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Effects of Reorganization of an Employer's Business

In wrongful dismissal cases, the amount of notice of termination owed to the discharged employee will depend on several factors. Length of service is one of those factors, and typically, longer term employees are entitled to longer notice periods. This is especially so for employees that have devoted a significant part of their career to a particular employer. Employees who worked through the ranks, developing expertise and knowledge in the affairs of their employer are considered vulnerable and in difficult circumstances when they are suddenly released into the labour market. The level they have achieved and the specialized knowledge they have attained may make it difficult for them to obtain other suitable employment.

This is an important consideration for businesses that are being sold or reorganized. In most cases involving businesses that have been sold or reorganized, the courts recognized that an employee who retains their employment following a sale or reorganization is entitled to rely on their employment history with the previous, as well as the current owner, in the calculation of their notice of termination. When a business is bought or reorganized, there will likely be an implied term in the contract of employment between the new company and the employee continuing in the service of the business, that the employee is given credit for their past service for the purposes of calculating notice of termination.

For the new employer, the implied term may be negated by a written letter to the contrary. In other words, the new employer may, at his option, advise the employee that it does not intend to give him/her credit for past services with the former company. If this is done, the employee has the option of entering into the new contract of employment on these terms or of declining to work for the new employer and suing the former employer for wrongful dismissal and damages in lieu of notice. Where the new employer does not advise the employee that it is unwilling to contract on the basis that the employee gets credit for past years of service, the new employer is deemed to have contracted with the employees on the basis that the employee will be given such credit.

The implied term proposed is required to prevent employees from being faced with what the courts have deemed to be an unjust result: that after years of employment with the new employer and after lapse of any rights to notice they might have against their former employer, they find themselves faced with the proposition that they lose the benefits arising from their years of employment prior to the take-over.

The implied term is also likely to be considered fair by the courts to the purchasing employer. If the purchasing employer does not wish to contract on this basis, he may inform the employee accordingly, giving him/her the choice of declining employment with the new employer, suing their former employer for wrongful dismissal, or, at a minimum, insisting on receiving their minimum statutory entitlements, such as notice of termination or pay in lieu in accordance with the Employment Standards Act, 2000.

Advice to Employers: Upon taking over a business, or part of a business, the new employer should ensure the employees are given written notice that their past years of service will not be credited, if that is the employer's intention. The employees should receive written notice of termination or pay in lieu in accordance with the Employment Standards Act, 2000. If an employee declines employment with the new employer, he or she may be considered to have failed to mitigate their damages. On the other hand, if they do accept employment, or continue in their position after being advised that their past services would not be recognized, the employees rights to common law notice will lapse with the passage of time.

The following cases and commentary help illustrate this point:

Debenham v. CSI-Maximus 2003 CanLII 10846 (ON CA):

In this case, the discharged employee was able to secure a notice of termination period of 15 months on the basis of 26 years (1974 to 2000) despite having worked for various owners during this period. The most recent reorganization had occurred in 1994. Had the new employer given notice that past years of service would not be credited, and had they paid out the statutory notice (presumably 8 weeks), the plaintiff's notice of termination in 2000 could have been based on 6 years of service instead of 26 years.

Addison v. M. Loeb Ltd. 1986 CanLII 2474 (ON CA)

In this case, the discharged employee was able to secure a notice of termination period of 12 months on the basis of 20 years (1963 to 1983) despite the fact that the original owner was in receivership in 1981 and the business subsequently sold to a new manager in April 1983, one month before the plaintiff's termination. Had the receiver provided notice in 1981 that past years of service would not be credited, and had it paid out the statutory notice (presumably 8 weeks), the plaintiff's notice of termination in 1983 could have been based on 2 years of service instead of 20 years.

When taking a business, the successor employer should require the vendor to sever its employees prior to sale. It is also prudent for the purchaser employer to include an indemnity clause in the buy/sell agreement. This proved very useful for the purchaser in Snodgrass v. Brunswick Chrysler Plymouth Ltd. 1989 CarswellNB 337, who was entitled to be indemnified by the seller employer with respect to the award it had to pay the plaintiff plus interest and costs.

Advice to Employees: Employers will usually try to limit the amount of notice of termination or pay in lieu it provides to discharged employees. As businesses or part of businesses are frequently bought and sold, employees should be mindful on how their notice of termination is calculated, which will include credit for past years unless they have received notice to the contrary and their statutory notice. Upon termination, it is wise to seek professional legal advice from an experienced employment lawyer.

To reach the author of this blog, Jean-Francois Lalonde, email [email protected] or call 613.232.5773 x 246.

Jean-Francois Lalonde is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer practicing with Vice & Hunter LLP. He is also a part-time professor at La Cité Collégiale teaching Employment Law for Paralegals.

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