Basic Rules

To establish a valid and enforceable contract, each party must provide something of value to one another. This is referred to as “consideration”. This issue often arises in employment law cases when the employment agreement contains a term contrary, usually, to the employee’s interests. The often litigated context is a new contract given to an existing employee which purports to limit severance obligations on termination. The accepted law is that there must be “consideration” given to the employee, such as increased compensation or a promotion to show an enforceable contract. More importantly, to the subject of this posting, continued employment is not sufficient to show this need for something of value to support the contract.

The Context of an Asset Purchase

A business can be sold in two ways, either by the sale of shares to a new majority owner or by the sale of assets. A share sale does not change the identity of the employer as the company remains the employer. An asset sale shows different issues. The buyer of the assets will be a different entity and hence the employer will similarly change.

In this latter context, the question may arise as to the impact of a new employment contract given to an employee of the selling company by the buyer. Is such an offer of employment by the buying company sufficient “consideration” to bind the employee to its contract ?

Facts of the Precedent Case

The case involved a person employed as Director of Finance with company A. He had been employed for 5 years when company A sold certain assets to company B. The individual was offered employment with B on basically the same terms except those in the employment contract which limited the severance claim on termination and also refused to acknowledge his employment history with A, save the statutory mandate. There was hence no additional consideration except the offer of employment with B.

When he was terminated by B, he sued for wrongful dismissal. His case was assisted by a term in the Employment Standards Act[1] which stated as follows:

If 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 and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

This section effectively deems employment in this context to be continuous. The motions judge agreed with this argument, negated the employment contract and awarded damages for wrongful dismissal of 19 months in the sum of $310,000.

The Court of Appeal disagreed and set aside the award.[2] The statutory term was intended, the Court ruled, to apply only to the calculation of the minimum sums mandated by the Act.

Significantly, the Court decided that the offer of employment by B was proper consideration to support the contract.

Employers’ View

The case is very important for any parties involved in the sale of a business in this manner. Often the liability issue of severance is a significant issue for the buying company as often economies of scale will lead to terminations. The selling company similarly may find the issue of the value of the transaction will be made less difficult as the buyer will be comforted by the impact of this decision.

Impact to Employees

The individuals in this context ironically have more bargaining power than may be apparent at first blush. A buying company will be in need of the skilled work force of the targeted company to make any sense of its acquisition. This is the moment for the employees to obtain real legal advice and negotiate collectively with the buyer. Absent this, the employee accepting employment on a new and likely limiting contract will likely be subject to its terms.

Get Advice and Know Your Rights

Whether you be employer or employee, it is important to know the law and your rights and remedies. This issue is particularly complex. For advice on this issue from either side, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins. We regularly advise workplace parties on a wide range of legal workplace issues. Contact us online or by phone at 416 364 9599 to schedule a consultation.

[1] Section 9(1)

[2] Krishnamoorthy v Olympus, leave to appeal to SCC refused