The Ontario Superior Court ruling in Manthadi v. ASCO Manufacturing, 2019 ONSC 5572 highlights how an employer can end up with unexpected employment liabilities after an asset purchase deal. It highlights the importance of careful wording when hiring employees in those situations.

What Happened?

The employee was a welder with Asco Manufacturing Limited (the "Old Company"), a furniture production company. She started in 1981.

In 2017, the Old Company sold its assets to a numbered company (the "New Company"). As part of the asset purchase agreement, the Old Company paid out all of its employees their entitlements for notice of termination and severance pay under the employment standards legislation.

The employee was told of the asset purchase deal on September 28, 2017. The Old Company stated her employment would end on November 24, 2019 and gave her a release to sign in return for the notice and severance pay.

The New Company then made an oral offer of employment. There was no paperwork. The employee accepted.

The employee then executed the release in favour of the Old Company and was paid out by it.

The asset purchase deal closed on November 2, 2017. The employee continued to work without interruption, though her stated date of termination with the Old Company was November 24, 2019.

In December 2017, the New Company put the employee on a temporary layoff. The employee attempted to contact the New Company the next month to ask when the layoff would end. She did not get an answer. Instead, in February 2018 she received a Record of Employment stating her employment commenced on November 6, 2011 and that her employment had ended on December 13, 2017 as a result of a shortage of work.

The employee sued the New Company, claiming an entitlement to common law notice based on her full tenure with the Old Company and with the New Company. There was no contractual provision limiting the employee to less than common law notice.

What Did the Court Say?

In theory, when a person's employment with one employer ends, and starts with a new employer after an asset purchase deal, the two periods of employment are distinct under common law.

In Ontario, however, the legislation provides employees with some protection against the possibility of losing seniority as a result of an asset purchase deal. Section 9(1) of the Employment Standards Act, 2000 says that, "[i]f an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act […]."

In theory, this section only protects employees' statutory rights when they are transferred as part of an asset deal. In Ontario, service-based entitlements arise for vacation (and vacation pay), notice of termination, and severance pay. The result is that purchasers cannot contract out of recognizing employees' past service for the purposes of the Employment Standards Act, 2000. The legislative provision does not expressly provide that common law rights continue.

As some employers might lament, however, sympathetic plaintiffs can result in outcomes less rooted in theory. This was the case in this instance. The plaintiff in this case had significant service, her transfer to the purchaser was seemingly treated in a haphazard manner, and the buyer later put her on layoff and then disappeared.

In this case, the Court had little sympathy for the New Company. It decided that the New Company inherited all service of the employee for the purposes of her entitlements at common law, not just for the purposes of her statutory rights. It also decided that the Employment Standards Act, 2000 payout the employee received from the Old Company would not reduce any of her claims against the New Company, despite those payments having been made to satisfy all the employee's statutory entitlements accrued up to her date of transfer.

The employee was awarded damages for a common law notice period of twenty (20) months.

Lessons Learned

This case shows that the failure to properly manage the transfer and hiring of employees can result in unexpected liabilities to the buyer in an asset purchase deal.

The employee's transfer from the old to the new company had been done in a disorganized manner. Her termination and hiring dates between the companies, and the information provided to her, was confusing. Her transfer could have been handled much better. In particular, a properly drafted offer of employment by the New Company could have limited its liability.

In its ruling, the Court noted that there was no agreement with the employee that the New Company would recognize her past service for statutory purposes only. It was never agreed that her past service would not be used for other purposes, such as her common law entitlements.

Purchasers in an asset deal should be aware of the new employer's fate. Proper offers of employment are key. They should set out express terms including any limitations to recognizing past service with the seller (other than those protected by applicable employment standards legislation). This may provide protection against the purchaser unwittingly being "on the hook" for an employees' past service.