Sometimes, the common sense expectations of employers does not align with employment law. In Zoehner v Algo Communication Products Ltd., the plaintiff and his two brothers were owners of the defendant company. The plaintiff and one of his brothers, Paul, each owned 44.3% of the shares and both were employees of the company, independently responsible for the operations of the “Interconnect” and “Manufacturing” divisions, respectively. The third brother owned the remaining 11.34% but was not involved in the company’s operations.
The brothers agreed to sell off the two divisions as part of separating their interests. Due in part to the Interconnect Division’s poor financial performance, the brothers decided to sell it first. The plaintiff located a buyer for it and negotiated the terms of the sale, which the shareholders unanimously approved. The sale agreement did not deal with the plaintiff’s employment rights.
Following the sale, the brothers had differing expectations about what would happen to the plaintiff’s employment and pay. Although there was an arrangement for the plaintiff to provide transitional services to the purchaser, he did so through the defendant company and thus remained an employee of the company following the sale. Paul assumed that the plaintiff would retire and stop receiving a salary once the transitional services were concluded. However, the plaintiff insisted that he was still an employee and entitled to collect a salary. The company (representing the majority ownership of the other two brothers) quite understandably argued that the plaintiff had voluntarily eliminated his own position by selling the division where he worked. They also argued he had abandoned his employment by failing to report to work and providing no services in exchange for his salary following the end of the transition with the purchaser. After reaching an impasse, the other brothers voted to dismiss the plaintiff.
The court disagreed with the company’s characterization of the facts. The court found that, from a legal standpoint, the company had decided as a corporate entity to sell the Interconnect Division. As the sale was legally the company’s decision, not the plaintiff’s, the company could not argue that the plaintiff had abandoned his job nor could the plaintiff’s redundancy and lack of work following the sale justify termination without severance. The court found that the plaintiff had been wrongfully dismissed and awarded him 24 months of reasonable notice, which was reduced to 19.2 months for the plaintiff’s failure to mitigate.
Employers can take away the following points from this case:
- Do not make assumptions regarding the nature of an individual’s employment status on sale of a business even for an owner/employee. In the case above, the plaintiff was remained an employee of the company, even though he was a major shareholder and director, had voluntarily participated in (and profited from) the sale of the business he ran and thus effectively eliminated his own job.
- When selling a business, it is important to plan for the future role of the selling owners who were also employees. Options include:
- Arranging for the owner to continue employment with the purchaser;
- Ensuring even owner/employees have an employment agreement which defines and limits their severance;
- If that is not possible, have the owner/employee sign off on severance or agree to resign and waive entitlement to severance as a condition of the sale—a point the other brothers missed in this case;
- Where feasible, give lengthy advance notice of the owner/employee’s job ending. In this case, the company could have reduced its severance liability by more than 50% by formally notifying the plaintiff his employment would end at the conclusion of the transition period with the purchaser.
If you want more information on employment relationships following an acquisition or sale, abandonment of employment, or employment agreements, you can contact us at:
Geoffrey Howard: firstname.lastname@example.org
Sebastian Chern: email@example.com