In an asset-sale transaction, if the purchaser offers to employ an employee of the vendor, can the purchaser vary some (or all) of the fundamental terms of the employee’s employment contract and rely on the offer itself as sufficient legal consideration for such changes?

In the case of Krishnamoorthy v. Olympus Canada Inc., 2017 ONCA 873, Ontario’s top court ruled that it can.

Facts

The case came before the Court of Appeal from an unreported decision of Justice Grant R. Dow of the Superior Court of Justice, dated September 28, 2016.

The issue on appeal, as framed by the court, was a narrow one: Did Justice Dow err in concluding that the termination clause in the parties’ employment agreement was unenforceable due to a lack of consideration?

The following were the facts referenced by the Court of Appeal in reaching its decision:

• Olympus America Inc. (“Olympus America”) carries on an optical sciences business in the United States. Carsen Group Inc. (“Carsen”), an unrelated company, carried on business as an exclusive distributor for Olympus America’s products in Canada.
• In May 2000, Mr. Krishnamoorthy commenced employment with Carsen as a senior financial analyst. By 2005, he had been promoted to Director of Finance.
• In 2005, Olympus America decided to terminate its distribution agreement with Carsen. Olympus America announced that a new, related company, Olympus Canada, would be established to distribute its products in Canada. Olympus America terminated its distribution agreement with Carsen effective July 31, 2006. Olympus Canada purchased some, but not all, of Carsen’s assets.
• Carsen advised its employees, including Mr. Krishnamoorthy, that Olympus Canada had indicated their intent to offer employment to certain employees. It also advised them that Carsen would provide “an appropriate financial package” for those employees not offered employment with Olympus Canada.
• Carsen had 125 employees. Olympus Canada offered employment to 122 of them, one of whom was Mr. Krishnamoorthy.
• In November 2005, Olympus Canada provided an offer of employment to Mr. Krishnamoorthy under the terms of a written employment agreement. The terms of the agreement were substantially similar to those he had with Carsen with certain exceptions. First, a termination clause limited the compensation Mr. Krishnamoorthy would receive in the event of termination without cause to the greater of (1) notice or pay in lieu of notice and severance pay under the Employment Standards Act, 2000, S.O. 2000, c. 41 (the “ESA”), or (2) four weeks’ pay per year of service with Olympus Canada or Carsen, up to a maximum of 10 months, if Mr. Krishnamoorthy signed a release.
• In addition, the agreement provided that Mr. Krishnamoorthy would be treated as a new employee and, except as otherwise provided in the agreement or as required by applicable legislation, his service with any other employer would not be recognized.
• The agreement also included a clause that released Olympus Canada and its affiliates from any claims that Mr. Krishnamoorthy might have in respect of his employment with and/or termination from Carsen or any other employer that had employed him.
• Mr. Krishnamoorthy signed the employment agreement on December 16, 2005. He did not receive a signing bonus or any other additional compensation for entering into an employment agreement with Olympus Canada. Nor did he receive any pay in lieu of notice or severance pay from Carsen. His employment was to start on August 1, 2006.
• On April 10, 2006, Carsen wrote to Mr. Krishnamoorthy confirming that his employment with Carsen would terminate on July 31, 2006 and that Mr. Krishnamoorthy had accepted an offer of employment with Olympus Canada. Mr. Krishnamoorthy subsequently commenced his employment with Olympus Canada.
• On May 19, 2015, Olympus Canada dismissed Mr. Krishnamoorthy without cause. Olympus Canada offered him compensation in accordance with the 2005 employment agreement. Mr. Krishnamoorthy refused the offer, commenced an action against Olympus Canada for damages for wrongful dismissal, and subsequently moved for summary judgment.
• Before the motion judge, Mr. Krishnamoorthy took the position that, pursuant to s. 9(1) of the ESA, his employment with Carsen and Olympus Canada was continuous. He argued that the termination clause in his 2005 employment agreement was unenforceable because Olympus Canada had failed to provide him with consideration for amending his employment agreement to include that clause.
• In response, Olympus Canada argued that its offer of employment constituted sufficient consideration and, as such, the termination clause was binding.
• The motion judge accepted Mr. Krishnamoorthy’s position. He implicitly concluded that Olympus Canada’s offer of employment did not amount to sufficient consideration and so the termination clause was invalid. He awarded Mr. Krishnamoorthy damages equivalent to 19 months’ pay in lieu of notice.
• In reaching that conclusion, the motion judge found that, upon the sale, Mr. Krishnamoorthy’s remuneration and duties, and the substance and nature of the business, all remained the same. Insofar as s. 9(1) of the ESA was concerned, he noted that Olympus Canada “did recognize this issue in the employment agreement but limited it to (10 years or 10 months’ notice).”

Decision

In finding that the motion judge erred in concluding that there was no consideration for the termination clause and that therefore the clause was invalid, the Honourable Justice Sarah E. Pepall wrote the following on behalf of the Court of Appeal:

[23] In Addison v. M. Loeb Ltd. (1986), 1986 CanLII 2474 (ON CA), 53 O.R. (2d) 602 (Ont. C.A.), Dubin J.A. (as he then was) explained the position of an employee at common law when there is a sale of a business, at pp. 603-604:

At common law, since a contract of personal services cannot be assigned to a new employer without the consent of the parties, the sale of a business, if it results in the change of the legal identity of the employer, constitutes a constructive termination of the employment.

…

If the employee is offered and accepts employment by his new employer, a new contract of employment is entered into.

[24] Applying those principles in this case, Mr. Krishnamoorthy’s employment with Carsen was terminated and he entered into a new contract with Olympus Canada upon the sale of the business. At issue is whether there was consideration for that new contract.

[25] It is well established that a promise to perform an existing contract is not consideration: Holland v. Hostopia.com Inc., 2015 ONCA 762 (CanLII), 392 D.L.R. (4th) 650, at para. 52. In other words, new or additional consideration is required to support a variation of an existing contract: Hobbs v. TDI Canada Ltd. (2004), 2004 CanLII 44783 (ON CA), 246 D.L.R. (4th) 43 (Ont. C.A.); see also Francis v. Canadian Imperial Bank of Commerce (1994), 1994 CanLII 1578 (ON CA), 21 O.R. (3d) 75 (Ont. C.A.) In this case, the motion judge, relying on Hobbs and Francis, found that Olympus Canada’s offer of employment did not constitute consideration and further concluded that Hobbs was indistinguishable.

[26] However, that is not this case. Hobbs and Francis both involved employment with a single employer and not two different employers as is the case here. The motion judge erred in disregarding the new contract of employment with Olympus Canada, who was a new employer upon its purchase of some of Carsen’s assets. That Mr. Krishnamoorthy’s day-to-day job did not materially change after the sale does not change that fact.

[27] Although s. 9 of the ESA deems there to be continuity of employment if certain requirements are met, it does not deem there to be continuity for all purposes. Section 9(1) of the ESA states:

If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

[28] In Addison, this court interpreted the substantially similar language of s. 13(2) of the predecessor Act:

Where an employer sells his business to a purchaser who employs an employee of the employer, the employment of the employee shall not be terminated by the sale, and the period of employment of the employee with the employer shall be deemed to have been employment with the purchaser for the purposes of Parts VII, VIII, XI and XII.

[29] Dubin J.A. acknowledged in Addison, at p. 604, that this predecessor provision “was enacted to avoid, to some extent, … unfairness” to employees when the employer sells the business. However, he rejected the argument that s. 13(2) deemed there to be continuity of employment for all purposes.

[30] Similarly in this case, if the purpose of s. 9(1) of the ESA had been to deem there to be continuity of employment for all purposes, there would have been no reason to include the words “for the purposes of this Act” in the section. These words make clear that s. 9(1) cannot be used to claim rights or entitlements on which the ESA is silent.

[31] Section 9(1) of the ESA does not deem the employment contract between an employee and an employer to bind a subsequent purchaser of some of that employer’s assets as was the case here. Nor does s. 9(1) of the ESA require the purchaser of a business’ assets to offer employment to employees of that business on the same terms as their original contracts as claimed by Mr. Krishnamoorthy. He cannot rely on s. 9(1) to achieve either of these effects. He can only rely on s. 9(1) to claim those entitlements that are set out in the ESA itself.

[32] This interpretation is consistent with this court’s comments in Abbott v. Bombardier Inc., 2007 ONCA 233 (CanLII), 85 O.R. (3d) 21, at para. 18:

Viewed in the context of the entire statute, in our view, the purpose of s. 9 of the ESA is to protect minimum statutory entitlements that are related to length of employment where the purchaser of a business, or part of a business, continues to employ the employees of the vendor following the sale. Such entitlements include: vacation entitlements, entitlements to pregnancy and parental leaves, as well as entitlement to notice of termination or pay in lieu of notice and severance pay. [Emphasis added by Pepall J.A.]

 

[33] Thus, on my reading, Mr. Krishnamoorthy cannot rely on s. 9(1) of the ESA to support his argument that Olympus Canada’s offer of employment did not amount to consideration.

[34] In short, Olympus Canada’s offer of employment amounted to consideration for the termination clause. The motion judge erred in concluding otherwise.

In response to Mr. Krishnamoorthy’s arguments that the termination clause contained within the employment was nonetheless unenforceable, the court found that it did not have the benefit of any factual findings beyond those relating to the narrow issue addressed by the motion judge. It therefore ordered that the action proceed to a trial of the remaining issues in dispute between the parties.

Commentary

In one of my earlier posts, I took the position that simple continuation of employment is not sufficient consideration for a new employment agreement. That position, while demonstrably correct, fails to account for the facts in the Krishnamoorthy case.

In this case, as I have commented with respect to others, had Mr. Krishnamoorthy disapproved of the terms of employment offered to him by Olympus Canada, his remedy was to decline such offer and seek recompense from Carsen. On this point see my post: What Happens in a Buy/Sell Deal if One of the Vendor’s Employees Refuses to Accept the Purchaser’s Offer of Employment?

To that end, I find myself agreeing with the Court of Appeal in this case.

While such a position may be unfortunate to Mr. Krishnamoorthy right now, the fact remains that he may still win his case if the trial court finds that his employment agreement is nonetheless not dispositive of his legal entitlements. (Thereby begging the question why the two issues weren’t argued at the same time.)

Takeaways for Employees with Labour Pains

The takeaway from this case for employees is to be mindful of any new contract of employment offered to you in the context of a sale of a business. 

There are a number of reasons you should have an offer of employment professionally reviewed. Put at its most basic: what you don’t know can cost you.

If you are an individual looking for assistance with respect to the interpretation or enforceability of the terms of your employment contract, the professional, experienced and cost-effective employment lawyers for employees at Ottawa’s Kelly Santini LLP would be happy to be of service to you.

Takeaways for Employers with Labour Pains

The takeaway for employers, especially those contemplating the purchase of a business, is obvious: you don’t have to be stuck with the vendor’s existing employment agreements. If you wish to make fundamental changes to the terms of the staff’s employment, then, subject to the terms of the agreement of purchase and sale, you may do so. It of course can get much more complicated than that in the context of a buy/sell arrangement and specific legal advice should always be obtained before doing anything, but this decision provides hope and reassurance.

If you are an employer and you need to make changes to the terms of your employee’s employment, or if you want to introduce written employment agreements with your staff, the professional, experienced and cost-effective employment lawyers for employers at Ottawa’s Kelly Santini LLP would be happy to be of service to your business or organization.

Sean Bawden