The recent decision of the Ontario Court of Appeal in Manthadi v. ASCO Manufacturing, 2020 ONCA 485, analyzed the common law approach to the calculation of reasonable notice when a vendor terminates a worker’s employment in an asset purchase transaction, the employee signs a release and is hired by the successor employer, and the successor then terminates the employee’s employment. The decision indicates that the employee’s past service with the vendor may be a factor in the reasonable notice calculation, which involves weighing the experience the employee brings to the successor employer and does not involve “stitching together the employee’s two terms of service.”  

Furthermore, Manthadi establishes that in the context of an asset purchase transaction, when an employee releases the vendor from all liability in connection with the employee’s employment, the employee will not be disentitled  from making a claim against the successor. A payment made to the employee under a Settlement and Release Agreement (“Release Agreement”) could, however, be relevant to the length of the notice period assessed against the successor employer. In addition, the factual circumstances surrounding the making of the Release Agreement and its terms may be relevant to a court’s assessment of an employee’s understanding of how they would be treated on the sale of the business, and the terms on which they would be employed by the successor.

Background

For approximately 36 years, the respondent (“Employee”) was employed by a company operating as ASCO Manufacturing Limited (“Vendor”). The appellant (“Purchaser”) purchased the Vendor’s assets and business name. In the Agreement of Purchase and Sale (“Agreement”), Vendor warranted that it had provided notice of termination and paid severance to all employees, and indemnified Purchaser against all claims arising from a breach of its warranties. Vendor presented Employee with a Release Agreement, which provided written notice that her employment would be terminated, and indicated that she would be paid eight weeks’ gross compensation in satisfaction of all claims. Employee was advised that she would be offered continued employment with Purchaser and released Vendor from all liability in connection with her employment and its cessation. Employee was hired by and worked for Purchaser for one month when she was laid off and never recalled.

The terms of Employee’s employment with Purchaser and the capacity in which she was employed were disputed. Purchaser said Employee was hired for general labour on a temporary basis to move the purchased assets to the Purchaser’s place of business. Employee said she was offered and accepted employment by Purchaser on an indefinite basis. The parties also did not agree whether there was an express understanding that Employee would be credited with her years of service with Vendor, or on the impact of the Release Agreement. By way of a motion for summary judgment, the Employee sued the Purchaser for wrongful dismissal.

Decision of the Motion Judge

The motion judge granted Employee’s summary judgment motion, holding that Employee had been continuously employed for 36 years, and the proper notice period was 20 months. The motion judge also held that the Release Agreement was not relevant as it dealt with relations between Employee and Vendor, not relations between Employee and Purchaser. Purchaser appealed the motion judge’s decision to the Court of Appeal.

Decision of the Ontario Court of Appeal

Summary Judgment

The Court of Appeal set aside the summary judgment and ordered that the matter proceed to trial.  It considered summary judgment inappropriate given the disputed facts before the motion judge; cross-examination on the parties’ affidavits in a summary trial was  necessary to resolve them.  

Common law approach to reasonable notice by successor employer

The court confirmed that Addison v. M. Loeb Ltd. (1986), 25 D.L.R. (4^th) 151 (OCA), a prior decision of the Court of Appeal, establishes the law in Ontario for how to calculate damages for reasonable notice of a long-term employee whose employment is terminated by a successor that purchased the employer’s business. Addison recognizes the employee’s service by attaching appropriate weight to the employee’s prior “experience,” one of the factors set out in Bardal v. The Globe & Mail Ltd. (1960) 24 D.L.R. (2d) 140 (Ont. H.C.), the seminal decision that establishes how to determine common law reasonable notice. In addition to weighing the employee’s experience, Addison weighs the benefit of that experience to the purchaser.

Addison does not “stitch together the employee’s terms of service with the vendor and purchaser” and consider them one continuous period of employment, or use length of service as the yardstick. The approach in Addison is flexible and enables the court to deal fairly with all of the circumstances of an employee’s claim. Under “the rubric of experience,” courts can recognize all or some of an employee’s service with the vendor employer to arrive at a result that is fair, and that does not devalue the employee’s past service. Notably, the notice periods awarded in both Addison and Bardal were no less than the outcome had length of service been used as the yardstick.

The Settlement and Release Agreement

 The Court of Appeal agreed with the motion judge that the Release Agreement did not disentitle Employee from making a claim against Purchaser. However, it concluded that:

1. The payment made under the Release Agreement could be relevant to the length of the notice period assessed against Purchaser; and
2. The factual matrix surrounding the making of the Release Agreement, and its terms may be relevant to Employee’s understanding of how she would be treated on the sale of the business and the terms on which she entered Purchaser’s employment.

There was no valid Vendor/Employee agreement limiting Vendor’s notice obligations under the Employment Standards Act, 2000. The court noted that the fact that the payment to  Employee was less than pay in lieu of notice that a long-term employee might have expected could support the inference that Employee understood that she would be employed by Purchaser on an indefinite basis and that she would successfully mitigate all damages from her termination by Vendor. 

Bottom Line for Employers

Manthadi confirms, among other things, that if a purchaser in an asset purchase makes an offer of employment to any of the vendor’s employees and subsequently terminates their employment, the employee’s past experience with the vendor and the benefit of that experience to the successor will factor into a calculation of common law reasonable notice. 

Manthadi also establishes that while an employee’s release of the vendor in an asset purchase will not preclude the employee from making a wrongful dismissal claim against the purchaser, other factors relating to the release may be relevant.    

Accordingly, in asset purchase transactions, purchasers should retain experienced employment counsel to help them carefully consider whether to offer employment to the vendors’ employees, and if so, to help them draft their offers on terms that will protect them from liability to the extent possible.