The Ontario Court of Appeal recently restored an employment termination clause that a motion judge struck down as invalid for lack of consideration.
There are three elements to a valid employment contract: offer, acceptance, and consideration. Generally, consideration can be anything of value exchanged by the parties to the contract. An employment contract will be invalid where there has been no consideration.
The employee in Krishnamoorthy v. Olympus Canada Inc. worked for a company that sold photography equipment (“OldCorp”). A new company (“NewCorp”) purchased some, but not all, of OldCorp’s assets, and offered employment to OldCorp’s employees. NewCorp offered the employee in question a written employment contract that was substantially similar to his former contract, with a few exceptions.
The new contract included a clause that purported to limit the compensation the employee would receive upon termination. In addition, the agreement provided that the employee would be treated as a new employee and, his service with any previous employer would not be recognized.
The employee signed the agreement with NewCorp. He did not receive any compensation for entering into the employment agreement, nor did he receive any pay in lieu of notice or severance pay from his previous employer, OldCorp. OldCorp confirmed that his employment would terminate in approximately three months, and that the employee had accepted an offer of employment with NewCorp. Ten and a half months after he started working for NewCorp, it dismissed the employee without cause and attempted to rely on the termination clause in the contract.
The motion judge found that there was no consideration for the contract with NewCorp, and so the termination clause was unenforceable.
The Court of Appeal overturned the motion judge’s decision. The Court noted that a promise to perform an existing contract, for instance an employer’s promise to keep employing an employee, is not consideration for changes to that employee’s employment contract. However, in this case, NewCorp was a new employer. It had no obligation to continue the employee’s employment after it bought some of OldCorp’s assets. As such, NewCorp’s offer, and the employee’s acceptance, constituted a valid new employment contract. The consideration was the same as for most new contracts of employment: the promise to perform certain services for wages. As such, the Court set aside the summary judgment and ordered the matter to proceed to trial.
The Court of Appeal dealt narrowly with the issue of whether there was valid consideration for the new contract, which included a termination clause. However, the Court noted that when an employer sells a business or a part of a business and the purchaser employs an employee of the seller, section 9(1) of the Employment Standards Act (the “ESA”) deems an employee’s employment to be continuous. However, it does not deem it to be continuous for all purposes, but merely for the purposes of the minimum standards contained in the ESA. As such, the employee in the instant case could not use section 9(1) to claim rights or entitlements on which the ESA is silent.
This was a favourable outcome for the employer. However, there are diverse legal issues which arise on the sale of a business, and organizations undergoing such transition should seek legal advice from an employment lawyer to avoid unexpected outcomes.