When a company purchases another business, it is important to consider the legal implications respecting the status of employees. The Ontario Superior Court recently decided a case regarding the validity of an employment contract where an employee had signed an agreement with his former employer but never executed a new agreement when the company was purchased by another business. The plaintiff argued that the employment contract only governed the previous employment relationship. The Court disagreed, finding that the terms of the employment contract still applied.
The Plaintiff was employed by Centricity which was purchased by Open Text. The Plaintiff had signed an employment contract with Centricity which provided him with notice of termination under the Employment Standards Act (the “ESA”), plus an additional four weeks. He also received a one month sabbatical every five years. When Centricity was purchased by Open Text, the Plaintiff was not asked to execute a new employment contract but he did sign a new non-competition and non-solicitation agreement. All of his other terms and conditions of employment remained the same except Open Text did not offer the one month sabbatical. Although the Plaintiff was displeased that Open Text would not be offering the sabbatical, he never raised this concern with the company.
When the Plaintiff’s employment was terminated by Open Text he was provided with ESA notice plus an additional four weeks as provided in the terms of the employment contract. The question for the Court was whether he received sufficient notice of termination. The court looked at three issues: (1) Whether the contract was binding, (2) Whether it continued in effect after the takeover of Centricity, (3) Whether the Defendant could rely on its terms. The Court found that the employment contract was binding. The employment contract had a clause which provided that the agreement could be assigned by the Company to any affiliate of the Company, and that it would be binding on the parties and their respective successors and assigns. The Court found that the employment contract was binding on Open Text as a successor to Centricity. Although the Plaintiff had signed a new non-competition and non-solicitation agreement provided to him by Open Text, this did not constitute a new employment agreement.
The next consideration was the effect of the takeover of Centricity by Open Text on the employment relationship. The Court determined that the employment relationship remained unchanged. The transaction was an amalgamation, which, unlike an acquisition, does not change the corporate identity of the employer. The Court cited well established case law regarding the distinction between share and asset purchases with respect to employment status, which provides that since a sale of shares does not change the corporate identity of the employer, it does not automatically lead to the termination of the employment relationship.
Finally, although Open Text changed one term in the employment contract, the offer of a sabbatical, this was never challenged by the Plaintiff and it was not argued at trial that this represented a fundamental breach of the employment contract. As such, Open Text was able to rely on its terms when it terminated the employment relationship.
Written employment contracts are a valuable asset to an employer and can significantly reduce the potential liability upon the termination of employment. An employment contract can be used to clearly spell out the terms and conditions of employment, including an employee’s entitlement to notice when employment is terminated. A well drafted employment contract can protect an employer from costly litigation. Additional considerations may apply when a company is considering the purchase of another business. The nature of the transaction will affect the employment status of employees in the business being purchased. For instance, had there been as asset purchase in this case, the employer would have needed, at a minimum, to have the employees’ consent to the assignment of their employment on the same terms and conditions. Companies should always seek legal advice on the potential liabilities associated with employees prior to entering a transaction.
This was first published on First Reference Talks, on May 8.