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If the purchaser of a business has an employee sign a new employment contract, is it enforceable?

3 minute read

The answer to this question depends upon the kind of sale that occurred. Generally speaking, a sale of shares does not involve any change of the identity of the employer and so, there would be no termination of employment. The new owner essentially steps into the shoes of the old owner and becomes bound by the employment contract that the old owner had with the employee. If the new owner wanted to have the employee sign a new contract, the purchaser would need to offer sufficient consideration to do so. Otherwise, without the employee getting something in exchange or to benefit them for signing the new contract, the contract will not be not enforceable.

Things are more complicated if there is a sale of assets. If there is a sale of assets, the law generally presumes that there has been a change of the legal identity of the employer. Therefore, the sale would result in a constructive termination of employment for the company’s employees and the purchaser does not need to recognize the employee’s previous tenure or contract with the seller. Any new contract between the purchaser and the employee would typically be enforceable as there would be sufficient consideration for the new contract.

This question was addressed by the Court of Appeal in Krishnamoorthy v. Olympus Canada Inc. In that case, the plaintiff began working for Carsen Group Inc. (“Carsen”) in 2000. In 2005, many of Carsen’s assets were sold to Olympus Canada Inc. (“Olympus”). Olympus made an offer of employment to the plaintiff and had him execute an employment contract in 2005. The contract essentially limited his entitlement upon termination to his entitlements under the Employment Standards Act. The plaintiff took the position that there was insufficient consideration for the employment contract and therefore it was not enforceable. Specifically, the plaintiff relied on s. 9(1) of the Employment Standards Act, 2000 which states that for the purposes of the Act, employment shall be deemed to be continuous when an employer sells their business. The court disagreed. The Court of Appeal held that s. 9(1) only deems employment to be continuous for the purposes of the Act, but employment will not necessarily be continuous for the purposes of the common law when there is a change in the legal identity of the employer. The sale of assets from Carsen to Olympus had resulted in a change of the legal identity such that the plaintiff’s employment had essentially ended in 2005. This mean that there was sufficient consideration for the new employment contract that the plaintiff signed with Olympus at that time.

If there has been a sale of a business, it is very important that employers and employees understand what kind of sale has occurred. If there has been a change in the legal identity of the employer, then the purchaser could legitimately have an employee sign a new employment contract in those circumstances, but otherwise doing so may be problematic. Sales of businesses can have an important effect on what an employee may be entitled to upon termination and this needs to be considered by both employers and employees when businesses are sold.

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George A. Hamzo

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