Friday, March 4, 2016

Canada - Where Principles Collide - Quebec Court of Appeal Modulates Successor Employer Rights and Obligations and the Rules Governing Constructive Dismissal in the Non-Unionized Sector

By Theodore Goloff, Robinson Sheppard Shapiro, Montreal


“Privity” of contract, the personal nature of the employment relationship, sometimes described as being intuitu personæ, and the abolition, in Canada, of enforced indenture/personal servitude as early as 1834, would dictate that, absent intention to the contrary, none but the original parties to any employment-related agreement could be debtor or creditor of the obligations and rights that they create. Sale, transfer or other alienation of the employer’s business or enterprise, to the extent that it extinguishes one of the parties, would therefore per se terminate the relationship.

All eleven Canadian labour relations jurisdictions tempered and modulated these principles, early on, creating “successor employer” obligations to preserve the integrity of union certifications, the process of collective bargaining and, indeed, collective bargaining agreements themselves, from the vicissitudes of mergers and acquisitions. Since they arose in the 1960s, successor employer provisions have generated a plethora of contentious, hard-fought and complex Supreme Court decisions. Obliging “successor employers” to respect union certifications that are essentially creatures of statute giving rise to collective agreements distinct from the individual employment agreements that they may condition and affect, is an “easy stretch”. Since, as is the case almost everywhere in Canada, union certification arises by government fiat that imposes a process of collective bargaining, codifies the rules of industrial conflict, modulates how and when collective agreements come into being and to some extent their contents, and determines the manner in which disputes that arise are to be settled i.e. arbitration, all of which are “policed” by recourse to the labour relations board, commission or tribunal that created these rights, such departures from legal theory are less difficult to conceptualize.

Enter Quebec – Stage Right – and its new Civil Code [“C.C.Q.”] in 1993, which, alone amongst Canada’s provinces and territories, creates successor employer obligations, even in the non-union sector, that complicate mergers and acquisitions, by adopting Article 2097 C.C.Q. which provides:

“2097. A contract of employment is not terminated by alienation of the enterprise or any change in its legal structure by way of amalgamation or otherwise.

The contract is binding on the successor of the employer.

2097. L'aliénation de l'entreprise ou la modification de sa structure juridique par fusion ou autrement, ne met pas fin au contrat de travail.

Ce contrat lie l'ayant cause de l'employeur.”

Reflecting successor employer provisions of the Quebec Labour Code (s. 45 et seq.), Article 2097, although similar, is not identical in wording or in application. Since employment agreements are essentially private, voluntary and consensual agreements, differences could be expected. In part, because of the distinction between an employment contract and a collective agreement, adoption of Article 2097 has brought new and complex issues to the fore.

At much the same time as Quebec’s new Civil Code came into force, the Supreme Court of Canada in Farber v. Royal Trust Co., [1997] 1 SCR 846 redefined the concept of constructive dismissal so as to include an employee’s resignation following unilateral, substantive and prejudicial changes by the employer to the pre-existing conditions of employment, changes that are neither permitted by the employment contract nor duly accepted by the employee, even without any employer intention to see the employee leave.

When allegations of constructive dismissal surface in the context of a merger and/or acquisition creating successor obligations, and where the change in the identity of the employer is the basis of or catalyst for the allegation of changed working conditions, the makings of a “perfect storm” of conflicting rights are present. The Quebec Court of Appeal, in just such a context, in 2108805 Ontario Inc. c. Boulad, 2016 QCCA 75 has recently done a review of how the rights and obligations that Article 2097 C.C.Q. provides playout in “real time”. While it raises perhaps as many questions as it settles, it should be carefully reviewed by anyone with an employment law or transactional practice that involves Canada.

Mise en scène

Hired by Hilton International in 1988, and having spent a number of years abroad, in 2002 Plaintiff Boulad was, at his request, assigned as Director of Operations at the Airport Hilton, one of several Hilton properties in the Montreal area. When Hilton Canada restructured its operations, that hotel, while being managed by Hilton, was sold to Westmount Hospitality Group. Boulad became the latter’s employee. This change, he claimed, suited him as his new employer, being a part of an international hospitality consortium, offered the same prestige and chances for advancement as was the case before. In late 2008, Hilton announced that it was giving up management of the Airport Hilton to Westmount, who, by 2009, sold that property to Defendant, subsidiary of a far smaller entity operating only two seasonal hotels in the South of France. The acquirer agreed to preserve the employment of all existing employees and their respective working conditions. Unhappy, however, at the changed circumstances, Boulad asked to be kept on by Westmount in some other capacity. While there was some dispute as to whether or not Westmount or its representatives agreed, at first, to do so, what became clear is that Boulad never intended to work for the hotel’s new owners. In September 2010, he instituted proceedings against both the Vendor and Purchaser for some $400,000 claiming that the sale of the hotel and the refusal to reassign him to some other position with Westmount constituted a substantive change of essential working conditions, and therefore, a “constructive dismissal”, entitling him to a substantial “severance” indemnity. Defendants’ answer was that in view of Article 2097 C.C.Q., the sale could not be viewed as a termination of any employment contract which, in any case, continued to have legal effect in every respect, the Purchaser being substituted for the Vendor as a “successor employer”. To be sure, Boulad was not obliged to remain in the employ of the successor employer, but if he chose not to, he would have voluntarily resigned, putting an end to the contract, attracting no severance or indemnity. By refusing to work for the Purchaser, Boulad, in any case, refused to mitigate any of his damages, depriving him of any right to indemnification.

Act One – Trial Court’s Decision

The Superior Court [2014 QCCS 1928] maintained Plaintiff’s position that in the circumstances, the change of employer resulting from the sale represented a unilateral and substantive alteration in his essential working conditions. In the Court’s view, Boulad’s departure was neither unreasonable, capricious or voluntary, adding that it would be ironic to view a provision designed to maintain the employment relationship as chaining the employee to a new employer without regard to the latter’s identity or attributes. The Court added that Defendant’s position with respect to the automatism of Article 2097 and its consequences, in its view, offended the proposition that “…the right of the employee to choose whom he would serve ‘constituted the main difference between a servant and a serf’”. Boulad could reasonably view the transfer to the numbered company or its parent as a form of demotion to a position lacking any of the attractions associated with a prestigious employer with worldwide connections. In such circumstances, his refusal to work for the purchaser did not forfeit his right to indemnification, notwithstanding any obligation to mitigate.

Act Two – The Court of Appeal Reverses

The Appellate Court recognized the attraction, at first blush, of the Trial Judge’s point of view. The size, reputation and importance of the successor employer might certainly dictate whether an employee wished to remain after purchase. Having chosen an employer with an international cachet, being forced, now, to work for one that is much smaller, could represent substantive change. The reverse might also be true. A smaller, more intimate work environment might have been the original attraction, meaning that a sale to a much larger organization might be troubling to the employee. On the human plane, Boulad’s reaction to Westmount’s refusal to alternatively transfer him or terminate his employment at the time of the sale (which would allow him to claim severance/common law notice pursuant to Article 2091 C.C.Q.), and “obliging” him to work for an employer not of his own choosing, placed him in the unenviable position of having to accept the unacceptable, resulting, whether by design or otherwise, in his being indirectly shown the door.

However attractive, the Superior Court’s analysis was judged wrong in law.

The appellate judgment determined that Article 2097, an imperative provision, serves to: i) confirm that “alienation” or “changed legal structure” does not, per se, and, in and of itself, terminate an employment contract; ii) continue said contract by binding the Vendor’s assigns; and iii) bind the employee, albeit implicitly, to such successor employer, all this by operation of law.

Had Westmount terminated Boulad’s employment in fact, at or immediately prior to the sale, the Court would have been required to decide whether, for instance, in response to the Purchaser’s dictates, it could have done so notwithstanding Article 2097 and the consequences thereof.

Indeed, in an earlier decision, Aéro Photo (1961) v. Raymond, 2014 QCCA 1734, in the particular circumstances of the case, the Court of Appeal found that an attempt to terminate a senior employee immediately prior to an assignment in bankruptcy, where the Trustee continued operating the enterprise, thereafter, as a going concern, eventually selling it to a third party, bound the eventual Purchaser by way of Article 2097 to pay the senior employee the hefty severance provided in his original employment contract. Indeed, it characterized such manoeuver just prior to the bankruptcy as a constructive dismissal, quashing it as being in violation of the procedural requirements of the executive’s employment contract. Because of the continuity of operations, it placed the bill at the eventual Purchaser’s door.

In Boulad, The Court of Appeal noted that it would be strange, indeed, if when the Vendor or Purchaser refused to respect Article 2097, same could be considered as a form of constructive dismissal, as in Aéro Photo, to suggest in the same breath, that the expressed intention of the Vendor and Purchaser to respect that provision, in every way, could also constitute a constructive dismissal. A provision whose purpose is to recognize that alienation or modification of legal structure does not bring about, per se, the end of an employment contract, could not at the same time, constitute a termination thereof, in the absence of any manifestation of the employer’s intent to voluntarily terminate the contract. Indeed, the Court pointed out that no reading of Article 2097 would be consistent with an ability of an employee to force an employer, against its will, to terminate an employment contract whose effects continued by operation of law. That would leave to the employee and not to the law, the choice of the effects of any such alienation or modification of legal structure, inconsistent with its imperative character.

The Court dismissed the position that application of Article 2097 and the change of the employer that the legislature imposes on the employee could constitute a substantial change in working conditions or give rise itself to a claim of constructive dismissal, because any such claim involves violation or abdication by the employer of obligations, whether explicit or implicit, that derive from the employment contract itself.

What the Court then said, merits very close examination:

[49] By virtue of its right to manage and direct the work recognized by Article 2085 C.C.Q., an employer may modify conditions of employment of its employees, even unilaterally, in order to adapt the work environment to the enterprise’s evolution, in order to make it more productive or to respond to external constraints, etc. An enterprise is a sort of ecosystem, as it were, marked by greater or lesser changes. In consequence, conditions of employment are dynamic and not static, the employer’s room to manoeuver depending clearly on the circumstances that pertain and the terms of the employment contract.” (Translation and highlighting, our own)

On the other hand, the Court left unanswered a series of questions that it raised itself, deciding that the facts before it did not require it to decide. In particular, it asked, whether the imperative character of Article 2097 C.C.Q. means, henceforth, that every employer who, prior to alienation of the enterprise, whether on his own or on instructions of the Purchaser, terminates the employment contract, in so doing and in reality, attempts to circumvent the legislature’s intent? Is there a distinction to be made between different circumstances, i.e. whether the employer provides common law notice or the payment in lieu thereof, required when terminating an employment contract without “serious reason” or when it does not? What happens if the Vendor immediately post-closing terminates the employee? Is there joint and several responsibility in such case?

In that regard, it may be worth noting that unlike the successor employer provisions of the Quebec Labour Code, Article 2097 does not specify that the Purchaser becomes bound “…in the place and stead of the former employer”. On the other hand, joint and several liability – termed in Quebec “solidary responsibility” – normally requires it to be clearly and specifically provided for.

Indeed, while recognizing the imperative character of Article 2097 – what some consider its “public order” character – the former employer’s exit from the business, like any other administrative or economic reason upon which a termination might rest, could not constitute a “serious reason”, allowing termination of the employment contract without the consequences normally attaching thereto, including the requirement to provide common law notice or pay in lieu thereof, in the case of a contract of employment of indefinite duration, or payment of the full value of the remainder of the contract in the case of a fixed-term contract.

However, in the light of a most recent judgment of the Superior Court, rendered a scant two weeks after Boulad, what was said by the Court at paragraph 50, gives cause for reflection:

“[50] This said, an employer may not, at least not unilaterally, change in a substantial manner, that is to say important manner, the essential conditions of the employee’s employment contract, essential conditions which deal principally with remuneration, the nature of the tasks involved, as well as the place they are to be executed…” (Translation and highlighting, our own)

These remarks, or rather the reference to “essential conditions”, may allow in some future case, one party or another, to claim that not all parts of the employment contract continue in effect, all this, because of how the courts have interpreted tacit renewal of fixed-term contracts. Pursuant to Article 2090 C.C.Q., when at the end of a fixed-term contract, an employee is allowed to continue working for five days or more without protest, the employment relationship is tacitly renewed, but on the basis of a contract of indefinite duration. On the other hand, recent judgments have said that only the “essential conditions” of employment contracts are in fact tacitly renewed. In particular in Traffic Tech Inc. c. Kennell, 2016 QCCS 355, the Superior Court determined that restrictive covenants are not essential conditions relating to the employee’s remuneration, the nature of the work, or the place of execution and fall by the wayside and cannot be tacitly renewed pursuant to Article 2090. If that same reasoning were to be applied to Article 2097 C.C.Q., one can imagine the havoc that it might play with regard to mergers and acquisitions in knowledge-based or contact-based industries. The Purchaser would be obliged to continue employment of key employees pursuant to Article 2097, but without benefit of any restrictive covenant not to compete or not to solicit in the event of that employee’s eventual resignation.

One last comment is in order. The Court recognized that pursuant to Article 2097, an employee could not force the Vendor to transfer him to another position and maintain him in its employ any more than such employee could force the employer to promote him. On the other hand, the Court wrote, that “Change Of Control Provisions”, had they been part of Boulad’s original employment contract, would have allowed him a recourse against one or the other, Vendor or Purchaser.

Furthermore, the Court refused to view an employer’s original sales pitch to prospective employees of potential possibilities of career advancement as an enforceable offer and acceptance, equivalent to a binding condition of employment, absent specific representations to that effect in the contract. As the Court said in Boulad:

“[64] ...(E)nterprises are moving changeable entities that are neither immobile or immutable; they are at the mercy of circumstances and it is improbable that an employer would undertake to remain exactly as it is without change or that it would include the climate at work, its general ambiance, a promise of promotion or opportunities for transfer as formal conditions guaranteed to its employees. In brief, absent an undertaking representing the common intention of both parties, this type of general considerations is not to be considered part of working conditions.

[65] In the end, it is not because Respondent believed he could be transferred or could maintain his employment with the Appellant notwithstanding the sale of the enterprise that the latter was obliged thereto. What would have been required is that Appellant bound itself voluntarily to such an employment contract resulting from the common intention of both (Article 1378 C.C.Q.).” (Translation and highlighting, our own)

Act Three – Musings on Mitigation

In obiter, since the appeal had already succeeded on other grounds, the Court did note that in refusing the successor employer’s offer of continued employment, Boulad had failed to mitigate his damages, forfeiting any claimed right to indemnification. The Court noted its reticence to force an employee to accept an offer of employment from an employer who had terminated the employment contract, particularly where there is perceived hostility, embarrassment, humiliation or loss of faith/dignity. None of that was present. Appellant’s claim that working for the successor employer given its small size and relative obscurity in the hotel industry amounted to “professional suicide” was found to be unsubstantiated by sufficiently cogent proof. Hence, even on that basis his claim was without merit.


Certainly from the perspective of this management side employment lawyer, the Boulad decision seems to put to rest a number of issues. Indeed, it seems to underscore what a generally stated management rights clause would provide in a collective agreement. On the other hand, when notice is taken of recent judgments regarding what are or are not “essential working conditions”, it may raise substantive questions regarding just what continues in effect as a result of Article 2097 CCQ. All in all, Boulad is a case to be reviewed with care by anyone with an employment or transactional practice touching on Canada.