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Buyers beware: Plan for the transition of employees when purchasing a business

The recent Ontario Superior Court of Justice ruling in Manthadi v ASCO Manufacturing highlights some of the complications that can occur if vendors and purchasers fail to properly plan for the transition of employees upon the sale of a business.

The plaintiff, Sandra Manthadi, was employed as a blaze welder for 36 years by 63732 Ontario Limited, operating as ASCO Manufacturing Limited.

On or about November 3, 2017, the Defendant, 2603420 Ontario Inc. (ASCO), purchased the tangible and intangible assets (including the ASCO name) from 637.

Manthadi filed a lawsuit claiming that she was offered continued employment by ASCO as a blaze welder following the purchase and that she was terminated without any notice on Dec. 13, 2017.

ASCO denied the assertions, claiming it had only purchased the assets of 637 and that the employment offer to Manthadi was for temporary employment as a general labourer on a fixed-term contract, which ended on Dec. 13, 2017.

In previous litigation, Manthadi had won a summary judgment motion in connection with her wrongful dismissal lawsuit, however, ASCO successfully appealed that decision and the summary judgement was ordered to proceed to trial.

Prior to trial, ASCO acknowledged Manthadi had not been provided with a written employment contract; that no documentation was signed with respect to the continuity of her service between 637 and ASCO; that there had been no correspondence with Manthadi regarding the continuity of her service; that there had been no lay-off period between her working for 637 and ASCO; that she had been laid off with an unknown date of recall on Dec. 13, 2017; and that Manthadi had never been recalled back to work.

The court’s decision

The court determined Manthadi’s employment with ASCO was for an indefinite duration, taking into consideration ASCO’s failure to communicate any expectations or terms of her continued employment, including its duration.  As it was an indefinite relationship, Manthadi was entitled to notice of termination.

The court then determined that ASCO purchased 637 as a “going concern.”  In other words, when ASCO purchased 637, the ownership and control of the business transferred to ASCO, including all assets and liabilities, and business carried on as usual, including the employment of the workers from 637.

In assessing whether ASCO had purchased 637 as a “going concern,” the court looked at a variety of factors, including: the nature of the transaction; what, if any, changes were to terms of employment, job duties, and compensation; whether 637 had ceased operations prior to the purchase; communications/ agreements regarding how prior service would be treated; and whether the purchaser retained employees and the right to use the previous name.

As ASCO had purchased 637 as a “going concern,” it was was a successor employer and Manthadi’s service with the predecessor employer was to be taken into account when assessing the appropriate reasonable notice period.

However, the court stated that it was not simply a matter of adding the two service periods together. Instead, the court used a contextual approach, which included an assessment of the benefit that ASCO received from Manthadi’s skills and experience from her previous employment.

Altogether, the court determined that Manthadi was entitled to 12 months’ pay in lieu of reasonable notice.

Lessons for employers

This decision demonstrates the trouble, and liability, a company can find themselves in if they fail to properly plan, and communicate, how employment will be handled upon the sale of a business.

During a sale of a business, both the vendor and purchaser need to determine what will happen with the employees.

There are several options, such as the vendor taking over the existing employment contracts and carrying over the employees and employment relationships as is; terminating the existing employment contracts with the appropriate notice of termination; or, if done properly, there could be some sort of combination of notice of termination and offer of new employment.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.