Employee considerations when buying a business

When a business inherits employees during a transaction, it often takes on new and complex employment challenges. In this video, Torys litigators Sarah Whitmore and Irfan Kara take questions from Andrew Bernstein about how businesses can integrate new employees while mitigating their organization’s risk.

We discuss:

  • how to prevent wrongful or constructive dismissal claims
  • how to manage diversity, equity and inclusion risk when buying a business
  • why employment class actions pose a specific risk
  • why the decision on asset vs. share purchase is critical

Click here to see other videos in this series.


Andrew Bernstein (00:07): Hi, everyone. I'm Andrew Bernstein from the Torys Litigation Department, and welcome back to our series on commercial disputes. Today, I have my colleagues, Sarah Whitmore and Irfan Kara, both from Torys' Litigation Group. They are experts on employment law and that's today's theme. So hang on! You're in for a wild ride. Irfan, let me start with you. When a new entity takes over an existing business, there are usually decisions that need to be made with respect to employees of the business, whether they're offered employment with a new entity, whether the employment becomes redundant and needs to be terminated, whether a new role can be offered. What can businesses do to mitigate the risk of wrongful or constructive dismissal claims in those situations?

Irfan Kara (00:47): Thanks, Andrew. It really is an important consideration that we deal with quite often in the context of business transactions and the sale of businesses. And the considerations are a bit different depending on whether it's a share purchase or an asset purchase. And from a share purchase perspective, it's generally fairly simple because, you know, you've got the employer continuing on as the same entity generally, the obligations remain the same, service continues. You know, there may be some negotiated indemnities between the vendor and purchaser, but other than that, from an employment law perspective, everything kind of remains the same. If it's an asset purchase, the law has a bit more to say about this and it has more to say because the purchaser will have a choice as to whether or not they want to offer employment to the employees of the vendor. And if they do, there are a couple of things to take into consideration to mitigate that wrongful or constructive dismissal risk that you mentioned. And they really fall around two categories. It's comparable employment and continuous employment. From a comparable employment perspective, really the issue here is, is the offer of employment from the purchaser being made for a role and for a compensation that is substantially similar to what that employee was receiving with the vendor. And this is important from a risk mitigation perspective, because if that employee says, "No, I don't want to take that offer of comparable employment," then the vendor and purchaser can say, "Well they failed to mitigate their losses, and they have no common law claim for wrongful or constructive dismissal." And so that's a really important risk mitigation factor. The other side of it is continuous employment. And this is a big consideration, you know, that's tied to whether or not that asset purchase was considered a sale of business under the Employment Standards legislation. And if it was, and every employment standards legislation has its own kind of factors with respect to what constitutes a sale of business—it doesn't always constitute that—but if it does, then the law says that the employment would be continuous and this is a big factor for long-service employees, because if they reach a termination event at some point in the future, the liability for notice or pay in lieu of notice would be higher. So a consideration for sure to take into account for purchasers when they're dealing with commercial transactions involving employees.

Andrew Bernstein (03:00): Okay. Next question's for Sarah. Sarah, what if these issues arise with a group of employees? Is there a class action risk or is that too far-fetched?

Sarah Whitmore (03:11): So class action risk is always real when it comes to employment claims, I would say. And we've seen a significant rise in employment class actions over the years. Most have focused on claims for unpaid overtime or claims for employment benefits that are not being accorded to a group of employees as a result of an alleged misclassification. However, there are also examples of claims arising out of the scenario that Irfan just touched on through an asset purchase. And what happens in those cases is the group of employees maybe offered new employment with the purchaser, but the vendor might choose not to offer termination pay to that group of employees. And what would occur, or what could occur, would be a claim for a wrongful dismissal on behalf of the whole class. The issue with these claims, and something that potentially weighs in favour of defendants, is that they can be hard to certify. And the reason for that is a common defense to these claims, and Irfan touched on this, is that the employment simply continued to the new entity, and what's required to prove that is that the employees consented to the new employer, assuming responsibility for the vendor's liabilities, and that the new employer consented as well. When we talk about certification and what's required to actually start a class action, the question is, "Can these claims be prosecuted in common?" It's a procedural step that occurs before we even get to figuring out liability. And the class has to show that there are common issues that can be resolved without individual inquiries that will advance the claims for all class members. And what we've seen in the past is defeating certification of these claims by showing either individual employment contracts that need to be investigated, communications with individual employees that raise questions about their consent, and other individual factors. So the answer is yes, this can a class action risk, but it might not be the worst type of employment class action to face.

Andrew Bernstein (05:08): I don't think there's any good ones, but I take your point. So let's move on to a different subject—diversity, equity and inclusion. That's very much at the forefront of employers' minds today. So first question's for you, Sarah. Employers are being expected to do more to ensure that their workplaces are diverse, equitable and inclusive. And the law has followed suit. Should DEI be a significant consideration when making a commercial deal involving inheriting employees?

Sarah Whitmore (05:40): Absolutely. You know, one of the things that we've been talking about a lot with our clients recently is the benefits and the business kind of improvements of simply having a diverse workplace. And so that kind of goes without saying that's baseline and that's something that a purchaser wants to consider. But there are also litigation risks that go along with acquiring a business where the workforce is not diverse, or where there have potentially been issues around recruitment and promotion of diverse employees, because that's often what we see. As Irfan mentioned at the outset, a significant risk for purchasers is inherited or assumed liability that comes from taking on previous employers' employees. And the question that you need to consider when it comes to DEI is the Human Rights Code and whether there is a basis for discrimination across the existing workforce. And what we know and what the code tells us is that employers cannot discriminate on the basis of enumerated grounds. So that means no discrimination on the basis of race, sex, disability or other protective grounds. And that's tablestakes, that's well known to all of us. But what I think is coming out and what is more novel is claims that promotion or recruitment decisions have violated this right under the Human Rights Code. And what you want to think about when you're a purchaser is, were there policies in place or were there procedures for things like promotion decisions to try to really encourage diversity. And I think it's something that will only increase as the years go on. And it's something we need to be mindful of.

Andrew Bernstein (07:24): Thanks Sarah. Irfan, in light of the risks flowing from human rights liability, do we worry that this is just something that's going to happen before the Human Rights Tribunal, or is there any chance that this risk could manifest in a court proceeding?

Irfan Kara (07:39): So that kind of leads us back to class actions, right? And that's what we've seen in the last three to five years, is an increased prominence in EDI-type class actions. And it's important for employers to be aware of this and businesses to be aware of this in the context of commercial deals, because what we've seen previously is employers have been successful in defeating certification in these types of claims because they've said that, you know, from a jurisdictional standpoint, these types of claims are human rights matters, they're discrimination matters. And these are more properly before human rights tribunals and administrative bodies that have expertise in these areas.

Andrew Bernstein (08:10): Right.

Irfan Kara (08:10): But that's taken a bit of a change recently and courts are looking to actually take these on a bit more. And we've seen a couple of cases where the courts have agreed to frame these claims as breaches of contract. And so, you know, I've found that to be preferable to proceed by way of class action. So there are two really big-name cases in recent years. The one really big one is the Lewis class action in British Columbia against WestJet. And it's the sexual harassment and gender discrimination class action. And the main allegation here was that, you know, the class was exposed to systemic sexual harassment and it was framed as a breach of contract in essence that the class suffered a breach of contract, and the employer, WestJet, breached the employment contract by not providing a workplace that was safe from harassment and by not properly investigating claims for harassment and allegations of harassment. And so initially, the British Columbia Court declined to certify this because, again, it was a human rights matter, it's more properly before an administrative tribunal, and the expertise of those tribunals would give the class better access to remedies. Very, very recently, the British Columbia Court of Appeal actually overturned that and agreed to certify the class action on the basis that it was preferable to proceed by way of class action because this was a breach of contract claim. And so it really does emphasize the need to have a very proactive policy for employers with respect to EDI and harassment, and discrimination. And we don't know if this is going to be something that gets certified in Ontario, for example, where we have more stringent, now preferable, procedure requirements under the Class Proceedings Act, due to recent amendments. But it's still important for employers to realize that this is a type of claim that a class action may be certified against an employer for, you know, failure to meet contractual EDI requirements without any evidence of loss. And then the other really big one recently is the Thompson case, and that one is a proposed class action in very early stages involving hiring and promotion with respect to Black employees in the federal public service. It hasn't gone very far, but it's another big example and we'll see kind of where that goes in the coming months. And the last point on litigation risk, and Sarah touched on this a bit earlier, is that this doesn't just tie to things related to hiring. EDI covers the entire employment relationship, and it covers things from hiring, to retention, to performance reviews, internal processes all around from start to finish of the employment relationship. And so it's really important to think about those things in the context of a commercial deal that involves employees coming over.

Andrew Bernstein (10:44): Okay. Well, thank you very much to both you and Sarah. That was an incredible amount of insight in a short period of time. So that wraps up today's session and watch for the next one on the continuing series about commercial disputes. Thanks very much.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2022 by Torys LLP.

All rights reserved.
 

Subscribe and stay informed

Stay in the know. Get the latest commentary, updates and insights for business from Torys.

Subscribe Now