Every contract must have an offer, acceptance and consideration. Consideration means that each contracting party must exchange something of value. Famously, the old English courts said that a "peppercorn" would constitute sufficient consideration. If there is no consideration, the contract is invalid and unenforceable.
On November 16, 2017, the Ontario Court of Appeal faced the following question: when a business's assets have been sold, does a purchaser's offer of employment, in and of itself, constitute sufficient consideration to establish a valid employment contract? The unanimous answer was yes, overturning the trial judge's decision.
Carsen Group hired NK in 2000. In 2005, Olympus Canada purchased some, but not all, of Carsen's assets. NK signed a new employment agreement with Olympus. The Olympus agreement included clauses limiting NK's compensation in the event of termination without cause. It also stated that NK would be treated as a new employee. The agreement released Olympus and its affiliates from any claims regarding NK's employment or termination from Carsen.
NK did not receive a bonus for signing the Olympus agreement. Further, NK's entitlements in the event of a termination without cause were less than those in his agreement with Carsen.
NK was later terminated without cause on May 19, 2015. He received a severance offer in accordance with the Olympus agreement. But NK sued for wrongful dismissal. He alleged that the termination clause in the Olympus agreement was unenforceable because it was not supported by consideration. NK relied on case law as well as section 9(1) of the Employment Standards Act, 2000 (ESA).
Trial Judge's Decision
Justice Dow of the Ontario Superior Court agreed with NK that the Olympus agreement was unenforceable for lack of consideration. The trial judge awarded him 19 months of pay in lieu of reasonable notice.
Justice Dow relied on comments from the Ontario Court of Appeal in 2004 (Hobbs v TDI Canada Ltd. - PDF) stating that any amendment to an employment agreement must be supported by consideration, especially in the employment context where there is an inequality of bargaining power between employees and employers. Olympus' lawyer distinguished the Hobbs case because it involved an amendment to an existing employment agreement; it did not involve a new offer of employment from a new employer who had purchased business assets. The trial judge rejected this argument on the basis that the substance and nature of the business remained the same. NK had the same pay and job duties under the Olympus agreement.
Court of Appeal Decision
The appeal court agreed with Olympus' counsel that Hobbs was distinguishable. It ruled that additional consideration is required only to support a variation of an existing contract. The Court then clarified the legal principles applicable to NK's circumstances. In the context of an asset purchase, the law deems the seller's employees to be constructively dismissed when the sale of a business results in a change of the employer's legal identity. A new contract of employment is entered into when an employee accepts an offer of employment from the asset purchaser.
A new offer of employment from an asset purchaser, in and of itself, constitutes good consideration even if the employee's job duties do not materially change. Further, asset purchasers are not bound by the terms of the seller's employment agreements, nor are they required to offer the seller's employees' contracts on terms identical to their original agreements. Lastly, the Court found that section 9(1) of the ESA, which deems continuity of employment for the purpose of calculating an employee's period of employment, is of no assistance to NK.
Asset purchasers can rest assured that employment agreements offered to a seller's employees are legally binding, even if no additional compensation, like a signing bonus, is given when the offer is made. Additionally, asset purchasers are free to offer new employment agreements on any terms, including terms that may limit an employee's entitlements upon termination without cause. Of course sellers will often seek commitments from the purchaser not to make any such significant changes, so as to minimize the seller's liability.
Furthermore, purchasers should still be wary of the wording of termination clauses contained in their offers of employment. Although the appeal court did not have to deal with it in this case, the Court still cautioned that it will carefully scrutinize termination clauses and interpret them in a way that encourages compliance with the ESA.