The Ontario Superior Court ruling in Manthadi v ASCO Manufacturing (2019 ONSC 5572) highlights how employers can end up with unexpected employment liabilities after an asset purchase deal. It also highlights the importance of careful wording when hiring employees in those situations.
The employee was a welder with Asco Manufacturing Limited (the old company), a furniture production company. She had started at the company in 1981.
In 2017 the old company sold its assets to a numbered company (the new company). As part of the asset purchase agreement, the old company paid out all of its employees their entitlements for notice of termination and severance pay under the employment standards legislation.
The employee was informed of the asset purchase deal on 28 September 2017. The old company stated that her employment would end on 24 November 2019 and gave her a release to sign in return for the notice and severance pay.
The new company then made an oral employment offer, which the employee accepted; there was no paperwork.
The employee then executed the release in favour of the old company, which paid her out.
The asset purchase deal closed on 2 November 2017. The employee continued to work without interruption, although her stated termination date with the old company was 24 November 2019.
In December 2017 the new company temporarily laid off the employee. The employee attempted to contact the new company the following month to ask when the layoff would end but received no answer. Instead, in February 2018 she received a record of employment stating that her employment had commenced on 6 November 2011 and ended on 13 December 2017 as a result of a shortage of work.
The employee sued the new company, claiming an entitlement to common law notice based on her full tenure with the old company and new company. There was no contractual provision limiting the employee to less than the common law notice.
In theory, when an individual's employment with one employer ends and starts with a new employer after an asset purchase deal, the two periods of employment are distinct under common law.
However, in Ontario, the legislation provides employees with some protection against the possibility of losing seniority as a result of an asset purchase deal. Section 9(1) of the Employment Standards Act 2000 states that:
[i]f 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. (Emphasis added.)
In theory, this section protects employees' statutory rights only when they are transferred as part of an asset deal. In Ontario, service-based entitlements arise for holiday (and holiday pay), notice of termination and severance pay. The result is that purchasers cannot contract out of recognising employees' past service for the purposes of the Employment Standards Act. The legislative provision does not expressly provide that common law rights continue.
However, as some employers might lament, sympathetic plaintiffs can result in outcomes less rooted in theory. This was the case in this instance. The plaintiff had significant service, her transfer to the purchaser was seemingly treated in a haphazard manner and the buyer later laid her off and then disappeared.
In this case, the court had little sympathy for the new company. It decided that the new company had inherited all service of the employee for the purposes of her entitlements at common law, not just for the purposes of her statutory rights. It also decided that the Employment Standards Act pay out that the employee had received from the old company did not reduce any of her claims against the new company, despite those payments having been made to satisfy all of the employee's statutory entitlements accrued up to her date of transfer.
The employee was awarded damages for a common law notice period of 20 months.
This case shows that a failure to properly manage the transfer and hiring of employees can result in unexpected liabilities to the buyer in an asset purchase deal.
The employee's transfer from the old to the new company had been done in a disorganised manner. Further, her termination and hiring dates between the companies, as well as the information provided to her, was confusing. Her transfer could have been handled much better – in particular, a properly drafted employment offer by the new company could have limited its liability.
In its ruling, the court noted that there had been no agreement with the employee that the new company would recognise her past service only for statutory purposes. It had not been agreed that her past service would not be used for other purposes, such as her common law entitlements.
Purchasers in an asset deal should be aware of the new employer's fate. In such cases, proper employment offers are key. They should set out express terms, including any limitations to recognising past service with the seller (other than those protected by applicable employment standards legislation). This may provide protection against the purchaser unwittingly being on the hook for an employee's past service.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
