How have Ontario Courts determined reasonable notice requirements when an employee is terminated from a successor employer?

In a decision called Manthadi v ASCO Manufacturing, the Court of Appeal allowed an appeal by ASCO from a summary judgment award from the Superior Court. The facts of the case are as follows: the employee had been employed by a company (637) which was sold to ASCO. At the time that 637 had been sold to ASCO, 637 entered into a settlement agreement with the employee in respect of the termination of employment. After approximately one month, ASCO terminated the employee’s employment.

On summary judgment, the Court indicated that the employee had been continuously employed from 1981 to 2017 and that the proper notice period was 20 months. The Court held that where there is a sale of business, common law notice is applied in a similar manner as to Section 9 of the Employment Standards Act, 2000. That is, where an employee becomes employed by a successor employer, they will be credited with the years of service with their previous employer if a termination occurs for the purpose of termination pay. Where common law notice is awarded, they will also be credited with the years of service with their previous employer.  The Superior Court also determined that the settlement agreement could not be applied to ASCO as the principles of “privity of contract” ousted any right of ASCO to rely on the agreement and that the agreement was unclear in what it intended.

On Appeal, the Court of Appeal disagreed with the Superior Court. First, it overturned the summary judgement on the basis that there were facts that impacted the case that could not be resolved by summary judgment as a result it would be necessary to proceed to trial. Second, it did not agree that upon a termination of employment by a successor employer, the operation of common law notice was to be applied in the same manner as section 9 of the ESA. The Court specifically noted that under the common law in an asset sale, employees are terminated when their employer sells the business and there is a change of identity of the employer. Specifically, a Court must review a contract of employment that is entered into within the new business to make a determination of the new relationship. In many cases, a purchasing employer will require to selling employer to pay all statutory benefits and common law notice to employees before the acquisition.

With respect to what a Court must consider when awarding reasonable notice where there is a termination of employment from a successor employer and no clause to oust reasonable notice, the Court of Appeal stated that the decision from Addison v Loeb Ltd. was still applicable. Specifically, a Court is not to stitch together both periods between the vendor and the successor employer, which is what occurred in the summary judgement in this case. Rather, the Court is to weigh the employee’s experience and the benefit of that experience to the purchaser and is to be included with the analysis of the Bardal factors when determining reasonable notice.   The Court of Appeal has not laid down a bright line test in this respect, and it appears that a purchaser would still be subjected to the discretion of a Judge presiding over an action for wrongful dismissal.

This is unfortunate for those businesses who end up acquiring a new business via an asset sale, as they cannot be sure what their exposure is to common law notice. With that said, an easy way to be protected as a purchaser if you are going to continue to employee old employees, is to have a proper termination clause to avoid common law notice on termination. If you are a business who is acquiring through an asset purchase, give us a call and we can provide guidance with respect to employment issues and the purchase.