What Happens in a Buy/Sell Deal if One of the Vendor’s Employees Refuses to Accept the Purchaser’s Offer of Employment?

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A typical term of any significant asset purchase agreement, which sees the employees of the vendor continue in employment with the purchaser, is that the purchaser will make offers of employment on substantially similar terms to the vendor’s employees. As is more fully explained in my post Continuity of Employment Following the Sale of a Business, pursuant to the provisions of Part IV of the Ontario Employment Standards Act, 2000:

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.

But what if one (or more) of the employees (unreasonably) refuses the purchaser’s offer? Is that employee still entitled to ‘severance’ pay? The answer will surprise most employers.

The Law

Part XV of the Ontario Employment Standards Act, 2000 prescribes minimum entitlements with respect to the termination and severance of an employee’s employment.

Section 54 of that law provides as follows:

54. No employer shall terminate the employment of an employee who has been continuously employed for three months or more unless the employer,

(a) has given to the employee written notice of termination in accordance with section 57 or 58 and the notice has expired; or

(b) has complied with section 61.

Section 55 of that law provides the following exception:

55. Prescribed employees are not entitled to notice of termination or termination pay under this Part.

Among the employees prescribed to be not entitled to notice of termination or termination pay are employees whose employment is terminated after refusing an offer of reasonable alternative employment with the employer. (See O. Reg. 288/01, para 2(1)5.)

Explaining the Law

Although it may appear that if an employee refuses to accept the purchaser’s offer of employment, such a refusal would disqualify her from the receipt of termination pay and severance pay, §19.20.1E of the Interpretation Manual to the Ontario Employment Standards Act, 2000 provides as follows:

The exemption uses the phrase “with the employer”. The use of this phrase requires that the offer be for reasonable employment with the employer. An offer of reasonable employment with a separate employer is not sufficient, even if that separate employer is a purchaser of the employer’s business.

What this means is that if the employee elects to refuse the purchaser’s offer, regardless of how reasonable the terms of employment, then the vendor must either: (a) somehow continue the employee’s employment; or (b) provide the employee with, at the very least, her statutory termination pay and severance pay.

But What About the Duty to Mitigate?

As is more fully explained in my post Explaining the Duty to Mitigate, as a general statement of Canadian employment law:

The duty on dismissed employees to mitigate their damages provides that an employer cannot be made to pay a dismissed employee any amount of money that the employee could have earned on his own through reasonable efforts. Duty

Put another way, following dismissal the dismissed employee must find new work; any money earned in that new employment serves to reduce the former employer’s obligations to pay wrongful dismissal damages.

Given this statement of law, vendors may feel that an employee who has refused to accept an offer of employment from a purchaser has failed to mitigate her damages and therefore no termination pay or severance pay would be owing.

However, it is important to note that the duty to mitigate is a common-law principle, whereas the obligations to pay termination pay and severance are statutory. There is no obligation on employees to mitigate statutory entitlements.

Takeaways for Employers with Labour Pains

The takeaway for employers, especially those contemplating a sale of their business is that there is some risk in an obligation to terminate the employment of existing employees. While employers may take some comfort in a contractual obligation for the purchaser to make offers of employment to the vendor’s employees, as the provisions set out above demonstrate, if those employees refuse, even unreasonably, to accept such offers of employment, the vendor can be liable for a potentially large sum of money. As such, the issue of continuity of employment is an issue that should be considered in any buy/sell agreement.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.