Your company just announced that it has been sold. What happens to the seniority of all the employees who stay with the new owner? If the new owner decides to lay off one of them later, does he get severance based on the entire time he has worked for the business or only the time worked for the new owner?
Even small business owners need to know the answers to avoid being hit with unexpected liabilities, as the recent B.C. Supreme Court case of Perkins v. Shuen demonstrates. In that case, the plaintiff started working as a dental assistant for Dr. Armstrong in 1981. Her duties expanded and became more administrative. She eventually assumed responsibility for supervising the small office staff and was instrumental in retaining patients when Dr. Armstrong fell ill. Eventually, he sold his practice to two other dentists, Drs. Schuen and Ling. Under the agreement of sale, Dr. Armstrong was required to give all staff notice of termination and he did discuss it briefly with the plaintiff. She continued with her regular duties with no change in pay but reduced vacation when the new owners took over.
Six months later, Drs. Schuen and Ling decided to terminate the plaintiff's employment, offering her 2 weeks severance. Ms. Perkins sued for wrongful dismissal. The judge applied principles established in prior case law, ruling that absent clear notice or agreement to the contrary at the time she was hired by the defendants, the plaintiff was entitled to severance based on her entire time worked at the practice. The fact that she had received some advance notice of termination from Dr. Armstrong did not change or reduce that entitlement, nor did the judge accept the defendants' arguments they had only bought selected assets, not a "going concern." In conclusion, he awarded the plaintiff 12 months of severance (26 times the amount originally offered!) as compensation for the "reasonable notice" the defendants were required to provide under common law, an amount based in large part on her over 23 years of service with Dr. Armstrong.
The defendants sought at trial to require Dr Armstrong to pay a portion of the severance cost but the indemnity clause in the purchase agreement only required him to do so if the employee was terminated within 90 days of closing. Since the defendants terminated the plaintiff after that time limit, Dr Armstrong was held not to be liable to pay any of the award.
The Employment Standards Act ("ESA") contains strong protection for employees on the sale or transfer of a business. The purchaser must recognize the prior service, for all purposes under the ESA, primarily vacation entitlements and notice/severance on termination. In addition, the purchaser can be liable for wages earned under the previous owner, such as banked overtime or earned but unpaid commissions.
The ESA expressly bars any attempt by employers to "contract out" of this rule. By contrast, under the common law, the courts allow purchasers to agree with employees acquired with a business that their prior service will not be recognized except as mandated by the ESA. The most important aspect to this "freedom of contract" is the ability to tell the employees their service with the prior owner will not be recognized when giving the "reasonable notice" required by common law. Of course, purchasers need to carefully consider the practical implications of not recognizing prior service. Employees may be upset, some may decide not to take the job or start looking for another job. Others may refuse to sign or acknowledge such a term. Some vendors require the purchaser to recognize employees' prior service as a term of the sale.
Purchasers who do want to limit their common law liability can do so by:
- advising continuing employees before or at the time of offering a job with the purchaser (e.g. by inserting a clause in a letter offering employment) that their prior service will not be recognized for common law reasonable notice purposes and in any other context permissible under the ESA e.g. a waiting period to participate in benefit plans; or
- having the employees sign a comprehensive employment agreement that defines and limits severance to an acceptable amount or formula (that still complies with the ESA by recognizing prior service to the extent mandated by the ESA (approximately 1 week per year to a maximum of 8 except "mass layoff" situations). For example, for an employee with 7 years service must be offered a termination clause which pays at least 7 weeks severance from the first day of work. Also, a probation clause will not be effective with continuing employees either, since its purposes are to allow the employer to terminate without any notice of severance.
Regular readers of this column will realize this is just another reason why it makes sense to use employment agreements. They are particularly valuable when hiring employees as part of a business acquisition.
Alternatively, if purchasers do not want to upset newly hired employees by refusing to recognize their prior service, they should try to negotiate clauses in their purchase agreements that effectively allow them to shift some of cost of paying severance to unsatisfactory employees for an initial period, such as by an indemnity to pay some or all of the severance or the right to deduct severance from an unpaid portion of the purchase price. As Perkins v Shuen demonstrates, allow at least 6 months to properly assess the suitability of the employee and the need for the employee's continuing services.
This article should not be considered legal advice.
About the Author:
J. Geoffrey Howard is an employment lawyer with the Vancouver firm Shapiro Hankinson & Knutson Law Corporation. He can be reached at ghoward@shk.bc.ca or 604-408-2044.
Reprinted with permission. "What Happens to Employee Seniority on Sale of Business" by J. Geoffrey Howard, from Business in Vancouver, where he writes a column.
