Monday October 14, 2019
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To accept or not accept? Employees’ Duty to Mitigate Upon the Sale of a Business

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What happens to employees when a company sells its business but neither party wants to fully take on all of the liabilities associated with the current employees?

This often happens in relation to the reasonable and statutory notice of employees “bag” without the parties truly knowing “who” should be left holding this bag.  With long serving and higher-level employees, this bag can be quite hefty.

The “structure” of the sale will significantly answer this question.  Is it an asset or share sale?

As a rule of thumb, sellers prefer share sales where all of the assets and liabilities (including the notice bag) go to the buyer, who will “stand in the shoes” of the seller – including in relation to employment contracts, and buyers prefer asset sales where they can pick and choose what assets and liabilities they take on – including employees they offer new employment to and on what terms and conditions.

Often as part of asset sales sellers negotiate into their deals, with or without a reduction in the purchase price for the value of the notice bag, the requirement that the buyers offer new contracts to the employees that both recognize their past service to the seller and are “substantially similar” to their existing employment contracts.  Doing so both insulates the sellers from wrongful dismissal claims and takes care of the former employees.  This apparently did not occur when Imperial Oil Ltd. Sold part of its business (i.e., an asset sale) to Mac’s Convenience Stores Inc. and resulted in the newest Ontario Court of Appeal (OCA) decision in Dussault v. Imperial Oil Ltd., [2019] O.J. 2800 that confirms that any offer of alternate employment isn’t “comparable” and doesn’t automatically satisfy an employee’s duty to mitigate their reasonable notice damages.

In the Dussault decision, the plaintiffs Dussault and Pugliese were both long service managerial employees of over 39 and 36 years respectively – meaning they were employees under the common law who out of the gate were entitled to 24 months of reasonable notice based on their total compensation packages, subject to their duty to mitigate.  The plaintiffs’ compensation packages with Imperial included base salaries and participation in both a savings and retirement income plan.

Mac’s offer of employment did not recognize the plaintiffs’ substantial years of service with Imperial, only guaranteed their base salary for 18 months (and decreased it thereafter) and provided a one-time lump sum payment to compensate them for the reduction in their benefit plans (i.e., no more savings and pension plan employer contributions of 3% of base salary each – 6% total) on the condition that they sign a full and final release in favour of Mac’s.

The plaintiffs refused Mac’s offer of employment and turned back to Imperial to provide reasonable notice.  When Imperial refused they brought wrongful dismissal claims.  Being so confident in their entitlements, the employees proceeded with summary judgement motions and were each awarded 26 months of reasonable notice (albeit not reflective of their total compensation packages as only awarded 3% of their 6% of base of employer contributions) given that the motion judge agreed that the offers were unreasonable.

Imperial appealed the motion judge’s decision arguing that the employees failed their duty to mitigate (but not on the length of notice – 26 months) and the employees cross-appealed it in relation to the award of only half of their employer contributions.  The OCA dismissed Imperial’s appeal, allowed the cross-appeal and awarded the missing 3% of base as well as partial indemnity costs of the appeal of $22,000 reaffirming that employees are entitled to compensation equivalent to the compensation they would have earned if they had remained employed during the reasonable notice period.

The take aways: 

Before engaging in a sale of business transaction, ensure that you seek advice and understand all implications of the deal’s structure (as there are tax and other implications).      

Be aware that the answer to the question whether an offer of alternate employment arising out of a transaction is comparable is a fact driven analysis involving consideration of the all of the terms and conditions being offered (e.g., the location and hours of the work, the new job’s status, the entire compensation package relative vs. the former terms and conditions of employment).

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  • To accept or not accept? Employees’ Duty to Mitigate Upon the Sale of a Business

    By Sheryl Johnson Time To Read: 3 min