March 18, 2021

Non-Unionized Employee Considerations in a Sale of Business Transaction

Buying and selling a business is not simply a transaction of bricks, mortar and goodwill. Employees of the business being sold are a significant part of the equation, but can present a unique and sometimes challenging problem because they are not assets of the business. The employees are people and the law protects their freedom of choice and security of tenure.  This blog provides a brief overview of one of the implications associated with a sale of a non-unionized business. Specifically, whether or not the purchaser is required to recognize prior employee service. 

The Legal Form of the Transaction is Important

A sale of the shares of a company vs. a sale of the assets has very different consequences for employees.  In an asset sale, the common law deems the employment of all employees of the sold business to be terminated.  If the employees continue employment with the purchaser, it is considered a new legal relationship, subject to the employment standards protections that employees enjoy, which are outlined below.  In a share sale, there is no interruption of the employment relationship.  From a legal perspective, the name of the sold organization has simply changed and all of the employment relationships remain intact pursuant to the contracts of employment already in place.

Employment Tenure Protected by Statute

Nokes v. Doncaster Amalgamated Collieries Ltd, a 1940 decision from the United Kingdom, established that employees must consent to a transfer of employment. The principle is now referred to as the “Nokes Rule”.  The underlying principle of the Nokes Rule is sound.  Employees cannot be bought and sold like assets and chattels.   They must consent to provide their services. 

The Nokes Rule had harsh, unintended consequences for employees, though.  Most employees desire to transfer to the purchaser upon the sale of a business in order to protect their livelihoods.  What many employees found, however, was that the purchaser of the business did not intend to continue their employment long term and released them shortly after starting. The employee was left with no protection. 

To mitigate the harshness of the Nokes Rule, most employment standards legislation requires the purchaser of a business to recognize the service of an employee.  As a result, if the purchaser elects to dismiss the employee, it must provide termination and possibly severance pay, consistent with the employee’s total length of service with the vendor and the purchaser.

Common Law Protections

Any employer who has been sued for wrongful dismissal knows that the statutory minimum requirements for termination and severance pay do not represent the end of the story.  Employees terminated in the absence of a contract of employment that limits their entitlement to the statutory minimums are entitled to reasonable notice of termination.  

What is reasonable will depend on the employee’s age, the availability of similar alternative work and the employee’s length of service.  Purchasers who employ the employees of a selling business may be liable to recognize the employee’s service with the vendor, despite the fact that the law considers employment with the purchaser to be a new relationship.  In a recent Ontario Court of Appeal decision, the Court of Appeal confirmed, in Manthadi v. ASCO Manufacturing, that an employer does not automatically recognize an employee’s prior service following a sale, in the absence of a written employment agreement that resets service time and limits notice entitlements.  However, a purchaser who assumes employment relationships and relies on their skills and experience to allow the business to continue to operate as a going concern following the sale is more likely to inherit prior service time.  In Ontario, at least, each case needs to be evaluated on its facts to determine if a purchaser inherits employee service time. To avoid common law recognition of prior service, purchasing businesses are well advised to enter employment agreements with transferring employees, prior to the sale of business transaction. 

The above is simply a snapshot, albeit often the most important, of the considerations an employer must account for when purchasing a business.  As noted, a written employment agreement is often the answer to avoiding significant and unanticipated liability.  

There can be a number of additional considerations that the purchaser of a business needs to take into account concerning employee issues. The purchaser of a unionized business will inherit the vendor’s obligations with respect to a trade union’s bargaining rights.  Further, employees on leave of absence must be accounted for as they can be a source of unexpected liability for a purchaser.  Whether a business sits on the selling or purchasing side of a business, the involvement of an employment lawyer is always well advised and value added.