To meet changing business objectives, a business may transfer, sell, lease or outsource a part or all of its operations to another business. From an employment perspective, this means that an employee may cease employment with a vendor and accept employment with the purchaser. The consequence of this change in employer is dealt with in section 9 of the Ontario Employment Standards Act, 2000 (ESA), which provides that

the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.1

Absent this provision, an employer that terminates an employee’s employment may have a statutory obligation under the ESA to provide service-based notice and severance payments to the employee. Section 9 of the ESA instead deems that the employee’s employment is not terminated and requires that the purchaser recognize the employee’s service with the vendor in calculating any future notice and severance payments.

How do a purchaser and vendor know when a contemplated business transaction involving the transfer of employees will be a “sale of a business” under the broadly drafted language of section 9? The ESA itself gives no assistance other than to provide that the definition of “business” includes “any activity, trade or undertaking” and that “sells” includes “leases, transfers or disposes of in any other manner”, and “sale” has “a corresponding meaning.” However, a recent Ontario Court of Appeal decision, Abbott v. Bombardier Inc. (c.o.b. Bombardier Aerospace)2 provides additional guidance in finding that an outsourcing transaction is a sale of a part of a business under section 9.

The Outsourcing Transaction

Under the terms of a contract between Bombardier Inc. and Conseillers en Gestion et Informatique CGI Inc., Bombardier outsourced its information technology services (ITS) group to CGI. The agreement provided that Bombardier would transfer assets of the ITS group to CGI, and CGI would offer employment to 194 employees in the ITS group. On July 10, 2003, Bombardier gave the ITS employees notice that their employment with Bombardier would end in eight weeks, that CGI would make offers of employment on equivalent terms and conditions to perform substantially the same work performed at Bombardier, and that their service with Bombardier would be recognized by CGI. On August 13, 2003, CGI made written offers of employment, which all the employees accepted. They commenced working for CGI on September 8, 2003.

Action against Bombardier for Severance Payments

On March 5, 2004, a number of the employees commenced an action against Bombardier, claiming severance pay under the ESA. The employees argued that section 9 did not apply and Bombardier had a severance payment obligation because either no sale of a business had taken place or the terms of employment with CGI were fundamentally different and therefore precluded continuity of employment.

On a motion and cross-motion for summary judgment, the Ontario Superior Court of Justice concluded that there had been a sale of a business and the employees were not entitled to severance pay. In making this determination, the Court found that section 9 should be interpreted broadly to include a range of transactions, including outsourcing of work. The Court declined to interpret section 9 more narrowly by using a “going concern” test applied in arbitral decisions to interpret the meaning of a sale of a business under section 69 of the Ontario Labour Relations Act.3 Instead, the Court found that a broader interpretation was more consistent with the objects and intents of section 9: to ensure the protection of employee entitlements during times of corporate change by ensuring recognition of prior service.4

The Court disagreed with the employees’ analysis of the impact of the purchaser’s offer of employment on radically or fundamentally different terms. Instead, the Court found that the terms are irrelevant once the employee accepts the offer.5 The Court also concluded that in any event, the evidence presented did not show that the terms of employment with CGI were fundamentally different.6

Court of Appeal Confirms No Severance Payable by Bombardier

In dismissing the employees’ appeal of the decision, the Court of Appeal confirmed that section 9 should be interpreted broadly and found that the outsourcing was a sale of a part of a business.7 Further, the Court of Appeal held that the evidence adduced failed to demonstrate that the terms of employment with CGI were fundamentally different from the terms of employment with Bombardier and therefore declined to comment decisively on whether making an offer on fundamentally different terms would preclude the application of section 9.8

The Bombardier decision is significant for two reasons. First, this interpretation of section 9 prevents employees from claiming severance under the ESA twice in respect of the same period of employment. Specifically, this approach denies an employee the simultaneous benefits of (i) statutory severance pay from the vendor; and (ii) contractual entitlement to continued employment with the purchaser with recognition of all past service with the vendor for the purpose of future severance entitlements. Second, the decision provides useful guidance to employers who are contemplating similar changes to their business. Severance payments may be a significant cost when a large number of employees with long service are involved. This decision gives employers greater certainty regarding when a party will incur severance payment costs under the ESA in the context of a sale of a business.