurances received from a vendor that appropriate notice and/or severance has been provided to all employees, a purchaser should never assume a settlement agreement between a vendor and its employees will be upheld should an employee initiate a claim for wrongful dismissal.
Employment issues are occasionally left to the eleventh hour in the excitement of the sale of a business, but these cases demonstrate that it pays for both the vendor and purchaser to be alive to these issues early in the sale process. Prior to hiring employees from a newly acquired business, a new owner who does not intend to recognize those employees’ prior service should explicitly advise their new employees of this in writing – preferably in a written employment agreement. Solid written employment contracts go a long way to reducing liability for new employers, with the added benefit of introducing more certainty to employees.