We are pleased to report that the Ontario Court of Appeal has reaffirmed the principle that a purchaser of the assets of a business is free to offer employment on new terms to employees of the vendor and can rely on the resulting written employment agreement as binding (Krishnamoorthy v. Olympus Canada Inc., 2017 ONCA 873). Employers can set their minds at ease that the lower court’s unexpected decision in this case has been set aside (Krishnamoorthy v. Olympus Canada Inc., 2016 CarswellOnt 18204).

Key Takeaways

Employers contemplating asset purchases can be assured that it’s still valid law that offering employment to an employee of the vendor is sufficient consideration for the employee to agree to new employment terms. That said, termination provisions must still comply with local employment standards legislation or they will be unenforceable. These provisions need to be drafted with care.

Background

In 2005, Olympus Canada Inc. (“Olympus”) offered Mr. Krishnamoorthy employment subsequent to its entering an agreement to purchase certain assets of Carsen Group Inc. (“Carsen”). Mr. Krishnamoorthy was employed by Carsen at the time. He signed the employment agreement which contained a provision limiting his future entitlement on termination to 10 months of base pay. Specifically, the clause allowed the greater of (1) notice or pay in lieu of notice and severance pay under the Employment Standards Act (“ESA”), or (2) four weeks’ pay per year of service with Olympus or Carsen, up to a maximum of 10 months. Following his dismissal in 2015, Mr. Krishnamoorthy brought a summary judgment motion claiming that his employment agreement was void for lack of consideration and that he was entitled to common law reasonable notice.

Ontario Superior Court of Justice decision

The motion judge determined that the termination clause was invalid because there was no consideration for Mr. Krishnamoorthy agreeing to the clause. In the court’s view, consideration beyond the offer of employment was needed to amend Mr. Krishnamoorthy’s employment agreement with Carsen to include the termination clause. The court held that Mr. Krishnamoorthy was entitled to 19 months of pay in lieu of common law reasonable notice.

Ontario Court of Appeal decision

The Court of Appeal held that the lower court erred in law in finding that there was no consideration for the new employment agreement. The offer of employment with Olympus was sufficient consideration in itself. As the Court stated, “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.”

The Court left the issue of whether the termination clause complied with the ESA to be decided at trial. The Court noted that courts will scrutinize termination clauses closely for compliance with the ESA.

Last but not least, the Court rejected Mr. Krishnamoorthy’s argument that section 9(1) of the ESA should be interpreted as (i) deeming the employment contract between an employee and an employer to be binding on a subsequent purchaser of that employer’s assets, and (ii) requiring the purchaser of a business’ assets to offer employment to employees of that business on the same terms as their original contracts.