The Court of Appeal of Québec recently ruled in the Boulad[1] case that there was no constructive dismissal arising from the sale of a business to a smaller third-party purchaser. The Court of Appeal overturned a Superior Court decision that would have required the employer to pay substantial damages to a manager who didn't want to work for the new owner.

The Facts

The employee ("B") had been employed for nearly three years in a hotel owned by the Westmont Hospitality Group ("Westmont"). When Westmont decided to sell the hotel to Jesta ("Jesta"), a French company, B held the position of Interim General Manager. B was to maintain his duties with the new employer.

B was unhappy and disappointed with this transaction. He felt that it deprived him of employment with a prestigious hotel group that offered numerous advancement opportunities and that it limited him to a less attractive career path. B demanded that Westmont assign him another position within the Group. Westmont said no. Therefore, B refused to report to work once the hotel was sold to Jesta.

B sued Westmont in Superior Court alleging that he had been constructively dismissed as a result of the sale of the business.

Decision of the Superior Court

The Superior Court agreed with B. It ruled that such a change in employer effectively constituted a unilateral and substantive change in the essential conditions of B's contract of employment. Thus it was a constructive dismissal. The Court noted that an employer's identity and reputation could be very important for any employee wishing to advance in his career. The employer's identity was therefore an essential condition of the employment contract.

The Court added that, in these circumstances, the fact that B refused to occupy a position with Jesta did not constitute a breach of his obligation to mitigate damages. As a result, he was entitled to severance pay damages.

Decision of the Court of Appeal

The Court of Appeal overturned the Superior Court's decision.

Remarking that a change of employer following the sale of a business might cause concern or dissatisfaction to an employee going from a prestigious multinational company to a relatively unknown and local company, the Court nonetheless found that this cannot in itself constitute constructive dismissal.

The vendor employer does not terminate the contract of employment when a business is sold, notably due to the principle of the continuity of employment contracts following this type of transaction. Under Quebec law at least, all of the vendor employer's obligations are thus transferred to the purchaser employer. In this case, there was never any question that B's position would be abolished by Westmont or Jesta before or after the business was sold.

The Court, however, commented that an employer cannot unilaterally and substantially change the essential conditions of the employment contract. Those deal primarily with remuneration, the nature of the duties, and the place where the work is to be performed. In B's case, none of these three characteristics would have been jeopardized following the sale of the business to Jesta.

Also, absent any change in the essential employment conditions of an employee, there must be evidence that the employer's conduct rendered the employee's work situation intolerable in order to find that there has been a constructive dismissal. That didn't happen.

B's refusal to work for Jesta therefore constituted a voluntary resignation on his part.

The Court noted in passing that B could have had an action against Westmont had the latter promised to keep him in its service should the business be sold or to pay him severance pay in such an event. But here, there was no such finding.

The Court further ruled that B's behaviour could constitute one of those rare cases where a dismissed employee's insufficient attempts to minimize his losses could completely deprive him of obtaining damages.

Conclusion

This decision by the Court of Appeal of Québec is of great interest because it closes the door opened by the Superior Court to the effect that a change of employer following the sale of a business may in itselfconstitute a form of constructive dismissal. The loss of prestige associated with being employed by the vendor isn't enough.

The decision clearly reaffirms the right of any employer wanting to sell his business to any third party without incurring severance liabilities, provided the employees preserve their essential conditions of employment. Note, however, that this case was decided under the Quebec Civil Code, and it remains to be seen whether it will be adopted in other jurisdictions across Canada, as the transaction between Westmont and Jesta appears to have been an asset sale.