Successor Employers: Your Company has Changed Hands

Successor Employers | Authors: Bram Lecker and Simon Pelsmakher, Student-at-Law

Successor Employers

What happens to your employment after your company changes ownership? The new owners are called Successor Employers and this is a time when employees are quite vulnerable. Whether companies have merged or sold assets outright to a third party, employees get caught in the middle. Unfortunately, the legal ambiguity shrouding transfers of business does little to take away this uncertainty.

This is a scenario we hear often in our boardrooms. Imagine working for the same employer for decades as a dedicated and loyal employee. Your benefits include a retirement package which you eventually expect to receive. Suddenly, the circumstances change. Your boss sells the company and shortly after, the new successor employers let you go with inadequate notice. They determine that you did not deserve a higher severance because you had not worked long enough for them. In addition, they inform you that since your retirement agreement was with your former employer, they have no obligation to pay it.

Can your benefits be taken away just like that?

Employment Law Provisions for Successor Employers

Most employees in Ontario receive protection from such incidents via Successor Employer provisions in the Employment Standards Act, 2000 (ESA). All agreements, including benefits packages, that you negotiate with your employer are essentially a part of the package when new, successor employers take over an existing business. These provisions are also recognized by our Common Laws, a set of judge made laws based on precedents.

Sometimes, organizations set themselves up as separate legal entities for tax liability and other business reasons. In employment matters, however, if there is a degree of legal commonality between those entities, our common laws will group them together to remove any confusion about who the actual employer is. Courts call them Common Employers.

The Common Employer Doctrine

The case of Downtown Eatery (1993) Ltd. v. Ontario (2001), 54 OR (3d) 161 was a wrongful dismissal dispute between a series of employers. The Court recognized that an employee might indeed, have multiple, concurrent employers. The judge ruled that if a degree of legal commonality existed between the employers then, for the purposes of employment law, they are the same legal entity and liable for damages in wrongful dismissal cases. Judges had the discretion to determine which factors to study to evaluate commonality when they applied this Common Employer Doctrine to cases.

King v. The Danbury Group

Subsequently, this Common Employer Doctrine was utilized by the judge hearing the case of King v. 1416088 Ontario Ltd. (Danbury Industrial), 2014 ONSC 145. Jack King had worked as a bookkeeper for the Danbury Group since 1973. Eight years into his tenure he started receiving a pension benefit. Throughout his employment, the company legally transferred ownership multiple times, mainly for tax savings purposes. However, Mr. King viewed the changes as “administrative”. They neither affected his duties nor his seniority and benefits.

Suddenly in 2014, Mr. King was fired and his employer refused to pay his pension benefits, just as we described above. This happened right after the company had changed hands, once again.

The judge applied the Common Employer Doctrine. He examined the successor employers and legal entities closely, reviewing the corporate location, website, structure, suppliers and more. He concluded that there was a large degree of commonality between the successive corporate entities. They all simply continued the Danbury business, name and goodwill. He ruled that these common employers shared the liability to Mr. King’s notice pay and retirement benefits agreement.

Both these decisions made one fact abundantly clear. While organizations have the legal ability to shuffle their corporate structures around for tax purposes, the same maneuvers may not help them under employment law. As common employers, successor employers must recognize the terms of your negotiated employment contracts with your previous employer. They have to offer you credit for past years of service when they calculate your salary, bonus, merit increases, employment benefits and even termination notices.

Successor Employers: Same Job, New Contract

When a business changes hands, successor employers sometimes change the terms of your existing employment contract. Examples include resetting your seniority, changing your commission structure or reducing your sales territory.

Until recently, the acceptable legal consensus for doing this was via “consideration”, i.e. the employer could compensate you with something new of value, like increased pay, benefits or vacation in exchange for the contract term changes. Employees have the right to seek severance and leave their position if the considerations are not acceptable. A unilateral change in contract remains grounds for a constructive dismissal lawsuit.

Controversial Court Decision

The case of Krishnamoorthy v. Olympus Canada Inc., [2017] ONCA 873 therefore, stands as an outlier following a controversial decision by the Ontario Court of Appeal.

Our client, Mr. Krishnamoorthy had worked for Carsen Group Inc. for 5 years when it was purchased by Olympus Canada. The new employer rehired a vast majority of the existing staff, including Mr. Krishamoorthy. They gave him a revised offer of employment which substantially limited his termination pay entitlements and reduced his seniority. In addition, they did not offer any considerations for these changes.

A few months later they fired him with severance pay that met the new contract terms. He sued Olympus Canada for insufficient severance and won the case at trial. The absence of consideration deemed his new employment contract null and void.

However, his employer appealed. The Appeal Court Judges reversed the decision. They ruled that Mr. Krishnamoorthy had the option of turning down the offer of employment and seeking severance; that the offer of employment was, in and of itself, a consideration. The existing employer had not revised contract terms.  Rather, this was a case of new company, new contract.

The Court’s decision shocked the legal community. It effectively flipped well-established contract and employment law on its head. In a word, the court said two separate answers exist to the same question.The judged applied common law to the case which stood in stark contrast to ESA.

Subsequently, we have submitted this case to the Supreme Court of Canada to reinstate the previous status quo.

Vet Your Employment Contract

Because of this decision, employees should seek proper legal advice before signing employment contracts. Most employees generally enter into such agreements from a position of disadvantage because signed employment contracts are often a condition of employment. If you hear rumours that your company will change hands soon, it is a good idea to seek legal counsel as soon as possible. You must get a good understanding of your rights as a continuing employee.

Let us review your employment contract and advise you before you sign. We firmly believe that being informed of your rights is a good first step for leveling the playing field with your employer.

Lecker & Associates are employment and disability benefits lawyers.  Our team of Toronto employment lawyers exclusively represents employees. If you enjoyed this article, please consider sharing it. We update our Employee Rights Blog regularly and encourage you to visit often.