The sale of a business entails certain responsibilities on the part of the employer. California courts have held that a sale of the business constitutes a termination of the employment, which triggers all payments due to employees upon their discharge.
In Chapin v. Fairchild Camera Etc. Corp. (1973) 31 Cal.App.3d 192, a corporation called Fairchild Camera sold one of its departments, including the employees in the department, to another company. The new company then terminated the employment of many of the employees. The new company decided whether or not it wanted to pay the terminated employees any severance. The Fairchild Camera employment policies, however, provided that terminated employees were entitled to severance pay. The court found that when Fairchild Camera sold its department, it could no longer fulfill its part of the employment relationship. As a result, the sale or transfer was tantamount to a layoff from Fairchild which triggered the obligation to pay severance money.
The Chapin court also held that severance pay must be paid even though the employees were not entitled to unemployment benefits as they were working with the new company. "Separation pay is not analogous to, nor is it a form of, unemployment compensation. Rather, it is a kind of accumulated compensation for past services and a material recognition of their past value. [Citation.] It concerns the past, not the future, and once it is earned, it becomes payable no matter what may thereafter happen."
[Note: severance pay is not required to be paid unless the employer contractually agrees to pay this benefit.]
The ruling in the Chapein case is also consistent with general contract law that the employer who owes wages (the obligor)) may not substitute another obligor in its place without the expr ess written consent of the employee (the obligee).Corporate Stock Sales
This sale = discharge rule would not apply when a corporation sells its stock. Even though the corporation has a new owner, the employees do not have a new employer. They are still employed by the same corporation.
Sole Proprietorship Sales
The sale = discharge rule is triggered when a sole proprietor sells his or her business. For example, Joe Adams dba LA Locksmith sells his business to Mary Bugle. Even if Ms. Bugle does business as LA Locksmith and there is no apparent change in the business, the employees are now employed by Ms. Bugle and not Mr. Adams, and have been discharged from Mr. Adams' employ
Contractual Restrictions on Severance Pay
There is no requirement that a company pay severance money. This is an issue of contract. Thus, a company can provide that severance monies will be paid upon termination, unless the termination is caused by a sale. The Chapin court noted that "Fairchild can easily protect itself by informing its personnel that certain benefits do not accrue or are not payable in cases of sale or merger.
Chapin v. Fairchild Camera Etc. Corp. (1973) 31 Cal.App.3d 192