A merger or acquisition creates challenges and opportunities for organizations in a number of ways, including the employment law issues that face the new unified workplace. This paper will discuss four areas of employment law where a merger has a major impact: union representation; mass terminations under the Employment Standards Act; golden parachutes for executives; and constructive dismissal.
When a business is sold, all collective agreements that the business had with its unions automatically continue in force. The purchaser 'steps into the shoes' of the vendor and is automatically bound to those collective agreements. As part of the purchaser's responsibility under the old collective agreement, the purchaser is responsible for all outstanding union grievances filed prior to the purchase. The provisions in the federal and provincial labour relations legislation on what counts as a sale for these purposes are quite broad. The form of the merger does not matter. A share purchase, an asset purchase, or even a corporate reorganization can all be a "sale of a business" in this context. Instead of focusing on commercial law concepts of "sale", the provisions cover any transfer of a business, in any manner, including a lease. Even buying the assets of a company assigned into bankruptcy and continuing its business is a sale. Unions' certification to bargain is not based on the identity of particular employees, it is based on the identity of the employer and on job functions. So, if the same job functions are performed that were previously covered by the union, the union and the collective agreement can still be in place even if the purchaser does not hire the old employees. The circumstances under which a business is not considered to be sold, and where the purchaser is not bound by existing collective bargaining, tend to be those where the purchaser bought the land, buildings or equipment, but not the goodwill, accounts receivable, inventory, licences and managerial expertise. Where the purchaser and the employer disagree on whether a business has been sold, either can make an application to the appropriate labour board, federal or provincial, to determine the issue. The labour boards tend to accept these applications for quite long time after a transaction, sometimes even years later.
The legislation in Ontario has a special provision for cases where the purchaser changes the character of the business such that it is "substantially different" from the business of the vendor. In such a situation, the employer can bring an application within 60 days of the sale to terminate the bargaining rights of the union. For labour relations purposes, the sale of a business occurs on the date when the new owner takes over responsibility for the employment relationship and the operation of the business, not the date the financial transaction is finalized. It is on that date of responsibility for the business, not the financial transaction date, that the 60 days begin to run. The federal legislation, applicable to federally regulated industries such as banking and telecommunications, has no analogue to the Ontario provision for a change in the character of the business.
Where a purchaser without a union acquires a company with a union, or where a purchaser with a union acquires a company without one, the bargaining status of the all the employees can be put into play. The union's original certification will generally either cover all employees except managers and confidential employees or cover employees who perform certain functions. If the employer "intermingles" union and non-union employees, the union or the employer can make an application to the appropriate labour board. Intermingling refers to operational mixing of the businesses and integration in terms of structure, policy, and managerial reporting. On receiving an application, the labour board can determine whether the employees are represented by the union and what the appropriate bargaining unit is, which will determine which employees are represented by the union. Labour boards are not necessarily eager to change bargaining units that have worked well for collective bargaining in the past, and will not usually do so because of nominal intermingling. They will change the unit, however, where there is significant intermingling. If there is a change to the bargaining unit, the union will usually need to win the support of the employees. If, putting the two workforces together, there are many more unionized employees in the relevant group than there are non-unionized employees, the board will often just declare that the union represents all the employees. Otherwise, the board will order a representation vote. If the majority of the employees vote against the union, the union will no longer represent any of the employees. If they vote in favour, it will represent all of them. The potential of these provisions to significantly change the collective bargaining landscape for the employer makes the rules around intermingling quite important. Employers contemplating a merger and the business benefits to be gained from integrating organizations need to take these considerations into account.
Sometimes employees at both the vendor and the purchaser are represented by unions. The rules for this situation are somewhat similar. Both collective agreements initially continue in force, with the purchaser again being automatically bound to any collective agreement made by the vendor. Where the employees in the two unions are intermingled, either of the unions or the employer can make an application to the labour board. The board will decide what bargaining unit or units are appropriate. The employer is not entitled to assume that the larger union will prevail, and must adhere to both collective agreements. The board has ordered representation votes even where more than 80% of the employees were represented by one union. Since both collective agreements remain in force until the board makes a declaration otherwise, the employer must cope with the fragmentation of labour relations in the interim. The same standards apply to the intermingling of employees of two different unions as apply to the intermingling of union and non-union employees. It will sometimes be the case that a reorganization that accompanies a merger will intermingle non-union employees with multiple unions. In the event that a board determines that the appropriate bargaining unit includes employees from both unions and non-unionized employees, the employees be able to vote for three options: the first union, the second union or no union. The voting in such situations is by successive ballots, dropping the least most popular option. Where more than two unions are present, the rules are the same, and any vote simply uses additional rounds of balloting.
EMPLOYMENT STANDARDS ACT
Like the labour relations legislation, Ontario's Employment Standards Act automatically makes the purchaser of a business the successor of the vendor. Like the labour relations legislation, the Act defines sale of a business very broadly, including a lease, transfer, or disposal of the business in any manner. The Act deems the employee's employment with the vendor to have been with the purchaser for the purpose of calculating the length employment. There is an exception to this rule if the purchaser does not hire the employee until more than 13 weeks have passed since the earlier of the sale of the business and the employee's last day with the vendor.
Many mergers involve the termination of a large number of employees. The Act has special provisions that apply to mass terminations. These provisions take precedence over the normal requirement for notice, or pay in lieu of notice, which is a maximum of eight weeks for employment of eight years or more. The mass termination provisions apply where an employer gives notice of termination to 50 or more employees in the same four week period, at the employer's establishment. The employer's establishment is simply the location at which it caries on business. If the employer multiple locations are within the same municipality, however, those locations count as one establishment. This can sometimes mean that terminations at the vendor's premises and the purchaser's premises are added together. Under the mass termination provisions, for all employees with more than three months continuous employment the notice period depends on how many employees are terminated. The notice period is eight weeks where 50-200 employees are terminated, 12 weeks were 200-500 employees are terminated, and 16 weeks where more than 500 employees are terminated. There are several important exceptions to the mass termination provisions. Mass termination notice does not apply if the terminations represent fewer than 10% of the employees who work at the employer's establishment and if the terminations are not caused by the permanent disappearance of part of the employer's business at the establishment. The definition of establishment is important again here. If the purchaser has employees at another location in the same municipality, they can be counted to reduce the proportion of terminated employees below 10%. Even if the purchaser's other location is not in the same municipality it is possible to count the locations as a single establishment if there is a written employment contract that gives one or more employees at one location seniority rights that allow them to displace employees at the other location. In addition, employees are not entitled to mass termination notice where they refuse offers of reasonable alternative employment with the employer.
In the common law of wrongful dismissal, the form of a merger can be important, though in practice this it less important than it used to be. In the case of a merger or amalgamation in the legal sense, where two corporations agree to become one, contracts of employment continue uninterrupted. The same is true of a share purchase. An asset purchase is different. The traditional position of the law was that the sale of all the assets of a business terminated contracts of employment. If the employee was employed by the new purchaser, it was a new employment. In general, most courts now consider that the new employment contract has an implied term of an credit for the employee's service with the previous employer. This can, of course, be displaced by an explicit term in the employment contract to the contrary. As a result, even in the case of an asset purchase, the implied term of reasonable notice of termination is likely based the employee's length of service including time with the vendor.
It is not uncommon for an employee to accept an offer of employment from the purchaser but become unhappy with the new arrangement, claim constructive dismissal, and demand damages for reasonable notice. A constructive dismissal occurs where the employer unilaterally makes a "substantial change" to an "essential term" of the contract of employment. A minor change to the terms of the employment contract, while still a breach of the contract, would only give rise to damages, not a right to resign and sue as if there had been a discharge.
Constructive dismissal can take place in a number of ways, but a commonly claimed form of constructive dismissal following a merger is demotion, especially by senior employees. The good faith of the employer is helpful, and courts will sometimes consider the employer's valid business purposes, but these are not the most important issues. The most important factors are an employee's duties, status, and prestige before and after the alleged demotion. A change from general manager to branch manager, for example, has been held to be a demotion. A transfer from project manager to pilot-manager, with a loss of responsibility for international operations, has also been held to be a demotion. The employer is not without any latitude though. In one post-merger case, the employer reduced a former vice-president of sales to western sales manager, and the court found that it was a reasonable reorganization. An employee's title is important because it is an indication of an employee's status and prestige, though the title alone obviously not enough. A change in remuneration can lead to constructive dismissal in itself if it is substantial enough, but the remuneration package is also relevant to determining whether there is a demotion. Retaining similar job responsibilities is very important, especially management responsibilities. There are cases, however, where employees with limited management responsibilities who spent the majority of their time on other functions lost their management duties without being demoted. Even where functions do not change significantly, prestige can be an issue. For example, where the general counsel of the previous entity was offered a position in the legal department of the new entity, there was a constructive dismissal. In ambiguous cases, the law encourages the employee to try the new position out until its scope is established.
In addition to demotion, other potential sources of constructive dismissal claims in the context of a merger include a downward change in reporting relationships and a change in remuneration. Changes in reporting relationships are not usually sufficient in themselves for constructive dismissal, but they can be where prestige is implicated. In one case, five departmental managers, including the manager of engineering services, initially reported to one vice-president. The employer changed the reporting structure so that only the manager of engineering services reported to that vice-president. The court found that as a result of the change, other employees would perceive the manger of engineering services as no more than an assistant in his department to the vice-president, not a full manager. The court found that the manager was constructively dismissed.
It is not the case that a change in remuneration necessarily gives rise to a claim of constructive dismissal. Certainly, a "significant" reduction in remuneration is constructive dismissal. However, if the salary reduction is not significant in relation to the overall income, the reduction is counterbalanced by other increases and is necessitated by the company's legitimate business requirements, it will not be a constructive dismissal. Different judges have taken different views of what a "significant" reduction is, with some finding that $7 a week is significant, and others finding that $10,000 a year out of a salary of $95,000 a year is not significant. It is clear though, that fringe benefits are an important part of remuneration and removing them can result in constructive dismissal where they are sufficiently fundamental to overall remuneration.
In any event, employees are not supposed to run straight to courts when they feel the employer is breaching their contract. In every case of alleged constructive dismissal, there is a general duty on the employee, in the face of a change made by the employer, to attempt to negotiate an appropriate alternative unless it is clear that negotiation would be futile.
CONCLUSION Like the law of labour relations and employment standards, the law of constructive dismissal adds another set of considerations to be taken into account in setting up the newly merged workplace. Employment law has a role to play in shaping an organization's approach to a contemplated, ongoing, or recent merger. In the hands of skilled and knowledgeable human resources professionals and employment counsel, the employer can avoid the pitfalls of employment law and make full use of its protections.