Friday, May 18, 2012

Further Difficulties with Fixed Term Contracts

I recently explained the limitations and difficulties of fixed term contracts.  One of the points I highlighted is that a fixed term contract displaces the employer's common law entitlement to terminate employment on notice.

One employer recently discovered that this phenomenon can be extremely expensive.  Earlier this month the Superior Court released its decision in Loyst v. Chatten's Better Hearing Service.  In a nutshell, Loyst started running the Chatten's office in 2003, and when Chatten's was purchased in 2006, the purchaser kept her on as Office Manager on a 5 year fixed term contract for service.  (Raises spectres of my recent posts about buying a business and independent contractors, but neither one was a major issue in this case.)  The contract was extremely simple, setting out the position, the remuneration, and stating that at the end of the 5 years, Loyst was to receive a 15% interest in the company.  A year later, the contract was amended only to the extent that it made it into an employment contract rather than a contract for service.

Over time, Loyst developed a strained relationship with the new owner, to the point that, on March 12, 2009, the new owner told Loyst that she could no longer be the office manager but instead her duties would be restricted to bookkeeping and accounting.  He could no longer have people reporting to her or have her dealing with customers, receiving any bonuses, bonus trips, or attending partnership meetings.  Her salary would remain the same, and while the owner claimed at trial that he had assured her that the 15% interest in the company would still be provided at the end of the contract, the judge found this to be improbable.  Loyst did not recall that being mentioned, and in her evidence the owner had basically denied the existence of a written contract.

Loyst responded that the changes to her contract were not acceptable, and the owner told her that if she did not want to accept the new conditions she could pack up her desk and leave.  She did so.

There were just cause allegations, mostly turning on things that Loyst had allegedly said to customers or co-workers at some point in time.  After-acquired cause was alleged in respect of a complaint to a third party about the owner which the owner discovered after the termination.  In context, all the allegations were fairly tenuous - the judge found that, at worst, the after-acquired cause was something deserving of sanction but not summary dismissal.

The truly striking issue on this case is the damages.

As I have noted in the past, when terminating a fixed term contract which does not have an early termination clause (which clause can present its own challenges), the measure of damages is not held to the common law reasonable notice period.  Rather, the employee is ostensibly entitled to receive the damages she would have received throughout the rest of the contract, had the contract been completed, subject only to the obligation to mitigate.

In other words, in this case, where there were nearly 30 months outstanding in the contract at the time of termination, she was compensated on the basis of her earnings over those 30 months.  (If it weren't a fixed term contract, her entitlements at common law very likely would have been less than a year.  If there were a good written termination clause, her entitlements could potentially have been limited to less than 2 months.)  Even after taking into account her mitigation earnings, this left nearly $77,000 in salary outstanding (about 15 months salary), despite the fact that she was not compensated for loss of bonuses, etc.  Plus $180,000 in respect of the 15% interest in the company.

So this wrongfully dismissed employee, with a salary of $60,000 per year and six years of service, ended up with entitlements to the effect of $300,000(!!!!!), reduced to about a quarter million after mitigation earnings.

The problem with the employment contract, which ended up being very expensive for the employer, is that the parties clearly did not contemplate at the time what would happen if the relationship broke down.  Having lawyers in at that stage, instead of trying to clean up contractual entitlements through litigation, probably could have had the result that the employer's liabilities on termination of the contract would have been reduced by more than $200,000.


Hat tip to Professor David Doorey for posting about this case in his Workplace Law Blog, which brought it to my attention.  He focused on the actual dismissal itself, and his discussion on the point is interesting, though as a minor point I disagree with the breadth of his assertion that an employer cannot unilaterally amend employment contract terms.  An employer cannot unilaterally amend fundamental terms of the employment contract.  However, unilateral amendments which do not go to the heart of the employment contract are permissible in most contexts.

It's largely a matter of scale.  If an employee's reporting structure is changed so that he reports to the VP Communications instead of the VP Marketing, then that's probably not going to be a problem.  You probably don't need the employee's consent for that.  However, changing from reporting to the President to reporting to a mid-level manager suggests a significant demotion, which is more likely to be a fundamental change.  Likewise, modest changes - even adverse changes - to an employee's remuneration package will not generally be a problem, depending on the terms of a written contract.  As the easiest example, consider a scenario where an employer switches group health insurance providers, and ends up with slightly different coverage (better dental and optical, maybe, but worse AD&D coverage).  An employee would have a very difficult time treating himself as having been constructively dismissed by such a change.  (The trouble is that there are a lot of grey areas in this analysis.)

Indeed, in this case, when assessing damages, the trial judge noted that the yearly bonus, bonus trips, and attendance at partnership meetings, despite being things that Loyst had enjoyed through the employment relationship, "were not an integral part of Loyst's compensation and were not called for in the contract".  By contrast, the changes to her job description alone "constitute unilateral changes to a fundamental term of the employment contract" (para 36).


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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