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Seller of Business is Special Circumstance That Justified Termination Following Expiration of Contract

    Client Alerts
  • April 17, 2015
When a small business is sold, the purchaser often agrees to hire the former owner. The buyer wants to retain the seller’s expertise and experience, and the salary paid to the seller can make up part of the purchase price. Typically, the seller enters into a term employment contract that anticipates employment for a specific period of time following the purchase.

In some cases, however, the buyer decides that it does not need the seller’s services after this initial contractual term expires. Earlier this month, the Fifth Circuit Court of Appeals recognized that in these situations, the seller’s employment with the purchaser is different from that of other employees, and that the purchaser has leeway to decide not to continue the employment relationship. In Squyres v. Heico Cos., the plaintiff sold his business to the defendant and entered into a three-year employment agreement following the sale. At the conclusion of the contract’s term, the defendant declined to renew it and terminated the plaintiff, who was 70 at that time. He sued, claiming age discrimination.

The Fifth Circuit affirmed summary judgment for the company. The court found that the plaintiff had not produced evidence that countered the defendant’s assertion that he was not performing up to expectations. The plaintiff countered by claiming that even if it did not renew the contract, the defendant should have retained him as an at-will employee. The court disagreed, noting the plaintiff’s “unique employment situation.” The Fifth Circuit pointed out that the plaintiff’s salary was part of the purchase price of the company. His situation differed from other at-will employees at the company because there was no indication at the time of sale that employment would last more than the three-year period.

Purchasers of small businesses may be reluctant to retain the seller due to concerns over their ability to terminate him or her based on business reasons. This case provides buyers with some comfort that federal courts reviewing discrimination claims understand the special circumstances involved with such post-sale employment arrangements.