Legal issues arise when a business is sold
Author: Daniel A. Lublin
Ideal Mold Corp. was built on the backs of its owner, Frank Riegl, and his number two man, production manager, John Novosel. Opened in 1974, the business prospered and 15 years later, Ideal Mold was worth millions. Novosel had been led to believe that, one day, he would take over the business when Riegl retired. Novosel and Riegl frequently discussed the matter and Riegl encouraged Novosel to run the business as if it was his own.
When Riegl finally announced his retirement, he lined up a number of purchasers to share the business with Novosel but, ultimately, a deal couldn’t be reached. At the end of February 1989, Riegl went on vacation. He didn’t talk to Novosel before leaving, nor did he call while away. When Riegl returned, Novosel heard rumours that he was looking to sell the company to others, but Riegl assured him not to worry.
A few weeks later, Novosel was summoned to Riegl’s office and given a letter stating that the business had been sold but that his employment as production manager would continue under the new ownership. However, they neglected to tell Novosel what they really had in store for him.
When Novosel tried to give employees instructions, the new owners told them not to listen. Novosel was then taken to a machine in the far corner of the shop and told to get to work. He wasn’t even allowed to use the employees’ lunchroom. Sick of the atmosphere, Novosel left and sued for wrongful dismissal.
Ideal Mold’s defence was that Novosel was required to continue to work at the job; and as a result of his resignation, he was not entitled to any damages.
The court disagreed. Ideal Mold was ordered to pay Novosel the equivalent of 15 months’ salary as severance for his termination, plus his legal costs.
When a business is sold and an employee is offered a position that is largely similar to the one he or she had with the former company, the employee takes a serious gamble if turning it down. If a court would have considered Novosel’s new employment to be comparable, overall, to his previous job, his legal claim would have been dismissed. However, in this case, the new owners fundamentally changed Novosel’s job, and in so doing, treated him so poorly that he was entitled to leave the job and sue for wrongful dismissal.
Technically, an employee is dismissed when a business is sold and the legal identity of the employer changes. However, employees have an obligation to continue to work unless the terms of the new job are significantly different. When an employee is caught in the middle of a sale of a business, I usually consider the following evidence:
Are the financial terms the same? If the new position has a reduced compensation plan, a decision not to accept the job is more reasonable. Benefits and minor terms may, however, be modified without necessarily creating a lesser position.
Are you required to sign a contract that imposes new terms and restrictions that did not previously exist? Courts typically view a decision to reject a new contract as reasonable in cases in which new and disadvantageous terms are introduced.
An objectively intolerable working environment can also be viewed as a significant change. In Novosel’s case, he was purposefully humiliated. Under those types of circumstances, a decision to leave is more reasonable.