Ontario’s Court of Appeal has clarified the basis on which reasonable notice should be calculated when an employee is dismissed and then rehired as part of a court-approved plan of arrangement under the Companies’ Creditors Arrangement Act (the “CCAA”).

Background

The employee in Antchipalovskaia v. Guestlogix Inc. initially commenced employment with Guestlogix as a Senior Business Analyst in July 2011.

In February 2016, Guestlogix obtained a protection order from its creditors under the CCAA (the legislation that allows insolvent corporations that owe creditors more than $5-million to restructure their business and financial affairs). In June 2016, a group of investors agreed to purchase the shares of Guestlogix on the condition that the eventual CCAA plan of arrangement (the “Plan”) must contain a broad release of liabilities for employee claims arising prior to the Plan’s implementation date.

Pursuant to Guestlogix’s implementation of the Plan, the company terminated the employee’s employment and then immediately rehired her in the same position. In connection with the termination, the employee submitted a proof of claim in the CCAA proceedings for payment of her statutory termination and severance pay entitlements under the Employment Standards Act, 2000 (the “ESA”).

As a creditor in the CCAA proceedings, the employee was entitled to vote on the Plan. In August 2016, she – together with a majority of other creditors – voted in favour of the Plan, which included the broad release of claims. The Plan was subsequently approved by Ontario’s Superior Court in September 2016. The CCAA monitor then accepted the employee’s claim for termination and severance pay and she received a payment of $13,367.83 (representing her pro rata entitlement as an unsecured creditor).

Following Guestlogix’s exit from CCAA proceedings, the employee continued in her employment with Guestlogix for almost three more years until she was dismissed without cause in June 2019. The employee filed a civil claim for wrongful dismissal and the motion judge awarded damages in lieu of 12 months’ reasonable notice on the basis that she was continuously employed from 2011 to 2019. Guestlogix appealed the motion judge’s decision to the Court of Appeal.

Court of Appeal’s Decision

The Court of Appeal held that the motion judge erred in finding that the employee’s service with Guestlogix should be treated as continuous from 2011 to 2019. In particular, the motion judge’s decision failed to consider that, in the context of approval of the Plan in the CCAA proceedings, the Superior Court had issued an order releasing all claims against Guestlogix (including any claims by the employee) that existed prior to the Plan’s implementation date. Therefore, the motion judge should have treated the employee’s period of employment as running from 2016 to 2019.

That said, the Court went on to explain that the employee’s previous period of employment was still relevant for the purpose of calculating her reasonable notice entitlement. In particular, the employee’s years of experience from 2011 to 2016 provided a benefit to Guestlogix that could be attributable to the period of her employment following her rehire (e.g., there was no need to provide the employee with any additional training). According to the Court:

[W]here an employee is dismissed and rehired in the context of a change in ownership, the length of employment at common law is not deemed to be continuous as it is under the ESA. Nevertheless, the employee’s years of employment with the previous owner may still be relevant to determining the appropriate notice period given that the employee’s past experience brings value to the new employer.

In the Court’s view, a seven-month reasonable notice period was appropriate in this case. According to the Court, seven months (admittedly longer than the notice period the employee would have been entitled to if she had first started her employment in 2016) struck a balance between accounting for the benefit Guestlogix received from her previous period of employment and recognizing the court ordered release in the CCAA proceedings.

Notably, the Court refused to reduce the seven-month period by the amount of statutory termination and severance pay received by the employee in 2016 on the basis that her entitlement to reasonable notice was based on her second period of employment only (despite the Court’s comments about accounting for the benefit received by the company from the employee’s previous service).

Key Takeaways

The Court’s decision is important in that it confirms the scope and enforceability of court ordered releases in CCAA proceedings generally. However, it also casts some doubt on a purchaser’s ability to hit the “reset button” when it comes to employees of the insolvent corporation and their service-based entitlements (e.g., reasonable notice). For purchasers and sponsors looking to buy or invest in distressed businesses, deeper consideration should be given to such service-based entitlements when selecting employees to whom new offers of employment will be extended. In some cases, downward adjustments to the overall consideration offered to the insolvent corporation and its creditors may be appropriate. One way to potentially mitigate such liabilities is by requiring employees to sign new employment agreements with enforceable termination provisions that limit entitlements to the statutory minimums – something that Guestlogix did not have in this case.