The Successor Employer Analysis at Common Law: A Red Herring

There's another interprovincial schism that's emerged in the law on employment successorship issues. This time, Ontario is the outlier, but I think Ontario gets this one right.

The question is how to address successor employers in a wrongful dismissal action: Length of service being an important factor, under what circumstances should I get 'credit' for my service with a predecessor employer?

On a superficial level, many lawyers - even employment lawyers - will tell you that the issue is one of continuity of the relationship. If your employment with the successor employer is the same legal relationship as your employment with the predecessor employer, it's one uninterrupted period of service.

On any doctrinal approach, that superficial analysis is wrong. No matter which side of the schism you come down on, a true 'successor employer' scenario precludes most arguments of a singular employment relationship that bridges multiple employers. (Occasionally, you'll see discussion of a hypothetical argument of 'novation'. Theoretically possible, never actually happens in the employment context, and the technical requirements of it mean that it's not something you're ever likely to see happen in the employment relationship. So while I don't rule it out as a narrow hypothetical exception, it's academic to the point that it bears no further discussion.)

The Basics: The Rule Against Assignment

At common law, an employer cannot generally 'assign' an employment relationship without consent. There are historical and customary reasons for this, pertaining to a distaste for servitude obligations being bought and sold like chattel, and it's subject only to narrow exceptions for restructures as between related companies. In the modern context, the concerns come out - somewhat ironically - in a case involving a Bay Street investment advisor, whose services were (through a series of complex corporate transactions) sold to another company along with a forgivable loan that would be repayable if he resigned.

Despite being seldom invoked - almost a point of legal trivia - the rule against assignment is long-established, and the result is that an asset transaction terminates an employment relationship. In 1986, the Ontario Court of Appeal reflected upon it in Addison:

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.

In 2001, in H.J. Hotels, the New Brunswick Court of Appeal said something similar:

At common law, a contract of employment for personal service is not assignable without the consent of both parties, so that, where there is no such consent, a sale or transfer of a business from an employer to another terminates the contract of employment with the employee.

Share transfers are immune to this phenomenon, because there's not actually an change in the identity of the employer in such a circumstance.

The Operation of an Asset Transfer

To an outside observer, an asset transfer and a share transfer look pretty similar - money changing hands, and a change in management following.

But on the inside, they're very different. A share transfer is simply the purchase and sale of all the shares in a corporation: The corporation, as an entity, still continues on, with all its relationships and contracts and property rights unchanged. The transaction itself only inherently changes the shareholders - though often they'll appoint different directors and officers in turn.

An asset transfer means that NewCo is buying all the assets of OldCo's business - inventory, capital assets, goodwill, intellectual property, etc. (This may be the entirety of OldCo's assets, leaving only a shell with nothing but the proceeds of sale, or it may be one line of OldCo's business.) One purpose of an asset transfer is that these assets come without the baggage of pre-existing contractual relationships with third parties, or potential tort liabilities, except for those obligations expressly assumed by NewCo.  Typically, the parties will secure an assignment of various other commercial contracts - with landlords, suppliers, etc. - but the transfer of the business to the new corporation, combined with representations and warranties by the seller, has the effect of protecting the purchaser from having additional unknown stakeholders coming out of the woodwork and saying "Hang on, you have obligations to me, too."

Often, NewCo will agree to continue employing some or all of OldCo's workers. Usually, but not always, this means having those workers sign an employment agreement.

But aside from the change in management, and sometimes having to sign new paperwork, an employee's life isn't usually particularly disrupted by this. OldCo, to insulate itself from common law dismissal liabilities, usually expects that NewCo will offer similar compensation and maintain otherwise similar terms and conditions of employment. (Take note of this phenomenon, because it's important.)

Successorship

When a company acquires a business line from another organization, and retains the employees performing that work, that company is referred to as a 'successor employer'.

When we talk about successorship generally, we could be talking about three different frameworks.

The first is the 'employment standards' statutory framework. Typically, this has service-based entitlements (like notice of termination), and the statute deems employment (under certain circumstances) to be 'continuous' for the purpose of calculating those entitlements. This deemed continuity usually has the impact of preventing the statutory termination framework from being engaged at all. (This creates an odd-looking matrix in which the employment contract is terminated at common law, triggering common law remedies [subject to mitigation obligations], but where a termination event as defined in the ES framework has probably not occurred.)

The second is the 'labour relations' statutory framework, for unionized contexts, which allows a union to seek bargaining rights in respect of NewCo based on the rights it had in respect of OldCo.

The third is the common law framework, and this is where the schism appears.

In non-unionized context, the primary impact of successorship deals with 'length of service' as a Bardal factor affecting the length of the reasonable notice period. In Addison, the Ontario Court of Appeal held that it was appropriate to treat the employee's service as including his time with OldCo.

In these circumstances and in the absence of an express understanding to the contrary, it would, I think, be unfair to assess the appellant's damages for wrongful dismissal in the same manner as if he had walked into the store for the first time after the respondent purchased the business and became a new employee of the respondent, even at the rank of assistant manager.

In 1987, the BCCA reached a similar decision, but arguably not quite the same, in Sorel v. Tomenson Saunders Whitehead Ltd., recognizing an implied contractual term of recognition of prior service.

We think the legal situation might be conceptualized as follows:

1. When a purchaser acquires a business as a going concern, there is an implied 'term in the contract of employment between it and those employees continuing in the service of the business, that the employees will be given credit for years past service with the vendor for purposes of such incidents of employment as salaries, bonuses and notice of termination.

2. This implied term may be negated by an express term to the contrary. In other words, the purchasing employer may, at his option, advise the employees that he does not intend to give them credit for past services to the vendor. If this is done, the employees have the option of entering into the new contract of employment on these terms or of declining to work for the purchasing company and suing the vendor for wrongful dismissal and damages in lieu of notice.

3. Where the new employer does not advise the employees that he is unwilling to contract on the basis that the employees have credit for past years of service, the employer is deemed to have contracted with the employees on the basis that the employees will be given such credit.

This approach was followed by the NBCA in H.J. Hotels, and then in Alberta was adopted in Kennett v. Superior Millwork.  (The actual proposition was cited by the Court of Queen's Bench; the decision on the whole was upheld on appeal.)

So it's fair to say that the "implied term" analysis is good law in BC, Alberta, and New Brunswick. Honestly, in my years of practice in Ontario, I assumed that we were operating under the same analysis: It's consistent with the treatment in Addison that deemed continuity is presumptive absent an express understanding otherwise.

But apparently not.

Last year, the Ontario Court of Appeal released a decision in Manthadi v. ASCO Manufacturing, clarifying that successorship is not about an 'implied term', but rather about the broad contextual nature of the Bardal analysis. It found a "presumption" that the employee is entitled to credit for prior service, but ultimately the role of the trial court required it to craft a solution fair to both parties bearing in mind the specifics of the scenario.

In doing so, the ONCA expressly split from the Sorel/H.J.H./Kennett framework.

The Contrast

This divide isn't one that's obviously skewed toward or against employee rights. In Manthadi, the plaintiff obtained summary judgment on the basis of an 'implied term' analysis; the ONCA held that the facts surrounding the corporate acquisition were complicated enough that the analysis required a trial, and wasn't appropriate for summary judgment.  The subtext of Manthadi is that there may be cases where employees - despite the absence of a clear employer indication that prior service would not be recognized - may find themselves getting no credit for prior service, or perhaps only partial credit.

Conversely, under the ONCA's approach, an employer notice that no credit will be provided for prior service would not be, in and of itself, determinative of the impact of prior service on the notice period.

There's also a divide in terms of simplicity and predictability. Manthadi illustrates this succinctly: The 'implied term' approach creates a fairly straightforward factual question with a Boolean answer, suitable for summary adjudication; whereas the Ontario approach has larger grey areas which may require a full trial, but leaves open a wider range of results to address the justice of the situation.

Analysis

While there's a lot to be said for improved predictability, Ontario nonetheless gets this right. Appellate courts - particularly in Ontario, but also elsewhere - have repeatedly told us that there's no arithmetical exercise to be undertaken in assessing the reasonable notice period. Various attempts to establish 'rules of thumb' are routinely rejected, and the idea that the Bardal analysis requires us to figure out which length of service to "plug in" to a formula is something of a misunderstanding of how the analysis works.

Moreover, the idea that a person might have a vastly different 'reasonable notice' period depending on whether NewCo uttered a few magic words at the time of the asset transfer...misses the point of reasonable notice.

The Purpose of Reasonable Notice

The core function of reasonable notice is to enable a dismissed employee to seek replacement employment, and the predominant inputs are measured by their likely impact on the employee's job search. There's also some element of recognition of service, in the sense that it's reasonable that a long-term employee who contributed to the organization over the course of decades should expect a more meaningful amount of notice.

But even length of service is at least partially examined in the sense of its impact on employability: With changing technologies and expectations, both in terms of most jobs and of the process for seeking jobs, a 20-year employee is going to have a much harder time adjusting to the job market than a 5-year employee: A long-service employee is more likely to be starting from scratch in terms of preparing a resume, and discovering how to search for a job, how to interview, etc. Updating/upgrading skills may also be necessary to be a competitive candidate; the things that made you competitive 20 years ago may no longer be special, or even relevant.

Furthermore, while a 20-year period of service with a prior employer can show 'commitment', it also often leads to an employee being relatively set in the processes used by the old workplace.

Thus, long-service employees have legitimate challenges when finding themselves suddenly in a position where they need to find a new job. Those challenges aren't ameliorated in the least by the fact that, when your 20 year employer sold its business 18 months ago, the incoming employer said you wouldn't get 'credit' for prior service.

As well, there's a reason why business purchasers often retain some or all of the workers. Their experience, history, and customer relationships add value to the business they're acquiring and operating. So while part of the calculus is that the tenure of the relationship and the employee's demonstrated loyalty simply makes it reasonable to expect more notice, the very point of employee retention is to reap the benefit of these long-tenure relationships.

These underlying mechanics are sort of understood. There's a stunning dearth of literature on the subject, but if you ask most practitioners, you'll get answers covering a range of what I've discussed above. (Some might argue that the sole reason for Bardal factors is re-employability, and that the significance of length of service to the calculus is something of a legal fiction. I simply think there's more going on here.)

So in general - though there can be exceptional circumstances - it doesn't make a great deal of sense to me that a Bardal analysis should treat a 25 year employee differently depending on whether it was all with one employer or there was an asset sale after the first twenty years.

And if we're going to say, as the ONCA did in Manthadi, that the amount of credit one should get for pre-asset-sale service...depends on context...then that's fine, but it really requires us to iron out a better understanding of what 'length of service' does, and why we treat it as we do. In part because, if there are 'factors' that would reasonably ameliorate the significance of lengthy service for an employee through an asset transfer, then realistically those same factors should attract consideration outside of successorship contexts, too.

What Factors Change the Calculus?

One of the relatively unusual facts in Manthadi was that she signed a release in favour of OldCo upon the transition. She also received some pay in lieu of notice, but...not a lot. Almost certainly less than she'd have been entitled to at common law (and by a large margin), and possibly less than even her statutory entitlements would have been if OldCo has just dismissed her outright. (Ontario has a statutory 'severance' regime that applies depending on certain factors, like the size of the employer's payroll, so while she probably got adequate statutory notice, the prospect of additional statutory severance - which would likely be six months in this instance - can't be assessed on the facts in the decisions.)

OldCo put the release to her, and supposedly she waited until she'd accepted new employment with NewCo before signing it.

While there's no question that she continued to work in her job right through the closing of the asset sale, NewCo took the position that she was only retained as a temporary general labourer to help move offices. She was only employed there for about a month after the closing, though the circumstances of the termination are convoluted with an apparent temporary layoff.

If she'd been paid a substantial sum for the release, it might seem a little bit unjust for her to ALSO have a claim for full pay in lieu of notice as against NewCo. But she wasn't. She was a 36 year employee and signed a release in exchange for 8 weeks' pay, apparently in reliance on the fact that her employment was getting picked up by NewCo.

I have a hard time seeing the release itself as impacting NewCo's obligations. (This is especially true if she waited until she had confirmed continued employment with NewCo before executing it, but not limited to that.)

In a case where she had no expectation at all of continued employment after the closing, notice provided by OldCo might be material to NewCo's obligations in the sense that she'd have had some cause to take preparatory steps to seeking re-employment which may remain relevant following termination of her employment with NewCo, but for an individual ostensibly entitled to around 2 years of notice, a few weeks of uncertainty isn't going to have a big impact on that.

Also, I'd highlight that there's a lot of case law on employer arguments that the employee 'ought to have been looking before the notice', and they consistently fail. The expectation is that employers will give clear and unambiguous notice, and if the employee ends up working past the notice date for whatever reason, the notice is a nullity. These are technical requirements, but they make general sense for the most part, in the sense that the obligation to actually seek a replacement job (and the ability to do it meaningfully) ought to require such clear notice.

Could the actual payment to her count, especially given its proximity to her termination by NewCo? After all, isn't that kind of a double-recovery?

Actual notice or pay in lieu provided by OldCo could conceivably be relevant, depending on the amount of pay in lieu, whether it overlaps with remunerative work for NewCo, and when the termination takes place with reference to the period in respect of which she received pay in lieu. (To clarify: While I think there's an argument to be made that termination benefits actually provided by OldCo might impact the analysis, I don't believe the fact of a release in favour of OldCo matters. At all. Period.)

In a case where the notice or pay in lieu provided by OldCo is relatively nominal, I don't think it changes anyone's reasonable expectations in terms of the amount of time needed for her to find new employment, or of broader fairness concerns.

What about the employer's perspective? Presumably, had she not signed the release against in favour of OldCo, she'd have been entitled to seek substantial pay in lieu of notice against OldCo after her termination by NewCo. Shouldn't that affect NewCo's reasonable expectations?

So this one is actually pretty complicated, but the answer is 'No'.

The scenario of 'overlapping notice periods', while a theoretical possibility I've warned many clients about, is super rare in practice: Employee gets dismissed, seeks a new job in mitigation, LOSES his new mitigation job, and then has wrongful dismissal entitlements against both the original employer and the mitigation employer in respect of the same time period. While the original employer probably has a legitimate expectation that the employee will act 'reasonably' in seeking entitlements against the mitigation employer, that's not likely to be a high burden, and I don't see any basis to think the expectation is reciprocal - i.e. that the second employer has any expectation that the plaintiff will maximize notice entitlements from the prior job: You're not mitigating the losses from the second termination by seeking money from your previous employer.

In fact, part of the reason the scenario is so rare is that the acquisition of a new job usually accelerates settlement. If it's early enough in the notice period that 'overlapping notice periods' is a plausible scenario, then the new job (presuming, as parties tend to, that it will continue) creates a very small range of liability in most wrongful dismissal litigation, so it's very unusual, practically speaking, for an employee to continue to press for wrongful dismissal damages that are expected to be mitigated. Manthadi is an unusual manifestation of this phenomenon, but it's not fundamentally different: After acquiring the mitigation job (and before getting terminated from it), she executed a release in favour of the old employer in reliance on that new job.

So, in any event, the new employer likely doesn't know about the pre-existing claim and can't expect to benefit from it. (Indeed, if NewCo does know about those particulars, that the employee is releasing substantial notice entitlements in reliance on the job offer, that could arguably inform NewCo's notice obligations upwards.)

In general, it's hard to see how a release signed as against OldCo can impact the core considerations of Bardal, in respect of a termination that occurs after that release is signed.

However, other factors might:  An employee whose job is fundamentally unchanged over the course of a transition might have a better claim to being given 'full credit' for the earlier service period than an employee whose day-to-day duties, work process, expectations, compensation, etc. have been substantially modified in the transition. The more the employment relationship with NewCo resembles that of a fresh hire, in my view, the weaker the employee's claim to credit for prior service.

This is reasonable on several levels: Firstly, it cuts against the presumption that a person doing the same job for decades will have a harder time transitioning to a modern position with a modern organization; if the person had to relearn the job to perform it for a new organization, that likely enhances re-employability.  Secondly, it reduces the inference that the person was hired for their deep familiarity and experience with OldCo's procedures, and that NewCo exploited the value inherent in the person's length of service.  Thirdly, if the position with NewCo wasn't really a suitable mitigation position in the first place, then the employee had a stronger potential claim against OldCo at the point of termination.

I might be persuaded that an employee with a highly specialized and high-responsibility role should get more credit for service with OldCo than an employee in an unskilled role. Or maybe only in certain cases.

One important point is that 'notice of termination' is largely a proxy for job security: Significant notice entitlements make it less likely that a person will be dismissed, and ensure that, if they are, they'll have time (or compensation entitlements) to try to find new work. So when taking an employee with significant entitlements and proposing to significantly reduce those entitlements based on circumstances entirely outside their control, that should set off alarm bells.

And yes, there are ways that employers can manoeuvre themselves into a position to force an employee to accept such a reduction in notice entitlements, but properly understood, such an employee is typically getting notice: Usually, the mechanism for that is going to be in the form of giving actual reasonable notice of the new term. (I favour a 'terminate the contract and offer a new one' approach, but there are other philosophies.) And for a reasonably sophisticated employee, I don't think anything should set off a louder alarm bell than an employer saying "If we were to fire you right now, we're not happy with the amount of notice we'd have to give you."

So the common law ought to be reticent to impliedly scale back an employee's job security entitlements based on circumstances that are outside their control - and that may not even necessarily be within their knowledge.

As a matter of legal principle, it's perfectly coherent to say that the nature and length of the employee's tenure with OldCo should be assessed in its full context for purpose of the Bardal analysis. But as a matter of practice, I would suggest that there ought to be a strong presumption in favour of the service with OldCo receiving treatment that is the same or similar to an uninterrupted period of service.

Further Remarks

I've always found discussions surrounding contractual modifications of reasonable notice...awkward and unnecessary. It's a legal construct, but it's already contractual in nature, so when you try to create a contractual term that's intended to modify how Bardal gets applied, what you're really trying to do is contract out of reasonable notice altogether, and replace it with...something different.

Which is fine, if that's the intention, but when the intention is effectively to leave in place 90% of the impact of this legally-implied doctrine, while just changing certain details at the periphery (length of service is deemed to exclude period x; this benefit or bonus isn't payable as part of it; etc.), that turns out to be conceptually more awkward than it ought to be.

Far better to expressly contract out of reasonable notice, and into a termination framework that suits the reasonable expectations of the parties, rather than trying to accomplish that through the backdoor by contracting out of service credit, etc.

*****

Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.

This post does not contain legal advice, but only general legal information.  It does not create a solicitor-client relationship with any readers.  If you have a legal issue or potential issue, please consult a lawyer.