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Can an employer be liable to an employee for previous service to a related employer?

In unionized industries and in particular the construction sector, there are well established rules governing when multiple companies can be considered a single employer under the law.  Dozens of multiple employer applications per year are brought in Ontario alone.  The same cannot be said about common employer determinations in the non-unionized sector.  However, a recent case heard by the Ontario Superior Court of Justice dealt with such a situation.

In King v 1416088 Ontario Ltd, the plaintiff was a long service employee of a business engaged in liquidation, valuation and auctioneering called “Danbury.”  The employee had initially been hired by a company called Danbury Sales (1971) Limited as a bookkeeper in 1973.  Over the course of his employment, the business of Danbury was carried on by no less than seven different corporate entities at various times.  Finally, in October of 2011, while working for Danbury Industrial, a company continuing from his original employers, along with all other employees of the company, was terminated without cause or notice.  At the time, the formal employer of the plaintiff had been Danbury Industrial for approximately six years.

In December of 2011, a company established but not engaged in business prior to the employee’s termination called DSL Commercial (“DSL”) began operating under the Danbury name.  The plaintiff brought an action against DSL and all prior Danbury companies for wrongful dismissal.

The dispute in front of the court was whether all of the companies for which the employee had worked under the Danbury name and the apparent successor company DSL were considered the employer.  The employee argued that all of the companies carried on the same business, albeit at different times, and the Court should treat them as the same employer.  The defendants argued that, as a result of pending litigation in 2011, Danbury Industrial was deactivated at the time of the employee’s termination, and that after the employee’s termination, there was a “clean break” from the previous corporations prior to DSL commencing operations.

Since the only corporation against whom the employee could realistically collect was DSL, this question was critical to the real world consequences of the case.

The Court sided with the employee.

The Court found that there were simply too many attributes in common between DSL Commercial and the previous employers to be ignored.  Not only did the companies all conduct business under the name Danbury under the same license, the companies used the same hardware and even office furnishings.  Even in the case of some companies for which there was less direct evidence to their place in the historical legal structure of the business, the Court pointed to the “overall inter-connectedness of the Danbury business, and the plaintiff’s contribution to [them]” as supporting the Court’s decision to treat them as a single employer.  All of the companies were held to be liable for the notice and severance pay payable to the employee.

Lessons for Employers

This case is not a typical sale of business situation, with two arms-length entities engaged in a transaction.  As a result, the outcome in this case is perhaps less of a surprise.

When a sale occurs by share purchase, the purchaser is almost certainly deemed to assume the existing employees along with their past service.  However, when the sale occurs by way of asset purchase, there is flexibility and risk.  When employee service and related efficiencies are deal-breakers, how that risk is shifted can become subject of intense negotiations between the parties.

This case plainly supports the view that courts will not permit employers to engage in a simple shell game with non-arms-length entities to avoid liability for employees’ service.  But it holds lessons for bona fide arms-length purchasers as well.

When purchasing the assets of a business, there are many ways to address the challenges posed by existing employees and their service.  Lawyers at Stringer LLP often advise parties to transactions on the solution to suit their needs.

This blog was originally posted on First Reference Talks, April 11, 2014