Are Employees Obligated to Accept Unfavourable Employment Terms When Their Place of Work Comes Under New Ownership?

Written on behalf of Arbesman Hamilton LLP

When a company (or part of a company) is purchased by another company, it’s natural for employees to wonder about whether their employment situation will change, including whether they will be able to keep their jobs. The Ontario Superior Court of Justice recently heard a case where two employees of a company (“the employer”) were offered continued employment with the company making the purchase (“the purchaser”), though with less favourable employment terms than they had under previous ownership. The employees rejected the offer, and the question before the court was what amount of severance they were entitled to.

Decades of Service

There were two employees involved in the case. The first, a male, worked for the employer for over 39 years and was 63 years old when he was terminated in 2016. He held a number of positions with the employer, and when terminated was serving as Manager, Real Estate Development Ontario which involved developing service stations across the province. His compensation package at the time was as follows:

  1. A base salary of $190,200;
  2. Employer contributions to a savings plan, including a portion in the form of Imperial shares;
  3. Reimbursement of business related 407 tolls and parking costs;
  4. Reimbursement of car costs related to business use and full reimbursement of business vehicle insurance costs;
  5. Reimbursement of home office expenses, including internet, mobile phone, office furniture and supplies;
  6. A defined benefit pension plan;
  7. Six weeks paid vacation, five floater days, and twelve earned days off per year; and
  8. Employment benefits.

The female employee had been with the employer for 36 years and was 57 years old when she was terminated. Her last position with the employer was as Territory Manager, which involved overseeing 24 of the employer’s retail sites. Her compensation package when she was terminated included:

  1. A base salary of $156,700;
  2. Employer contributions to a savings plan, including a portion in the form of Imperial shares;
  3. Direct reimbursement of all out of pocket expenses, such as meals and 407 toll charges;
  4. Reimbursement of car costs related to business use;
  5. Reimbursement of home office expenses, including mobile and land phone lines, office furniture and supplies;
  6. A defined benefit pension plan;
  7. Six weeks paid vacation, five floater days, and twelve earned days off per year; and
  8. Employment benefits.

The Sale of Part of the Company

In 2015 the employer announced it was looking to sell off its retail arm, which included 497 retail sites across Canada. They told their employees that it would take 12-15 months to complete their assessment on the sale and that employees would be kept informed of progress. On March 8, 2016 the employer announced to its retail employees that it had reached an agreement to sell its retail stores and that many of them would be offered employment with the purchaser. Both of the employees in this case were informed on March 9 that they would be offered employment with the purchaser. They were also told that they would be offered a lump sum payment to cover, for 18 months, the difference between their current benefit plan and the one they would be offered by the purchaser. However, they were not told what the amount of the lump sum would be (it came out during the trial that the male employee would have been given $81,800 while the female employee would receive $67,400). They were also told that if they did not accept the purchaser’s employment offers that they would be entitled to severance pay, though of a reduced amount in light of their passing up an opportunity for continued employment with the purchaser.

The New Employment Terms

The female employee was offered a position as Market Manager and was given three weeks to accept the offer, which included the following terms:

  1. Her base salary would remain at $156,700 per year for eighteen months;
  2. She would participate in a defined contribution pension plan;
  3. She would receive a benefit plan that she describes as “less favourable” than Imperial’s benefit plan;
  4. She would receive five weeks of paid vacation per year;
  5. She would be required to participate in a vehicle lease program at a rate of $70.00 bi-weekly; and
  6. She would have to purchase a cell phone for company use.

The male employee was offered a position as Real Estate Development Manager with the following terms:

  1. His base salary would remain at $190,200 for eighteen months;
  2. He would participate in a defined contribution pension plan;
  3. He would receive a benefit plan that he too describes as “less favourable” than Imperial’s benefit plan;
  4. He would receive five weeks of paid vacation per year;
  5. He would be required to participate in a vehicle lease program at a rate of $70.00 bi-weekly; and
  6. He would have to purchase a cell phone for company use.

After eighteen months, the employees were told that their salaries would be adjusted to reflect what the purchaser paid for those positions. The female would be making between $56,500 and $69,952 while the male would expect to make between $85,000 and $102,000. Both employees were told that the purchaser would not recognize their years of service with the employer.

Both employees rejected the offer from the purchaser. The female was terminated on August 12 and provided with $78,100 in severance, equal to what she was entitled to under the Employment Standards Act. Similarly, the male employee was provided with a severance of $94,800.

The employees ultimately decided to retire from the employer, allowing them to keep their severance as well as their pension benefits.

The case was resolved by summary judgment, with the following issues before the court:

  1. What length of notice were the (employees) entitled to?
  2. Did the (employees) fail to mitigate their damages, and specifically by not accepting the offer from (the purchaser)?
  3. What are the (employees’) damages?

Appropriate Length of Notice

The employer argued that since the employees had been given over one year’s notice of the employer’s plans to sell the company. However, court found there to be no basis for shortening the notice period. In situations where a shorter notice period is appropriate, employees often know that their employment is coming to an end. In this case, they were told they could expect to keep their jobs with the purchaser. It would not have been reasonable for them to start looking for alternative employment.

The court turned to the Bardal Factors, a set of factors that should be considered when calculating severance as outlined in the Supreme Court of Canada’s decision in Bardal v. Globe and Mail Ltd. The Bardal Factors include the character of employment, length of service, age, and availability of similar employment. In applying the Bardal Factors, the court determined:

  1. The character of their employment: While neither (of the employees) supervised other employees, they were both in positions with significant levels of responsibility. On its own this factor does not present unusual circumstances, but each of the other factors does.
  2. Their length of service: (the male employee) worked for Imperial for 39 years and (the female employee) worked there for 36 years. In both cases, as in Canac Kitchens Ltd., supra, Imperial was their only employer since their respective graduations from university and college.
  3. Their ages: (the male employee) was 63 years old and (the female employee) was 57 years old when their employment was terminated.
  4. The availability of similar employment in light of their experience training and qualifications: Imperial argues that the offers of employment from (the purchaser) is evidence of the availability of similar employment. However, in my view the (purchaser’s) offers demonstrate the opposite view. (The purchaser) had only agreed to pay the (employees’) base salaries at the same level as what they received from Imperial for 18 months. It is evident that (the purchaser’s) own pay scales for similar employment were significantly lower. This is reinforced by the fact that (the employees) were told by (the purchaser) that they would have to keep their salary confidential so as to avoid conflict with other employees. If anything, the offers from (the purchaser) emphasize the difficulty the (employees) would have in finding similar employment. In addition, given that they had only worked for Imperial for their whole working lives, it is evident that their skills and experience were geared to one particular employer, likely making it difficult to transfer those skills to a different employer.

On Mitigation

The employer argued that the employees failed to mitigate their damages by not accepting the new employment offer. The employees’ position was that the offer was not comparable, and as such, they had no obligation to accept. The court ruled it was not reasonable to expect the employees to accept their employment offers. The offer was made before the employees were terminated, rather than afterwards. Furthermore, the court ruled that it was unreasonable to obligate the employees to accept the employment offer in order to mitigate damages, since doing so would prevent them from suing the employer over notice.

The court also called out the purchaser’s refusal to recognize the employees’ years of service, writing “it was not reasonable to require the plaintiffs to accept an offer that did not recognize their years of service with (the employer). The evidence on the motion confirms that (the purchaser) purchased (the employer’s) retail business as a going concern. Previous cases have recognized that in circumstances where a new employer has purchased a business as a going concern, there is an implied term that the employees’ years of service will be recognized, unless there is an express term to the contrary. In circumstances where there is an express term to the contrary, the employee has the choice to accept the offer of employment with the purchaser or sue the seller for wrongful dismissal and damages in lieu of notice.”

The court also wrote that expecting the employee’s to hide their higher pay from other employees could create an atmosphere of hostility or embarrassment. The Supreme Court of Canada has ruled that terms that could lead to such an environment do not have to be accepted in order to mitigate damages.

Finally, the court wrote that while many aspects of the employment offer were similar to what the employees were making, there were substantial differences in salary and benefits. While the employees were told they would be given a lump sum to bridge the gap in these areas, they weren’t told what amount that sum would be until trial.

In ruling in favour of the employees, the court determined that the employees were entitled to 26 months of notice.

The lawyers of Arbesman Hamilton LLP represent both employers and employees in matters of employment law. We can help employers draft and implement policies aimed at avoiding litigation, while also helping employees and employers understand their rights and obligations in employment matters. Contact us online or call us at 416-481-5604 to schedule a consultation today.