Buyer Beware: Employment After Share Sale

April 6, 2021

By Brian Babcock

Employment contracts related to commercial transactions remain employment contracts and employment law applies. You should not ignore this if you are involved in a purchase and sale transaction, or any terminations after the sale.

Ontario courts continue to find in favour of employees on termination of employment issues. In Groves v. UTS  Consultants Inc., Mr. Groves sold his shares in his consulting company. He resigned as an officer and director, and entered into an employment contract. This is a pretty common ‘sale of a business’ situation.

Three years later, Groves, then 65, was terminated.

The Court of Appeal upheld the decision of a motions judge that found that the termination provisions of Groves’ employment contract were void as being contrary to the Employment Standards Act (ESA). He was found to have never resigned his employment, and thus his entitlement to notice was based upon his full length of service, which resulted in 24 months pay in lieu of notice.

The appeal turned primarily upon whether or not the judge erred in failing to consider the issue of resignation, and the subsequent employment contract, in the context of the commercial share sale.

In cases involving the enforcement of non-competition agreements, courts do take a different approach where the agreement is part of a share sale. In those cases, they are more likely to enforce a non-competition agreement where it was part of a sale than one involving other employees. The buyer in the Groves case argued that this principle should apply here.

The court found that the context matters, but that the ESA takes priority. They do not provide any detailed analysis as to why. It is consistent with other situations, where the “no contracting out” or “provisions must be equal to (or better than) ESA” has been the rule.

The Court also distinguished the facts of the Groves case from an earlier decision in which a resignation upon sale was found to preclude a claim for notice – in that case, the commercial transaction did not contemplate ongoing employment, unlike in Groves.

Although Groves signed a release of claims as part of the sale, the wording stated that it released “any claims” for “termination or severance pay”. As the court pointed out, these terms, as used in law,  do not include common law notice entitlements, but rather refer to entitlements under the ESA. As the release violates the ‘no contracting out’ provisions of the ESA, it was void.

Given that Groves was found never to have resigned as an employee, his entitlement to notice was based upon his full 25 years of service, including bonuses that he could have earned. This no doubt was an expensive shock to the purchaser, which must have still been left wondering why a fresh employment contract did not start a new clock running on these rights.

They are another employer learning the expensive lesson that Ontario courts fiercely protect employees, who are perceived as being vulnerable, even if, like Mr. Groves, they are experienced business people with the benefit of legal advice (though the case never says so, presumably Groves had lawyers on his share sale).

When concluding a purchase of a business, timely and expert advice on the related employment law issues may save you money in the long run.

On the other hand, if you are an employee in Mr. Groves’ situation, if you are terminated after you sell your business, you should seek employment law advice, because determining your rights is complicated, but generally, any doubt will be resolved in the employee’s favour.