Court probes worker's expectation of continued employment under new owner
The Court of King's Bench of Manitoba recently dealt with a case involving the sale of a company division and its impact on an employee's continued employment.
The court had to determine whether the employee was dismissed or resigned, and if dismissed, whether they acted reasonably in mitigating damages.
This case highlights the issues that can arise when businesses change hands and the potential implications for employees caught in the transition.
Background of the case
The case centred around a worker who was an electrical engineer with expertise in railway controls. In 2016, the worker's company was acquired by a larger corporation. As part of this acquisition, the worker entered into an Employment Agreement, a Retention Bonus Agreement, and a Restrictive Covenant Agreement with the new employer.
In 2018, the employer began discussions to sell the division where the worker was employed to another company. Employees were informed that the purchasing company would offer continued employment on substantially similar terms. The worker, concerned about how this might affect his agreements, sought clarification from management.
The purchasing company delivered formal employment offers to all employees, including the worker. The offer letter stated that to the extent not specifically addressed, the present terms and conditions of employment would be substantially similar at the new company.
Issues during the purchase
The court had to address several crucial questions:
1. Was the worker dismissed or did they resign?
2. If dismissed, did the worker act reasonably to mitigate damages?
3. Was the worker entitled to a pro-rated bonus under their Retention Bonus Agreement?
4. Did the worker have a right to a performance bonus under the company's variable incentive compensation plan?
The judge examined the circumstances surrounding the worker's employment termination. They considered the legal principle that a contract for personal services cannot be assigned without the consent of the parties.
The court found that the worker's employment was constructively terminated due to the sale of the division.
The judge stated:
"By operation of law, [the worker's] employment was constructively terminated by the sale of [the employer] to [the purchasing company]. From [the worker's] perspective, in other words, the termination of his employment with [the employer] was involuntary."
This determination was crucial in establishing that the worker did not resign but was indeed dismissed.
Mitigation of damages
While the court found that the worker was dismissed, it also concluded that he failed to act reasonably in mitigating damages by declining the new company's employment offer. The judge emphasised that the offer was for the same position with substantially similar terms and conditions.
The worker's main concern was that accepting employment with the new company would forfeit his right to receive payment under the Retention Bonus Agreement.
However, the court found this concern unreasonable, noting that the employer and purchasing company had made efforts to assure the worker that his rights under the agreement would be honoured.
The court noted:
"I am satisfied [the purchasing company] and [the employer] made reasonable efforts to give [the worker] the assurances he sought with respect to his rights under the Retention Bonus Agreement."
This finding significantly impacted the damages the worker could claim.
Bonus entitlements
The court made distinctions between different types of bonuses the worker claimed:
1. Retention Bonus: The worker was found entitled to a pro-rated bonus under the Retention Bonus Agreement because their dismissal was "involuntary."
2. Performance Bonus: The court determined that the worker was not entitled to this bonus as its payment was conditional on accepting the new company's employment offer.
The judge explained:
"Under the terms, [the employer] had broad discretion to change, modify or withdraw the plan unilaterally, including in the event of a change in ownership of the business."
The court’s decision
In summarising its decision, the court stated:
"[The worker's] employment was constructively terminated by [the employer], resulting in his dismissal without reasonable notice or pay in lieu thereof. [The worker] failed to act reasonably in mitigation of his damages by not accepting [the purchasing company's] offer of continued employment. Had he done so, he would have avoided all of the damages he now claims, including the loss of the bonus [that he sought]."
The court also emphasised:
"Because [the worker's] employment was terminated involuntarily, under the terms of the Retention Bonus Agreement he is entitled to payment of a pro‑rated bonus in the sum of $133,000 plus pre-judgment interest at the statutory rate."
This ruling demonstrates that certain contractual rights may persist even when an employee fails to mitigate damages in other respects.
Employers and employees alike should seek labour specialists and legal advisers when navigating corporate sales and restructurings. It emphasises the need for clear communication and careful consideration of all employment terms and agreements during such transitions.