THE EMPLOYERS' EDGE
Is An Offer Of Employment by a Successor Employer Sufficient Consideration? Court of Appeal Says Yes!
The Ontario Court of Appeal in Krishnamoorthy v. Olympus Canada Inc., ruled that a purchaser can vary some of the fundamental terms of an employee’s employment contract and rely on the offer of employment itself as a sufficient legal consideration for the agreement.
Olympus America carried on an optical sciences business in the United States. Carsen was an exclusive distributor for Olympus America’s products in Canada. The Employee (“N.K”) started off as a senior financial analyst with Carsen in May 2000. By 2005, N.K had been promoted to Director of Finance.
In 2005, Olympus America terminated its distribution agreement with Carsen and announced that Olympus Canada, a new, related company would be established to distribute its products in Canada.
In November 2005, N.K was offered employment with Olympus Canada. He signed the employment agreement which contained a provision limiting his future entitlement on termination to 10 months of base pay. The termination clause allowed the greater of (1) notice or pay in lieu of notice and severance under the Employment Standards Act, 2000, S.O., c. 41 (the “ESA”) or (2) four weeks’ pay per year of service with Olympus Canada or Carsen, up to a maximum of 10 months.
The agreement further provided that N.K would be treated as a new employee and, except as otherwise provided in the agreement or as required by applicable legislation, his service with any other employer would not be recognized. On signing the employment agreement with Olympus Canada, N.K did not receive a signing bonus or any other additional compensation. Nor did he receive any pay in lieu of notice or severance pay from Carsen.
Following his dismissal in 2015, N.K brought a summary judgement motion claiming that his employment agreement with Olympus Canada was void for lack of consideration and that he was entitled to common law reasonable notice.
The motion judge concluded that Olympus Canada’s offer of employment did not amount to sufficient consideration. Hence, the termination clause was invalid. N.K was awarded damages equivalent to 19 months’ pay in lieu of notice.
In overturning the motion judge’s ruling, the Court of Appeal rejected N.K’s argument that section 9(1) of the ESA entails that 1) an employment contract between an employee and an employer binds a subsequent purchaser of that employer’s assets and 2) section 9(1) of the ESA requires the purchaser of a business’ assets to offer employment to employees of that business on the same terms as their original contracts.
Section 9(1) of the ESA deems there to be continuity of employment if certain requirements are met where an employer sells his business to a purchaser who employs an employee of the predecessor employer.
However, the Court of Appeal ruled that section 9(1) of the ESA cannot be used to claim entitlements on which the ESA is silent. The fact that N.K’s day-to-day job did not materially change after Olympus Canada became the new employer upon its purchase of Carsen’s assets was not relevant. As such, Olympus Canada’s offer of employment was found to be sufficient consideration for the termination clause.
While rendering a decision favourable for employers, the Court of Appeal cautioned that courts will continue to scrutinize termination clauses closely for its compliance with the ESA. The lawyers at CCP are experienced in the drafting of enforceable employment agreements that comply with legislative obligations and court decisions. Click here for a list of lawyers that can assist with your employment contract questions.