A. The Canadian Employment Relationship

Canadian employment law is predicated on the notion that the relationship between an employee and an employer is a contractual one. The contract is governed by legislative minimums that underpin common law principles (except in Québec, where only the Civil Code is applicable). The employment contract usually takes one of three forms (written, implied or collective) and, in some cases, there may be overlap.

Many employees, particularly executives and senior management, will have a written employment contract which sets out the terms and conditions of almost every aspect of their employment relationship. Other employees may have only a short employment contract, which may outline key aspects of the employment, such as salary, hours of work, position and vacation terms. In both cases, where the contract is silent, legislative minimums will dictate the appropriate terms. Employment contracts may also be unwritten (in whole or in part) and may often include certain implied terms and arrangements that may have been agreed to by the parties, either directly or indirectly through employer policy or past practice.

Employees represented by a union will be governed by the terms of the applicable collective agreement. Employees governed by a collective agreement do not have individual contracts with the employer, and any enforcement of employment terms must be pursued in accordance with the grievance process set out in the collective agreement.  

Regardless of its type, every contract of employment (collective or individual) will expressly and/or impliedly impose obligations on both parties, such as the obligation to provide work, compensation and a safe work environment (in the case of the employer) and the obligation of loyalty and competence in performance of work (in the case of the employee). In the Canadian private sector, employment and labour relations matters are generally governed by provincial rather than federal legislation. However, certain types of businesses will be subject to federal legislation (such as railways, banks, broadcasting and telecommunications). Where a business has operations in more than one province, coordination of policies and practices is critical to ensure compliance with all applicable laws.

B. Termination of Employment

The application of legislative requirements and common law principles (or civil law principles in Québec) to an employment relationship means, among other things, that the concept of “employment-at-will” which would allow an employer to unilaterally terminate the employment relationship without notice and cause, does not exist in Canada.  

In each Canadian jurisdiction, employees whose employment is terminated without cause are statutorily entitled to working notice of termination or pay in lieu thereof. The length of working notice (and therefore the amount of any payment in lieu of notice) will depend on the employee’s length of employment and will vary between jurisdictions. In certain Canadian provinces, as well as those businesses governed by the federal Canada Labour Code, employees will also be entitled to severance payments based on their length of service. Similarly, federally and in certain Canadian provinces, nonunion employees who have been terminated without just cause may be entitled to reinstatement.  

Special notice requirements may apply where there is a group termination of employees. Depending on the jurisdiction, employers may have to notify governmental agencies and provide job search assistance for employees where there is a group termination.  

The statutory termination and severance requirements are quite modest. However, nonunionized employees in Canada are not limited to these minimum statutory entitlements. Provided the contract of employment has not specifically limited reasonable notice to that provided by statute (or a specified greater amount) and the employee has not been terminated “for cause”, the employer is required to provide “reasonable notice” of termination, which is often greater than the minimum required by statute. “Cause” is very narrowly defined and would not include, for example, downsizing due to economic factors. In the event reasonable notice is not provided, the employee may seek further compensation (in addition to required statutory minimums) through a wrongful dismissal action.

When setting the appropriate amount of notice that should be provided, an employer should consider, in addition to years of service, other factors such as the employee’s salary, position held with the company, his or her age and the likelihood of finding similar employment. Common law notice or notice required in accordance with civil law principles in Québec is quite generous and a review of these factors and the case law that has developed should be considered in each case. For union employees, any restriction on lay-off, entitlement upon termination of employment or the right of recall will be set out in the collective agreement.

An employee who has been terminated does have a duty to mitigate his or her damages by making efforts to obtain reasonable alternative employment. Failure to mitigate can reduce the amount of damages to which the employee may be entitled should the employee pursue damages through a wrongful dismissal action. However, minimum statutory notice and severance, if applicable, is not subject to mitigation.  

C. Special Considerations in Acquisition Transactions

In a share acquisition, the identity of the employer does not change. The acquired company, despite the change in share ownership, continues to be the employer for all employmentrelated purposes. This means there is no break in service or seniority (both of which are factors in determining, among other things, severance costs) because a purchaser inherits all obligations and liabilities of the acquired company with respect to employees, extensive due diligence is required in order to assess the scope of these liabilities, whether they relate to historic wrongful dismissal claims, complaints under human rights legislation or even occupational health and safety charges. On-going and past financial obligations relating to vacation pay and statutory withholdings will also have to be considered.

Unlike the Québec Civil Code, where the employee’s employment is deemed continuous even in the face of the sale of the assets of a business, at common law a sale of assets will trigger the termination of employment of the assets of the employees affected by the sale. These employees will have to be given and will need to accept offers of employment with the purchaser, in order for their employment to continue unbroken. In the event that an employee is terminated, does not accept a non-mitigating offer of employment or is not offered employment with the purchaser, the seller is generally obligated to provide reasonable notice or pay in lieu thereof. Therefore normally, a seller will require the purchaser to offer employment to all its employees on the same or substantially the same terms and conditions to avoid these notice and severance requirements. Employees who do not accept offers of substantially similar employment from the purchaser are still under a duty to mitigate and their refusal of a reasonable offer could be prejudicial to their ability to obtain an award of damages through a wrongful dismissal claim. However, in some provinces, an employee who refuses such an offer likely remains entitled to statutory notice and severance, if applicable. Employees who accept employment with the purchaser will generally take with them their accumulated service and seniority.

A purchaser and seller may agree (subject to any collective agreement) to a reduction in workforce prior to closing. It is, of course, a matter of negotiation as to who will pay the costs associated with any such terminations. However, because the purchaser often assumes all the employees of the seller, due diligence and the nature of any representations and warranties in an asset purchase transaction will not be that different from those in a share purchase transaction.

In every jurisdiction in Canada, labour relations legislation will almost always require the purchaser to assume the terms and conditions of a collective agreement following a sale, irrespective of whether the transaction involves a sale of assets or shares and whether or not it involves all or part of the business. In most cases, the purchaser will be bound by the existing collective agreement as well as any pending applications for certification. It will, therefore, be important for the purchaser to review a copy of all collective agreements in order to assess such things as restrictions on plant closures, layoffs, contracting out and transferring or redeploying employees. The collective agreement will also set out any scheduled pay or benefit increases. Any plan to reduce the workforce that is prohibited by the collective agreement will require the consent of the union.

In situations where the purchaser intends to intermingle the seller’s employees with its own, the different labour relations boards across Canada will decide how bargaining rights are affected.