ONCA Affirms an Offer of Employment by the Purchaser of Business Assets to an Employee of the Seller is Valid Consideration for a New Employment Contract
In Krishnamoorthy v. Olympus Canada Inc., 2017 ONCA 873, the Ontario Court of Appeal confirmed that s. 9(1) of the Employment Standards Act, 2000 (the “Ontario ESA”), deems there to be continuity of employment for the purposes of the legislation only, and does not displace the common law rule that an offer of employment by the purchaser of the assets of a business is valid consideration for a new employment agreement.
In May 2000, Nadesan Krishnamoorthy began employment as a senior financial analyst with Carsen Group Inc. (“Carsen”). About five years later, in 2005, Olympus Canada Inc. (“Olympus Canada”) agreed to purchase some of the assets of Carsen, and offered employment to most of Carsen’s employees, including Mr. Krishnamoorthy, then the Director of Finance.
Olympus Canada and Mr. Krishnamoorthy executed a new written employment agreement (the “Employment Agreement”). The terms and conditions of the Employment Agreement were substantially similar to those Mr. Krishnamoorthy had with Carsen, except for two provisions: (a) a termination provision, which limited Mr. Krishnamoorthy’s entitlements upon termination of employment without cause; and (b) a clause stipulating that Mr. Krishnamoorthy would be treated as a new employee with no recognition for previous service with Carsen, except as required by applicable legislation (the “New Terms”).
Olympus Canada did not offer and did not provide Mr. Krishnamoorthy with any additional consideration when he accepted the Employment Agreement, or at any time prior to the commencement of his employment with Olympus Canada.
In May 2015, Olympus Canada terminated Mr. Krishnamoorthy’s employment without cause and provided him severance in accordance with the termination provision in the Employment Agreement. Mr. Krishnamoorthy refused the severance and sued Olympus Canada for wrongful dismissal.
On a motion for summary judgment, Mr. Krishnamoorthy argued that his employment between Carsen and Olympus Canada was deemed to be continuous pursuant to section 9(1) of the Ontario ESA, and Olympus Canada’s failure to provide him with fresh consideration in exchange for the Employment Agreement rendered the New Terms unenforceable. Section 9(1) of the Ontario ESA reads:
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.
The motion judge agreed with Mr. Krishnamoorthy’s position and awarded him $310,040.88 in damages for failing to provide adequate reasonable notice of the termination of his employment (equivalent to 19 months’ pay in lieu of notice). Olympus Canada appealed.
The Ontario Court of Appeal Decision
The Court of Appeal overturned the motion judge’s decision, concluding that Mr. Krishnamoorthy could not rely upon s. 9(1) of the Ontario ESA for the purpose of establishing that the New Terms were unenforceable for lack of consideration. The Court of Appeal explained that the application of s. 9(1) is limited to deeming employment continuous only “for the purposes of this Act.”
Further, the Court of Appeal affirmed the following statement from Addison v. M. Loeb Ltd., 1986 CanLII 2474 (ONCA), regarding the sale of all or part of the assets of a business:
At common law, since a contract of personal services cannot be assigned to a new employer without the consent of the parties, the sale of a business, if it results in the change of the legal identity of the employer, constitutes a constructive termination of the employment.
If the employee is offered and accepts employment by his new employer, a new contract of employment is entered into.
Thus, the Court of Appeal held that Olympus Canada’s offer of employment was sufficient consideration on its own, and Mr. Krishnamoorthy could not rely on s. 9(1) of the Ontario ESA to rebut that conclusion.
The BC Employment Standards Act, RSBC 1996, ch 113 (“BC ESA”), contains a similar provision to s. 9(1) of the Ontario ESA. In particular, s. 97 of the BC ESA states that “[i]f all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition.” Consequently, Krishnamoorthy may be of interest to employers in British Columbia because the conclusion of the Ontario Court of Appeal may be applied by the courts in British Columbia.
In summary, where the purchaser of all or part of the assets of a business offers employment to a seller’s employee, and the employee accepts, the following common law rule applies: the employee’s employment with the seller is constructively terminated, and a new contract of employment is entered into with the purchaser. Krishnamoorthy affirms that a purchaser’s offer of employment is valid consideration for the new contract of employment between the purchaser and employee, even if the new contract of employment differs from the employee’s previous employment agreement with the seller.
Finally, purchasers must still ensure that all terms in the new employment agreement comply with minimum standards of applicable employment standards legislation, taking into account the employee’s period of service with the seller. In Krishnamoorthy, the Ontario Court of Appeal did not decide the question of whether the termination clause in the Employment Agreement was invalid for failing to comply with s. 9(1) of the ESA; this matter was sent back to the lower court for determination. However, if a termination provision in a new employment agreement with a purchaser fails to provide for the legislated minimum requirement for termination notice, pay or benefits, calculated by reference to the employee’s length of continuous employment, then the termination provision may be found to be invalid, and the employee may be entitled to reasonable notice at common law.
* This blog post was drafted with assistance from James Parker, Articled Student.
Calculation of Service Common Law Severance Corporate Transactions Employment Standards Employment Standards Act terminations