Bennett v. Cunningham - Court of Appeal Cautions Employees About Standing Up For Themselves

In January, I posted about the Divisional Court's decision in Bennett v. Cunningham.  This was the case of a junior lawyer who sent a scathing email to her boss criticizing her office practices and lack of response to concerns she had previously raised, and in particular billing errors which ultimately reduced Bennett's commissions.  She was fired, and at trial the judge held that there was just cause for termination, but under appeal the Divisional Court allowed the appeal and found that the letter, read in context, should properly be interpreted as a constructive attempt to resolve these concerns.

The Court of Appeal heard the matter, and released its decision on Friday, allowing Cunningham's appeal and restoring the trial judge's decision.

The Court of Appeal's decision essentially hinged on deference.  A trial judge is entitled to deference, particularly as regards factual findings, and concluded that the Divisional Court mistakenly substituted its view of the facts for the trial judge's findings.

Analysis

First of all, it should be noted that most of the material facts were agreed upon - the letter which was at the core of the 'just cause' analysis was simply a matter of record.  As for whether or not the majority of the concerns Bennett raised were justified, the Divisional Court did not attack the trial judge's findings that they were not.

The core aspects in which the Divisional Court disagreed with the trial judge were the following:

(1)  The trial judge concluded that the letter was "critical", "disrespectful", "accusatory", and suggested that Cunningham was "disorganized, incompetent, dishonest and negligent".  This was insolent.  The Divisional Court found that the only part of the letter which could be considered 'insolent' was the sole allegation that the docketing errors (affecting Bennett's commissions) were 'dishonest and negligent'.

(2)  The Divisional Court disagreed with the trial judge's failure to give weight to the closing of the letter, which was an invitation to discuss and resolve the issues, and also the failure to consider the overall context and purpose of the letter, as private correspondence between employer and employee, not disclosed to third parties.

(3)  The Divisional Court viewed the trial judge as having failed to consider the full context in light of the high threshold for an employer to meet in establishing just cause:  "As in other employment relationships, there remains a power imbalance and there is a strong policy interest in encouraging open and frank discussion between employer and employee of workplace issues."

My personal view is that this quotation of the Divisional Court is a highly important aspect of this case.  As an employment lawyer, I'm fairly confident that I can draft a letter in most contexts to address an employee's concerns and strengthen their position in possible subsequent wrongful dismissal litigation without crossing the line into 'insolence'...however, it's often a fine line, and many (I'd dare say most) employees are not entirely capable of toeing that line.  Therefore, a certain latitude needs to be afforded.

The Court of Appeal found that the trial judge had applied the necessary contextual analysis, and that the Divisional Court simply came to its own different conclusions.

Impact

This decision could be significant, for a couple of reasons.  Despite the title of this entry, the Court of Appeal didn't really address the merits of the case directly.  The Court didn't say "Employees should be more cowed".  But by restoring the trial judge's decision, that's the precedent being set.

I'm concerned, moreover, about the characterization of the finding of just cause as being "essentially factual in nature".  There are well-established and not-so-straightforward legal tests for proving just cause.  To call it a question of fact...well, it's highly inconsistent with the existing case law, including case law which the Divisional Court accurately summarized by noting that a trial court is required "to consider not just whether an employee may be found guilty of misconduct giving rise to just cause dismissal, but also whether the nature and the degree of the misconduct warranted the employee’s summary dismissal."

I can't really fault the Court of Appeal for its findings regarding difference #1 above.  Strictly speaking, a finding that the language and tone of a letter is altogether insolent is probably squarely within the realm of factual findings.  The Divisional Court may have stepped over the line of deference slightly when it zeroed in on the language of the letter and determined that only one narrow part was really insolent.  But when you start getting into the question of "Is it bad enough to justify summary dismissal?", that's more than just a simple question of fact.

The Divisional Court looked to the letter directly to come to its own assessment of the severity of the misconduct.  As I said, this may have been slightly over the line, but not unforgivably so, because the letter was simply a matter of record.  Perhaps more importantly, there was a reason they looked at the letter directly:  The analysis of severity in the trial judge's reasons were relatively scarce.

The trial judge's reasons, regarding just cause, boil down as follows:

Paragraphs 30-34:  The concerns raised in the letter were largely unjustified.

Paragraphs 35-37:  Bennett wrote the letter out of frustration, but her action was unreasonable.  She had an opportunity to apologize and failed to do so.

Paragraphs 38-40:  The overall tone of the letter was not courteous, and he doubted Bennett's sincerity in inviting a constructive discussion, because she hand-delivered it and also sent it by registered mail.

Paragraph 41:  Cunningham decided that she could no longer maintain the employment relationship.

Paragraph 42:  Cunningham's conclusion was justified.  "The comments and accusations in the letter undermined the confidence she had in Bennett and destroyed the employment relationship."

Paragraph 43:  The letter constituted just cause.

When the Divisional Court said that there was an absence of contextual analysis, this is what they were talking about.  There were no detailed reasons about how Cunningham's confidence was undermined.  She was shocked and angry, certainly.  But no examination of the severity of the insolence in light of the context of the employment relationship.  Just a blanket statement that Cunningham's conclusion was justified and that her confidence was undermined.  The problem is exacerbated by the subjective language the trial judge continued to use - the Divisional Court rightly called him on that, noting that the question isn't whether or not Cunningham was able to continue the relationship, but whether or not - in light of all the circumstances - the misconduct was objectively serious enough to regard the employment relationship as being at an end.

In other words, what we're looking at is a 'sufficiency of reasons' problem.  When it comes to simple factual findings, such as "John said x", then there's a low threshold for the judge to meet.  If there's contradictory evidence on the point, the judge probably needs to nod to the opposed evidence and explain why he disregarded it, but not in too much detail.  "I preferred John's evidence" is usually enough.  From there, it's simply a question of whether or not there's evidence on the record capable of supporting that conclusion, and that the trial judge didn't simply misapprehend what John was saying.

However, for questions of law, or of mixed fact and law, there are greater obligations.  It is not enough for a trial judge to show that he is aware of the issues; he must explain how he came to his decision, in such a way that his reasons can be subjected to appellate review.  Whether or not an act of misconduct rises to the level of just cause is certainly in that area.  The Court of Appeal's treatment of the issue of just cause as being simply factual...is worrying.

If the Court of Appeal really wanted to hold the Divisional Court's feet to the fire in terms of inappropriate appellate intervention, it should have sent the matter back down to the trial level for a new trial of the issue.  Respectfully, I think even that might have been overkill, given that there were really no contested facts at issue on the appeal.

At the end of the day, the Divisional Court's decision was based on a look at the record and a look at the trial judge's reasons, and a conclusion that 'It wasn't really all that bad'.  However, all of the underlying findings of pure fact were left completely intact.  Bennett sent the letter.  The language of the letter was harsh.  The allegations in the letter were wrong.  There was misconduct.  It was inappropriate to call Cunningham 'dishonest and negligent'.

But, said the Divisional Court, this didn't rise to the level of just cause.

Other Thoughts

Beyond the issues strictly on appeal, the trial judge's decision contains an asymmetry which should be troubling in light of the power imbalance of an employment relationship.  The expectation seems to be that, to the extent that there are difficulties in the relationship between Bennett and Cunningham, it falls to Bennett to be proactive and resolve them.

Consider, on the one hand, the trial judge's treatment of the "docketing system" issue.  Bennett submitted her docketed hours to Cunningham's assistant, who entered them into a system for billing.  She was entitled to a percentage of her collected billings.  However, she discovered that some of her hours were being entered as Cunningham's hours, presumably as an error by the assistant.  Cunningham's response was to tell Bennett that the errors would be corrected if Bennett provided the accounts in which the errors had occurred.  The trial judge felt that this was enough.

In other words, this was a system established by Cunningham, administered by an employee of Cunningham, which resulted in errors which favoured Cunningham, and Cunningham's answer was to put Bennett to the strict proof of each error.  Assuming Bennett still had copies of her handwritten dockets and access to all the accounts in question, it would still be a time-consuming and menial process to perform a line-by-line comparison of all of her time entries with the accounts on each file.  

On the other hand, consider the trial judge's discussion of the possibility of an apology for the letter.  Bennett delivered the letter on December 21, immediately before Cunningham left for a two week vacation, and failed to apologize in the two week window before she was summarily fired.  "Although that would have been difficult, if not impossible, to do in person, Ms. Bennett could have prepared and placed a written apology on Ms. Cunningham’s desk for her attention when she returned from vacation."  This implies that an apology would have been sufficiently mitigating that it might have changed the trial judge's analysis of just cause (and perhaps even suggests that the 'failure to apologize' was aggravating), and yet recognizes that there was no meaningful interaction between the parties between the delivery of the letter and the termination.  It also suggests that Bennett should have anticipated that a personal apology after Cunningham's return would be impossible, and that the absence of a proactive apology cemented cause for dismissal.

The relevance of this asymmetry is simply this:  The trial judge was always looking to Bennett's acts or omissions - what could Bennett have done differently to save the employment relationship?  At no point does the trial judge ask whether or not Cunningham could or should have done something differently which might have salvaged the employment relationship, and there is usually such an obligation upon the employer:  That's what progressive discipline is all about.

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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.

Case Synthesis: Bowes and Kelcher

While I have seen it argued that the Bowes v. Goss Power Products Ltd. case pushes employment law further into its own unique species of contract (i.e. one in which the vulnerable employee needs to be protected), I have argued the contrary, that it reconciles much of employment law with the general principles of contract law.

It is an implied term of every employment contract that the employer will not terminate the employment relationship without just cause except on reasonable notice.  That's actual notice.  Most employers choose to breach this, and to be liable for damages for their failure to do so (i.e. pay in lieu of notice).  The obligation to pay arises by virtue of the breach of contract.

However, the implied term can be modified by an express contractual term.  This is what happened in Bowes.  The employer reserved the right to terminate on a certain amount of notice or pay in lieu, and when it terminated without actual notice, the pay in lieu provisions of the contract were enforced.  The obligation to pay arises by virtue of the contract itself, and isn't subject to other principles of damages.  What Goss Power thought was a right to terminate the contract without actual notice turned out to also be a contractual obligation to pay.

But that right to terminate without actual notice may have other impacts in a few other areas.  Whether or not a contract has actually been breached is going to have consequences.

In this post, I'd like to consider the interrelationship with the proposition set out by the Alberta Court of Appeal in Globex Foreign Exchange Corporation v. Kelcher.  Globex dismissed Mr. Kelcher without notice, and then attempted to enforce restrictive covenants against him.  The majority of the Alberta Court of Appeal, citing the principle from General Billposting Co. v. Atkinson, concluded that the wrongful dismissal meant that Globex was no longer entitled to rely on the restrictive covenants.

What if somebody in Kelcher's position wasn't entitled to actual notice?  What if an employee with a termination clause like Mr. Bowes, as well as an otherwise-enforceable restrictive covenant, was fired on pay in lieu of notice?

By structuring the contract in such a way that the employer can pay the employee to go away without breaching the contract at all, the employer would be protecting itself from liabilities or losses of rights incidental to repudiating the contract, including - most likely - application of the General Billposting principle.

Also, it would be much harder for an employee to make a claim for moral damages, bad faith damages, aggravated damages, etc., without an actual breach of contract to point to.

All that being said, it's quite difficult to implement restrictive covenants in such a way that they will be upheld by the Court.  An employer hoping to rely on a restrictive covenant really needs to have a competent lawyer involved right from the recruitment stage.  I would encourage Ontario employers to contact me for assistance in drafting employment contracts.

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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.

Between a Rock and a Hard Place

There's an interesting recent case from the Superior Court, Barton v. Rona Ontario Inc., involving a dismissed manager who was fired for just cause after compromising safety in favour of human rights.

The Facts

Barton was an assistant store manager at Rona's Barrie location, responsible for managing 140 employees.

In April 2009, a training program was scheduled in the store's training centre, and one of the employees, Kai Malmstrom, wanted to take the course.  Management wanted him to take the course, too.  The one problem was...well, physics.  Malmstrom was confined to a wheelchair, and the training centre was on the upper level of the store, and not wheelchair accessible.  The official plan was that, after the training session on April 17th, one of the attendees to the training session would provide training to Malmstrom on the ground floor.

Malmstrom wasn't happy with this.  He wanted to join his colleagues on the second floor, and take the training directly.

So Malmstrom and his colleague Mr. Stirk, came up with a plan to get Malmstrom upstairs using an order picker.  The essentials of the plan involved strapping Malmstrom's wheelchair to a skid and lifting him up to the second floor, and bringing him back down the same way.  On the evening before the training session, Malmstrom suggested this plan to Barton.  Barton, at the time, was in the middle of coordinating a major event in the store, and while he did not expressly permit the plan, he failed to expressly prohibit them from carrying out their plan before he was called away.  The evidence on the conversation was conflicting - the trial judge accepted that Barton reminded Malmstrom of the plan to have him trained later, but also accepted Malmstrom's evidence that Barton seemed agreeable to the plan, despite Barton's evidence that he tried to express his discomfort with the idea.

The next morning, as they began to carry out their plan, the Operations Manager, Clint Marsh, asked them what they were doing, and his evidence was that he prohibited them from doing so.  Then he was called away, and they continued nonetheless.

The plan proceeded essentially without incident, except that Stirk wasn't wearing the appropriate safety equipment when bringing Malmstrom back down.  Nobody was injured.  Nonetheless, it was an egregious safety violation.

Gierak, a Human Resources Advisor, conducted an internal investigation into the incident, and there were significant excerpts from her notes reproduced in the decision.  Both Marsh and Barton acknowledged they would have done things differently if given another chance - i.e. they would have stopped it (which is strange to me, given Marsh's evidence that he instructed them not to proceed).  They also noted that, had they not been confident that it would proceed safely, they would have stopped it.

It appears that, given Malmstrom's impression that Barton was okay with the plan, he left Stirk with the impression that Barton had given permission, who conveyed that same impression to Marsh.

Gierak's report did not recommend termination.  Up until her discovery that Stirk had foregone the appropriate safety equipment herself, she wasn't sure that there even was a safety violation, and felt that everyone's actions to get Malmstrom to the training session were, while perhaps ill-advised, understandable.

Nonetheless, following a second investigation by a second HR professional, management terminated Stirk and Barton for cause, and disciplined Marsh.  There is no indication in the decision as to whether or not Malmstrom was disciplined, nor any of the others involved.  (Apparently, several people assisted in the process of getting Malmstrom upstairs.)

The Decision

The question in this case was whether or not Barton's failure to stop the lift constituted just cause for termination.

Rona has very clear policies regarding safety protocols, including that immediate dismissal may be called for in specific cases of safety breaches, including deliberate acts that could endanger safety, riding on moving equipment, and deliberate violation of safety rules.

Furthermore, the Court accepted the proposition that managers are held to a higher standard than non-managerial employees.

The judge is not at all critical of Rona's decision to terminate Barton.  There were many 'good and valid' business reasons to terminate an employee in that context.  "In this case, for example, Rona might have formed the view that Mr. Barton lacked the character required of a senior management person and did not want him back.  Rona could have decided that, given the large number of store staff who witnessed the event and assisted in the lift and the descent, it was necessary to make an example of him...."

However, these reasons do not necessarily "pass muster as just cause".  The Court rightly notes that its assessment is simply whether or not the misconduct in and of itself justifies termination.  In this case, there is no reason to suggest that discipline would have been inadequate to preserve the relationship as between Rona and Barton.  No reason to think that a stern warning would have been insufficient to prevent Barton from engaging in such misconduct again.  His specific acts were not so egregious as to warrant termination, and progressive discipline would have been appropriate.

My Thoughts

This is a close case in some ways, but I believe the Court got it exactly right.  All Barton did was fail to prohibit a plan brought to his attention in a brief conversation during which he was otherwise occupied, and which was carried out the next morning before he arrived at work.

He probably should have said "Don't do it", and it's probably culpable misconduct that, as a manager, he failed to do so.  But just cause is a high threshold.  And it's interesting that Rona rolled the dice on this one, because it just so happens that the lawyer who represented Rona was one of the instructors for my law school employment law class, back in the day, where I was taught how high a threshold just cause is.  (I recall one of the instructors relating an anecdote from Court where a judge queried whether or not just cause still exists at all.)

One of the things which really surprises me about this decision, though, is how little discourse there was on the human rights aspects of the case.  The parties were clearly aware that the incident was simply an effort to get Malmstrom access to the training facility, and Barton himself was of the view that some blame lay with the lack of accessibility in the store.

It's hard to fault Malmstrom for wanting to attend the seminar in person.  Getting instruction from somebody who happened to attend the seminar is hardly a substitute for having gotten professional instruction in a structured classroom.  It seems like a discriminatory result.

Suppose, for a moment, that the lift could have been and was completed in a way that reasonably controlled for all risks involved.  (Even though not all safety protocols were observed during the descent, that's hardly Barton's fault:  He wasn't even there at the time, and even had he given express permission one would reasonably infer that it was subject to ordinary safety protocols being observed.)  A Rona safety policy saying "Don't do it" might not be sufficient to justify rejecting the plan; you would have to carefully and contextually examine the risks, figure out why the particular policy is in place and whether or not the risks it seeks to avoid can otherwise be accounted for.  We don't know what Rona's human rights policy says, but there's a good chance that it is also disciplinable for managers to engage in discrimination.

And also suppose that Barton hasn't memorized all such policies.  This is a fair supposition, I think.  Given an opportunity to review the safety policies and the human rights policies, and the specifics of the request being made, there may have been a right answer and a wrong answer within the context of Rona policy, but in the absence of such an opportunity to review, we're looking at two answers which could be wrong.  This is not a scenario where you can necessarily err on the side of caution, because there is no cautious approach.

Barton doesn't want to refuse the request, because he sees it as his responsibility (and Rona's responsibility) to accommodate Malmstrom.  He may be wrong.  It may be that the plan was inherently unsafe in such a way as to justify refusal, and it may also be that creating an access route or a ground floor training facility would amount to 'undue hardship', which would mean that Malmstrom would have no legal right to be so accommodated.  But this is a complex and nuanced human rights question, which lawyers could certainly and reasonably disagree about.

At minimum, this mitigates the severity of his failure to instruct Malmstrom not to carry out the plan.  We know that he was busy with other matters, he wasn't able to complete the conversation, and he didn't have an opportunity to return to the matter to finish dealing with it.  That he could reasonably and in good faith believe that his decision was to protect Malmstrom's human rights makes it difficult to argue that the decision, even if wrong, could be such misconduct as to warrant summary dismissal for cause.

But it's more than that:  Refusing to discriminate against somebody is a protected act under the Human Rights Code.  The law on this point is not particularly well-settled either - it is reasonably clear that a good faith complaint of discrimination will give rise to reprisal protection, even if the original complaint was not founded.  Imagine, for example, that I was denied a promotion, and I felt in good faith and reasonably that the denial was due to my religion, and I made a complaint accordingly, and was fired for it.  Even if I cannot prove the actual discrimination (and indeed, even if the denial of the promotion could be shown to not be discriminatory at all), the termination would still likely be an unlawful reprisal.  It is not so clear that the same principle applies to people refusing to breach another's Code rights, but it's arguable.  So if refusing to allow Malmstrom to attend the seminar would be unlawful discrimination (which could be argued), then not prohibiting him from doing so would likely be Code-protected.  Alternatively, even if it wasn't unlawful discrimination, the failure to prohibit him from doing so based on the good faith belief that Malmstrom was entitled to accommodation might still be Code-protected.

Highlights

I'm pretty sympathetic to Barton, but that sympathy arises from several places, and I wouldn't want to be taken as suggesting any sort of general proposition that safety ought to be compromised in favour of human rights.

Firstly, he wasn't there.  He discussed the matter the night before in what sounds like a fairly cursory manner, and didn't prohibit it.  That amounts to, at best, lukewarm complicity.

Secondly, not being there, he can hardly be faulted for the fact that not all safety precautions were taken.  He was dealing with people well-qualified and trained in the use of the equipment, and ought reasonably to have presumed that these folks would take all safety precautions.

Thirdly, nobody was injured.  Had there been injuries, that could be a whole different matter.

Fourthly, it was Malmstrom's idea in the first place.  Inherently unsafe, perhaps, but most of the risk was to Malmstrom, and he would have been aware of such risks.  (If it was the employer's idea, pressuring Malmstrom to engage in something unsafe as an alternative to reasonable accommodation, it could be a very serious problem under both the Human Rights Code and the Occupational Health & Safety Act.)

Fifthly, it was necessitated by an unfortunate absence of accessibility, which means that the employer probably has to shoulder at least some of the blame, and can't just point fingers at Barton.

In general, I'm inclined to believe that Barton was probably wrong, but not even at the longest stretch could I imagine this constituting just cause.

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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.

Can Your Employer Unfire You?

There is a new and very interesting case out of the Ontario Superior Court of Justice, Chevalier v. Active Tire & Auto Centre Inc..

As you may recall, Evans v. Teamsters involved a case of an employer terminating an employee, then offering him a fixed term contract to work through the notice period he demanded.  The Supreme Court concluded that his refusal to accept the job constituted a failure to mitigate, so his action failed.  This has had a lot of impact on constructive dismissal cases (i.e. 'Yes, you were constructively dismissed, but you should have stayed in the job anyways'), where there would not be an atmosphere of "hostility, embarassment, or humiliation".

Chevalier is along similar lines.  A manager had been in the job for 33 years, and, after Active Tire took over the workplace in 2007, it made several changes with which he was dissatisfied.  He experienced what he felt was harassment, was transferred to a new location (from Niagara Falls to St. Catharines), was required to work for a period of time in Toronto, and was required to do what he felt was demeaning work.

He was 'laid off' in the face of business difficulties (there were two managers on site, and it was decided that the location could only support one), and he immediately commenced legal action (two weeks after being dismissed).  Active Tire obtained legal advice, was advised that they were not entitled to lay him off (presumably there was no contractual right to do so), and they immediately apologized and offered him his job back.  He declined.

The employer denied having harassed him, and ultimately the judge accepted this, finding that Mr. Chevalier's recollection of events was "magnified and distorted" by his bitterness toward the company.  Active Tire's conduct was, according to the judge, directed toward making him "a more effective contributor as an employee".

The judge considered it relevant, but "not determinative" that Mr. Chevalier had already commenced legal action when recalled to work.

All things considered, the judge ruled, a "reasonable" person would have accepted the job and returned to work.  Accordingly, Mr. Chevalier's action was dismissed.

My Thoughts

The case law backs up the judge's analysis here, but I still question whether or not the result is in the right place here.

I'm not sure that the legal community in general fully appreciates how significant a step litigation is to the general public.  Suing somebody is a big deal.  Being sued is a big deal.  Very few people regard litigation as being simply business, from which they can detach any personal feelings.  Most people think of most commercial transactions as being in good faith, and few people will sign a contract if they expect to have to litigate it.

So I would argue that the fact that litigation has begun should be significant indeed.  (However, it is surprising that the litigation began so quickly in this case.  When I'm representing an employee and the employer has overstepped with something like a suspension or temporary layoff, I would normally start with a demand, putting them on notice of my client's position, and give them an opportunity to get their own legal advice on the point.  Sometimes, depending on the needs of the client, I throw a really slow pitch at first to encourage a recall.  Two weeks...well, it's really fast, and suggests to me that there may have been a "Gotcha!" aspect to the claim, trying to get the litigation moving before the employer could realize its mistake.)

There's also another dimension here.  On the findings of the trial judge, the employer's conduct prior to the termination was mostly within its rights, including disciplinary actions.  However, the layoff was not, and the fact that it followed other discipline - even justified discipline - may not be irrelevant to whether or not the layoff poisons the work environment.  If I discipline you, and then lay you off, the causal relationship is implied.  There may well be other legitimate business considerations at play, but at least the choice of who goes is probably being influenced by disciplinary history.  It sends a message.

This is especially so for a manager, being one of two managers.  It would undermine his authority with the staff, when the employer has clearly sent the message - to him and others - that they don't want him there anymore.

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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.

You're fired! No, I quit!

Every so often, you run into a case where an employee was planning to leave anyways, but was fired first.  Or where an employer gives notice of termination, and the employee resigns before the notice runs out.

What happens in such a case?  Can an employee still sue for reasonable notice if he quits - or was planning to quit - before being fired?

Often, in such a scenario, the employee's rights will be limited.  Let's start with the first scenario, where an employee was planning to leave, but was fired first.

Scenario #1

Conceptually, in a usual wrongful dismissal action, an employee is entitled to be compensated on the basis of what would have happened but for the employer's failure to give notice.  In other words, the judge looks into his crystal ball and sees what would have happened moving forward, and if the employee was going to quit soon, the judge will see that, and the damages will be limited.  Of course, a judge doesn't really have a crystal ball - just the evidence before the Court - and while an employee's intention to quit is going to be relevant to damages, it isn't going to change the fact that it was ultimately the employer who breached the contract.

In reality, what is going to be much more important is why the employee was planning to quit.  Let's say the relationship has been going south for a while and the environment has just deteriorated to the point that I can't be there anymore.  The fact that I was going to quit may be less relevant, because I'd still be able to frame such a resignation, perhaps, as a constructive dismissal.

On the other hand, if the reason I was going to quit is that I had landed a new job, then I have a bigger problem:  Mitigation earnings.  So it's early August, I line up a job to start at the beginning of September, and I'm planning to give my employer three weeks' notice, but I get fired first.  I'll probably be entitled to those three weeks (subject to contractual/common law doctrines), but even if I sue for pay through the whole reasonable notice period, the employer's full answer will be that I had a new job starting in September, and my earnings from the new job will be backed out of the old employer's obligations to compensate me.

Scenario #2

What happens if the employer gives me some actual notice, and I quit partway through?  Suppose for example that I've been with my employer for ten years, and I get 8 weeks' notice, and then put in my own notice of resignation.

Once again, the question is why I resigned.  Is it simply because I can't be there anymore knowing that I'm so unappreciated that I'm being fired?  The fact alone of having been given notice won't be enough.  Coupled, however, with other adverse treatment, it might be argued to constitute a constructive dismissal, which means that I could still seek pay in lieu of notice despite having resigned.

Or maybe I found a new job quickly?  Unusual, but it does happen, and again, there's the mitigation problem, as above.  I can't sue my employer for money I made elsewhere.

The Exceptions

It's law, right?  There are always exceptions.  And exceptions to the exceptions.  So on.

The duty to mitigate isn't universal.  In particular, statutory minimums are not subject to the duty to mitigate.  For the sake of the example, suppose I have ten years of service with an employer who meets the criteria for being required to pay statutory severance.  If they fire me, the stat minimum is 8 weeks' notice or pay in lieu thereof and an additional 10 weeks' severance pay.

So if I'm fired without notice, then it doesn't matter if I was planning to quit the next day without notice, or if I get a job immediately afterwards; I am automatically entitled to the full 18 weeks' pay.

Likewise, if I'm given my 8 weeks' actual notice, and I quit during that notice period, then I will still be entitled to my 10 weeks' severance pay, provided that I gave the employer at least two weeks' notice of resignation.

Having a new job, I may not have any additional entitlements at common law, but the stat minimums can be helpful, especially for long-service employees.  It can be a nice little windfall.

Similarly, following the recent Ontario Court of Appeal decision in Bowes v. Goss Power Products Ltd., people with employment contracts entitling them to a fixed period of notice or pay in lieu thereof will be treated the same way.  If I'm contractually entitled to six months' notice or pay in lieu, and I get fired, then - again - it doesn't matter if I already have a job lined up to start the next day and had a not-too-polite resignation letter in hand when going into the termination meeting, if they beat me to the punch and fire me, I get to chase the whole six months.

Naturally, that analysis doesn't apply to "just cause" terminations - it's never a good idea to just go and get yourself fired intentionally.

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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.

Ancillary Damages and the Sword of Damocles

I recently referred in passing the concept of ancillary damages, from Justice Echlin's decision in Brito v. Canac Kitchens, which I discussed here and here.

The essential facts are these:  Mr. Olguin (the plaintiff in Brito) was dismissed, and offered a modest package, which was less than his common law entitlements.  He didn't agree to the package, and his benefits and remuneration were cut off after his statutory minimums were satisfied.  He obtained new employment relatively quickly, but without benefits.  So when he began to undergo cancer treatments during what would have been the reasonable notice period, he incurred significant losses.

The issues included the length of the notice period, but by the point of trial, even the employer wasn't seriously arguing for a notice period which would have allowed them to terminate Mr. Olguin's benefits before he was diagnosed.  So the main issue was the scale of damages for their termination of his disability benefits; they argued unsuccessfully that he should have mitigated his loss by purchasing replacement benefits.  Instead, they were hit with the full amount his disability insurance would have had to pay out.  Pretty major.

But another head of damages awarded by Justice Echlin was "ancillary" damages, for cutting off his benefits and wages after only the statutory minimum notice period.  Looking at the description of his reasons for awarding them, they appeared to me to be in the nature of punitive damages, which traditionally have a very high bar in wrongful dismissal suits, including a separate actionable wrong and exceptionally bad conduct on the employer's part.  I couldn't see how this case would meet the traditional test for punitive damages.  But that doesn't mean it can't succeed - the law is always changing.

The Court of Appeal agreed that they looked like punitive damages, and found that, because punitive damages weren't pleaded by the plaintiff, the award couldn't stand.  Highly unsatisfactory.  Canac's approach to this matter is not an uncommon one:  Put an initial offer to the employee which satisfies his statutory entitlements and offers to continue wages and benefits past the stat minimums in exchange for a release.  Few employers are willing to continue wages or benefits - and especially LTD benefits - past the stat minimum notice period without a signed release.  That's the deal they're trying to make.  "Let's agree on how much we owe you before we pay you anything."  And in a case where the employee finds new employment, an employer would normally take money off the table.  Canac's actions, which Justice Echlin found to be so high-handed and oppressive as to justify additional damages, were essentially common practice.  So employers need a little something more from the Court of Appeal than "it wasn't pleaded".  A singular decision in exceptional circumstances, even from Justice Echlin, is unlikely to change the industry practice.

This was Justice Echlin's last reported decision, to my knowledge, before he passed, and it was a big one.  His analysis on LTD benefits are likely to become fairly well-entrenched in the law.  The ancillary damages leave a big question mark, however.

Right now, it's an outlier.  But outlier decisions which run against the grain of established law, when made by esteemed judges in the field, often plant seeds which can result in legal change down the road.  It's hard to completely ignore Justice Echlin, though two decisions (Asselin v. Gazarek and Day v. JCB Excavators Ltd.) that I know of have distinguished the case, calling it a "fact-specific" decision.

So, for now, the existing practice continues to involve the provision of only the stat minimums without a signed release, but I can't help but think that Justice Echlin has left us with a dark threat, that employers could land in trouble doing so, at least in the wrong circumstances.  We don't know if or when the sword of Damocles will fall, but employers have reason to be somewhat nervous about this.

(Incidentally, Justice Echlin himself evoked the image of the sword of Damocles in his decision in Carscallen, in a constructive dismissal context.)

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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. 

Full & Final Release Found to be Unconscionable

Occasionally, I have seen employers offering no more than the statutory minimum payment and asking for a full and final release.  For example, let's say you have an employee with between 4 and 5 years of service being dismissed for business reasons, under such circumstances that she is entitled to receive her termination pay, under the ESA, no later than, for example, August 1st.  Some employers will say "We are prepared to offer you four weeks' pay in lieu of notice provided that you sign and return a full and final release to us by July 31st".

There are a few problems with this.  In particular, even if one assumes that the pay in lieu includes everything to which the employee is statutorily entitled, it's still not going to be enforced if signed, because there's a lack of consideration.  The employee doesn't actually get anything by signing the release.  On the flip side of the same coin, the employee gets nothing by signing.

I never advise my employee clients to sign the release in such circumstances.  (See footnote.)  Rather, I find that the appropriate avenue is for me to send an immediate letter calling the employer on the bad faith offer, telling them that we're not signing the release, we still expect payment of the stat minimums by the required date, and a further proposal to satisfy my client's additional entitlements will be forthcoming.  It's the more honest, forthright, and good faith response, and a judge will prefer to see that than a fight about whether or not the release is enforceable.

But what happens when an employee gets a release offering the statutory minimum payment...plus $1?  The employer will rightly tell the employee that the offer "exceeds" his entitlements under the Employment Standards Act.  The employee might therefore sign it, completely oblivious to the fact that his entitlements aren't limited to ESA claims.

This was essentially the case in Rubin v. Home Depot, decided in May by Justice Lederer.  Mr. Rubin was dismissed at a time when his statutory entitlements to notice and severance amounted to approximately 27.75 weeks' pay.  In his termination meeting, he was presented with a termination letter offering him 28 weeks, which Home Depot noted would "exceed our obligations under the Employment Standards Act."  True.

The letter contemplated that he could take up to a week to sign.  Still, he signed it in the termination meeting.

Sidebar:  In my law school employment law class, I recall the instructor being asked about a scenario very much like this one:  "What happens if the employee wants to sign the release right away?".  There are times when I disagreed (and still disagree) with some of the instructor's conclusions, but this one was nailed:  "Don't let them."  Frankly, it isn't one-sided.  If we were talking about an offer that was a semi-reasonable approximation of the notice period, then it might be a tougher case.  But in the Rubin case, the employer made a mistake by allowing Rubin to sign right away.

There doesn't appear to have been a real allegation of pressure, but it appears that Rubin's position was that he was shocked by the termination and not thinking clearly (this is a very normal experience upon termination), and was under the impression that he didn't have another option other than Home Depot's package.

Rubin says that he 'immediately' realized he had made a mistake by signing, and contacted his accountant and family lawyer, and was subsequently referred to an employment lawyer, who sent a demand 8 days after the termination.

Home Depot argued that there was no pressure, that Rubin made inquiries about RRSP rollovers, and that even in conversations with Home Depot personnel in subsequent days he expressed no concerns about the release.

Rubin argued that the release was "unconscionable".

Unconscionability: The Titus test

There are four elements necessary to set aside a contract as "unconscionable".  All four criteria are essential.

1. A grossly unfair and improvident transaction;
2. Victim's lack of independent legal advice or other suitable advice;
3. Overwhelming imbalance in bargaining power caused by victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other disability; and
4. Other party's knowingly taking advantage of this vulnerability.

This is not an easy test to satisfy.

On the facts

(1)  Grossly unfair and improvident transaction

Rubin's counsel made arguments to the effect that Rubin was in a worse position for having signed the release than he would have been without.  Justice Lederer felt that the arguments were unnecessarily complicated (and on the judge's summary of the argument, I agree):  It boils down very simply.  Mr. Rubin was a 63-year-old employee with nearly 20 years of service, and the notice period of six months is "far removed from what the community would accept".

(2)  Victim's lack of ILA

The letter gave Rubin the option of taking a week to consider his options.  But Home Depot's evidence on the point was scarce.  It doesn't sound like this was drawn to Rubin's attention in the termination meeting.  It doesn't sound like they encouraged Rubin to get independent legal advice, or to take some time to think about his options.  Rather, the letter gave the impression that he had no other options, and moreover suggested that he had to sign in order to get any of the promised money, despite the fact that almost all of it was statutorily required.

(3)  Overwhelming imbalance in bargaining power

This is always the tough one, usually requiring something which prevents the person from knowing or understanding what it is he's signing.  In the ordinary course, a lack of appreciation of the scale of the effects won't be enough.

In this case, however, Justice Lederer embarked on an analysis of the natural imbalance of power between employers and employees, which is now well-established in employment law.  This isn't universal, for the purpose of the unconscionability test.  Where the employee is a high-level employee with professional training, that can offset the power imbalance.  But not so for Mr. Rubin.

Ordinarily, I would object in principle to suggesting that the relative unsophistication of the average employee is akin to illiteracy or language deficiencies.  But this case isn't entirely decided on that.  Mr. Rubin's evidence was that "When Mr. Fraser told me I was losing my job I felt like I had just been hit by a truck.  My mind started spinning and my heart began to race."

Which is normal.  Anyone who deals with dismissed employees regularly has heard this over and over again. When you fire somebody, there's a tendency for there to be a shock reaction.  Even where the employee saw it coming, even where the employee wanted to leave, it's not so different.  I've seen circumstances where the employee had a notice of resignation ready to go and had quietly removed most of his effects when the employer beat him to the punch - in that case, it's even good for the employee, yet the shock reaction is still the same.  People handle it differently, but almost everyone experiences it to some extent.

And that shock reaction, combined with an overall imbalance of bargaining power, is apparently enough to meet the third element of the test.

(4)  Other party's knowingly taking advantage of the disability

This is a trickier analysis in this context.  Ultimately, the judge decides it by looking at the termination letter itself.  It is ambiguous in respect to his benefits, and more importantly does not really appear to give him a choice.  It appears to say, on the whole, "Here's the deal, take it or you get nothing."  The judge notes that the letter said only that the offer was more than his statutory requirements, without explaining how much more, and without alluding to the fact that there may be further entitlements beyond the statutory minimum, and concludes that the letter "was arranged in that expectation that it would direct, if not compel, Eric Rubin to sign the release".

Accordingly, the release was set aside, and Mr. Rubin was awarded pay in lieu of 12 months.

Implications

First and foremost, employees, if you're reading this in contemplation of whether or not to sign a release, consult a lawyer.  Do not count on being able to rely on this doctrine.

Secondly, if you're reading this because you have signed a release without legal advice, still consult a lawyer.  Because there may be arguments to be made for setting aside a release, and you'll need a lawyer to look at your specific circumstances to get an opinion on the matter.

This is an important precedent, but not entirely broad:  A non-managerial non-professional employee, at the point of termination, will likely satisfy the third element of the Titus test.  That's a big deal.  But there's more to the test.  But for the fact that the consideration for the release was only very slightly above the statutory minimum, or the fact that the consideration was portrayed as being generous, or the fact that the offer had internal ambiguities, or the fact that no independent legal advice was suggested, the result could have been different.  Had the managers in the termination meeting strongly encouraged Mr. Rubin to take home the offer to think about it, the result likely would have been different.  Had Mr. Rubin taken home the offer for a couple of days and then returned it signed, the result almost certainly would have been different.

On FMC's Labour and Employment Law Blog, lawyer Kristin Taylor argues the following:

The Court’s willingness to intervene, not because the termination letter was misleading, but because it determined the agreement was grossly unfair, is of concern. It creates unpredictability if employers are not able to rely on compromise agreements reached with their employees because the employee may simply be able to renege without consequences.

Respectfully, I strongly disagree with this argument.  The Titus test is a multi-faceted test, requiring the Court to assess not only whether or not the deal is grossly unfair, but also whether the circumstances of the signing of the deal are such that a party is being taken advantage of.  It is incumbent upon the Court to assess whether or not a deal is "grossly unfair", and what the employee's entitlements would have been but for the deal are certainly fair game.  (I have argued that an employment contract signed at the point of hire limiting the employee to the statutory minimums only will never be unconscionable, because of the role of the ESA.  However, this is different, because of the pre-existence of common law entitlements at the point of termination.  We're talking about an employee who is entitled to - on the Court's rather conservative finding - an extra six months' pay, and he's signing it away for a day and a half's wages.)

More importantly, this decision is easy for an employer to control for.

Just by virtue of firmly telling the employee not to sign the release the same day, I would expect employers to be reasonably well-insulated from the consequences of this decision.  Of course, there are other aspects to a good termination letter as well, to further protect the release from being set aside.

I never ask someone to sign a release without directing the person to get independent legal advice first.  It's a proviso in most boilerplate releases that the releasor has had an opportunity to get such advice or has freely declined to do so, and so they should be encouraged to do so (outside of the text of the release, which always has dense language), and they should always have a meaningful opportunity to do so.

Personally, I'm a fan of the bifurcated termination offer:  Give a termination letter which explains the ESA minimums and says "You will get this, regardless."  At the same time, give a without prejudice offer saying, "If you sign this release, you'll get this too.  If not, you'll only get what's outlined in the termination letter."  Whether in one letter or two, ideally you should break it down for the employee, to make it clear that you're not threatening to withhold the stat minimums if they don't sign the release.  That threat, whether implied or express, will appear to be bad faith.

I've seen other bloggers suggesting that a severance offer should be "superior to the ESA in a meaningful way".  I'd like to parse this a little bit, because the word "meaningful" might be misleading.  In my view, provided that you've told them in no uncertain terms that they should get ILA, and that they should take the offer home and return it a different day, you've effectively immunized yourself against unconscionability, even where you're offering only token consideration, because it would become very difficult to establish the fourth element of the test, even if the deal is grossly improvident.  But I also think there's a grey area for 'grossly improvident', too.  Take Mr. Rubin, for example.  Statutorily entitled to 27.75 weeks, common law entitlement to 52 weeks.  Would a deal for 51.5 weeks have been 'grossly improvident'?  No, of course not.  What about 30 weeks?  Maybe.  What about 40 weeks?  I doubt it.  Token consideration is one thing, but if you're offering 3 months over the statutory minimum, then that isn't an insignificant amount of money.  It is not inconceivable that a person might reasonably apply a "bird in hand" analysis to it and take the deal even knowing that it doesn't fully address his entitlements.  So I'm not sure what Stringer LLP meant by "meaningful", but I think they're right if they mean it as being solely 'something more than nominal'.

That being said, consider Justice Echlin's decision in Brito v. Canac Kitchens - my commentaries here and here - in which Justice Echlin awarded "ancillary damages" because an employer offered significantly less than any good faith estimation of his reasonable notice period.  This was reversed on appeal on the basis that such damages weren't pleaded.  So it's a revolutionary concept, highly inconsistent with established case law, yet brought in by a well-respected judge in the field (who is now deceased), and if it is widely followed or endorsed by a higher court it will upturn many standard practices in employment law.  Ancillary damages are something of a sword of damocles hanging over the employment law field, to use an analogy which Justice Echlin himself enjoyed.

The bottom line is that this decision, like many others in recent years, is employee-friendly, but nonetheless should not be greatly concerning to most employers.  It won't create a problem for a dismissal which is guided by a skilled employment lawyer.

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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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I mentioned earlier that I don't advise my employee clients to sign releases, even when I don't think the release is enforceable.  I consider it to be a poor practice to sign documents on the assumption that it won't be enforced.  In essence, it is making a commitment that you have absolutely no intention of honouring.  There are three particular concerns with such a thing.  Firstly, judges will not be thrilled with that kind of bad faith.  Secondly, litigation is uncertain at the best of times, and quite often when a contractual provision is unenforceable it's as a measure of protection to less sophisticated parties.  Somebody who knows the law in the area will be less sympathetic to the Court, and the Court is more likely to find a way to enforce the contract.  Thirdly, it's simply a bad commercial practice.  Getting one-up on people may seem satisfying, but it can come back to bite you.

Bowes v. Goss Power Products Ltd. Reversed by Court of Appeal

I posted about Bowes v. Goss Power Products Ltd. twice before - once shortly after Justice Whitaker's initial decision on the application, and again when I saw it on the Court of Appeal's docket.

Background

Put very simply, Mr. Bowes was fired without cause, and had a contract which entitled him to six months' notice or pay in lieu on termination.  He started a new job, with equivalent pay, two weeks after being fired.  This case asks the question of whether or not Bowes is entitled to that six months' pay anyways.

The conventional wisdom is that he is not, that he has suffered no loss and has no basis to look to his employer for compensation.  He 'mitigated his loss', as they say.  Justice Whitaker held to this conventional wisdom, and dismissed Bowes' claim.  Bowes was clearly fighting an uphill battle.

I argued in my earlier entries that there are major flaws in the conventional wisdom - namely, that where an employer has the right to terminate without notice but with pay in lieu, there is no breach of contract that would give rise to the operation of the mitigation principle.  In order to get to Justice Whitaker's conclusion, I argued that one would have to "read in" a duty to mitigate into the contractual language itself.  And this is not good policy - as I wrote before, "In a contract drafted by the employer, and put to relatively unsophisticated employees for their signature, it is extremely undesirable to start reading in obligations based on arcane legal principles such as the duty to mitigate."  Essentially, my argument is that, if an employer wants the employee bound to an obligation to mitigate pay in lieu, the employer ought to be required to put express language to that effect into the contract.

The Decision

Primer

The Court of Appeal released its decision this morning.  It is a fairly lengthy decision, with a unanimous five-judge panel, authored by Chief Justice of Ontario Warren Winkler.  The Court allowed the appeal, finding that payment in lieu of a fixed term of notice is not subject to a duty to mitigate.

In explaining how it got there, I should first note that I skipped a step in my earlier posts when arguing 'No breach, therefore no duty to mitigate.'  Because if there's no breach, then why are they in Court at all?

Let's still try to keep this reasonably simple:  The terms of the employment contract gave the employer the contractual right to terminate without notice, on payment in lieu of notice.  (As distinct from the common law, which requires actual notice, and leads to an intervening 'damages' analysis to determine pay in lieu of notice.)  So the employer terminates the employee without notice, and this does not breach the contract.  The employee therefore has no obligation to mitigate, under ordinary common law principles, nor to account for mitigation earnings.  The employer then refuses to provide the agreed-upon pay in lieu of notice, and the employee argues that this does breach the contract.

What I didn't go into is why this breach doesn't give rise to a mitigation obligation.  I would ordinarily frame this argument with reference to the first principles of damages, in that mitigation relates to income earned through opportunities available because of the breach of contract.  The failure to give working notice, at common law, frees up an employee to work at a new job, so when the employee finds a new job, that's mitigation.  By contrast to an employee who wrote a book in his off hours while employed, and earns royalties which continue to come in after he loses his job; these earnings are in no way a result of his employment contract being breached.

With this contractual language, Goss Power Products had the right to send Mr. Bowes home without notice without breaching the contract, and that act frees up Mr. Bowes to look for new work.  Or sit at home and watch soap operas for six months.  His call, on the plain language of the contract.  So when he finds new work, and starts earning replacement income, the employer still hasn't breached the contract.  So, when the old employer later refuses to pay up, it is that refusal which breaches the contract, which is in no way causative of the employee's opportunity to earn new income.

The Court of Appeal took a slightly different tack, referring to other jurisprudence which resulted from those first principles.  In essence, their decision turns on a characterization of contractual pay in lieu of notice as "liquidated damages" or a "contractual amount".

Contractual Amounts vs. Common Law Notice

Bowes argued that, as the Court put it, "when an employment agreement specifies a period of notice the parties are merely inserting a term akin to a pre-estimate of damages that would flow from non-performance of the agreement."  Such pre-estimates of damages, are generally enforceable, provided that they are not in the nature of a penalty and are reasonable in the circumstances, and - outside the employment arena - are not subject to a duty to mitigate.

The employer's argument is fundamentally based on a passage from a decision by Justice Nordheimer in 2000, Graham v. Marleau, Lemire Securities Inc., stating that a contractual term fixing the notice period "is nothing more than an agreement between the parties as to the length of the reasonable notice to terminate the contract", without being intended to impact other matters such as the duty to mitigate.

The Court of Appeal rejected this argument, finding that "a fixed term of notice or payment in lieu is not equivalent to common law damages for reasonable notice".  When agreeing to contractual language with fixed entitlements on termination, the parties are agreeing to something entirely different from the common law.  The maximum length of the notice is half of the maximum damages which might be recoverable under common law principles and the calculation of pay in lieu was limited only to base salary, with no accounting for his bonus, car allowance, or other benefits (which, again, would be included pursuant to common law principles).  Thus, the Court found that it is an error to simply equate a contractual fixed term of notice or pay in lieu with common law wrongful dismissal damages.

The Court went on to cite language from a 1995 decision by the English Court of Appeal:  "The concept of a duty to mitigate is entirely foreign to a liquidated damage claim....How could it be right to hold the plaintiff, who can show that his actual damage is greater, to the stipulated sum, but permit an employer who can show that it is less to take advantage of that fact?"  (The English Court made the further criticism, quite astutely, that such an interpretation of such contractual language undermines a core objective of the term itself - to provide certainty and avoid the need for litigation.)

The Golden Parachute Concern

The employer argued that, from a public policy perspective, it was unfair to the employer to give the employee such a windfall, in the form of, effectively, double-recovery.

The Court had a number of responses to this, some of which appear to be little more than fact-based retorts, but others which are more substantial.  In particular, the Court notes that it is common in sports, entertainment, and senior management fields for mitigation to be excluded from such contractual provisions.  If it isn't unfair for "the rich, famous, and powerful" - gleeful side note:  Chief Justice Winkler uses the Oxford comma! - it isn't unfair for the "less privileged".  On a more sober side note, many 'less privileged' lacked the bargaining power to insist on an exclusion of mitigation, and yet now will benefit from the lack of language on the point because of the changing law; however, in some ways that's a problem of the employer's own making.

[55]  It is worthy of noting that, in most cases, employment agreements are drafted primarily, if not exclusively, by the employer.  In my view, there is nothing unfair about requiring employers to be explicit if they intend to require an employee to mitigate what would otherwise be fixed or liquidated damages.  In fact, what is unfair is for an employer to agree upon a fixed amount of damages, and then, at the point of dismissal, inform the employee that future earnings will be deducted from that amount.

[56]  Notably, the concern expressed in Graham seems to disregard the oft-observed disparity in bargaining power between employee and employer.  On this point, Iacobucci J. endorsed the following excerpt from K. Swinton, "Contract Law and the Employment Relationship:  The Proper Forum for Reform"...in both his decisions in Wallace v. United Grain Growers Ltd....and Machtinger...[citations omitted]:

[T]he terms of the employment contract rarely result from an exercise of free bargaining power in the way that the paradigm commercial exchange between two traders does.  Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure.

As I said before, I consider this to be the most important policy concern.  The legal question, framed at its simplest, is:  When a contract sets out a fixed notice period or pay in lieu, who benefits from silence on the question of mitigation?  The answer consistent with the entire body of law interpreting employment contracts is simple:  If the employer wants to require the employee to account for mitigation, the employer can build in language.

(Of course, the fact that the parties can contract into a mitigation obligation is emphasized several times, and was never in doubt.  So now employers will start building that language into their termination clauses as a matter of course.  No problem, that's their right.  But I wonder how many such clauses, moving forward, will end up failing altogether because of an accidental extension of the mitigation principle to the statutory minimum notice?  Remember:  statutory minimum notice isn't subject to mitigation, and a clause that purports to make it subject to mitigation will be void.  Reasonably easy to account for, if you're aware of the problem, but easy enough to miss, too.)

Consequences

A lot of employment contracts in Ontario have language akin to Bowes'.  While many such contracts limit the employee to the statutory minimums (which means you can't exclude mitigation), and it's relatively unusual that a dismissed employee finds employment quite as quickly as Mr. Bowes did, there are still going to be a lot of dismissals into the future where this case is very significant to the employer's liabilities.

That is, of course, unless the Supreme Court overturns it.  The employer will likely seek leave to appeal, and it's anybody's guess whether or not the Court will hear it.

Did the Court of Appeal Go Too Far?

I'm a little bit concerned about some parts of the decision that are a bit overbroad.  In particular, I've been operating on the premise that a contract contemplating pay in lieu of notice is fundamentally different from the common law, whereas a contract which simply fixes the notice period (without a 'pay in lieu' option) will otherwise operate within the common law framework.

The Court, however, suggests (maybe?) that a contractually fixed notice period is still a different creature in kind from the common law notice period, and therefore might also be treated differently, perhaps also being excluded by default from an obligation to mitigate.  It isn't certain; the Court doesn't really parse the effect of a contractually fixed notice period without pay in lieu, but some of the language used by the Court suggests that it may go that way.

Again, I would feel uncomfortable with that, because it doesn't accord with the first principles of contract law.  If we contract for actual notice, and you fire me without notice, my obligation to mitigate should apply in full force.  Even on the analysis used by the Court, it doesn't seem to me that there's any way of expanding "contractual amounts" to cover language that doesn't include "or pay in lieu".

Congratulations

I'd like to express congratulations to Mr. Bowes, and to his lawyer, Alex Van Kralingen, who contacted me this afternoon to bring the decision to my attention, noting that I "seemed to be the only one in cyberspace on [Bowes'] side".  They were the underdogs in this fight, and - assuming again that it holds up - it will have a significant impact on the law.  The best wins are always the ones that everyone thought you would lose.

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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.

Breaching Employment Contracts

In my recent post about employment contracts and statutory minimum entitlements, it might be noted that some of the 'example' language used did not allude to 'pay in lieu of notice'.  When terminating employees on a not-for-cause basis, most employers give pay in lieu of notice rather than actual notice, so doesn't it make sense to build 'pay in lieu of notice' into the contractual language?  Give the employer the contractual right to do that which the employer is most likely to actually want to do?

To be perfectly frank, that's a common approach.  Many - perhaps most - employer-side lawyers use contractual notice entitling the employer to dismiss on a certain amount of "notice or pay in lieu of notice", or some such formulation.  And in some circumstances I will as well, but in general I find the term to be better without the 'pay in lieu' option.

This is an area where the principles of employment law are slightly broken, which is why the standard approach of entitling the employer to terminate on 'pay in lieu of notice' hasn't exploded in anyone's face yet.  But if it ever gets fixed, there will be a lot of employers out there with numerous contracts that don't do what they want.

There are several possible issues, including formulaic ESA compliance, actual increased ESA liabilities, and mitigation.

But first let me begin with an explanation of why the language usually doesn't help an employer much.

Efficient Breach

The concept of "efficient breach" has long been an integral part of contract law.  With a handful of exceptions, you can, and should, breach a contract when the cost of completing the contract is more than the damages the other side will suffer because of its breach.   Then you compensate the other party by paying him the value of his losses, and all is well.  It's a complicated and nuanced doctrine, but the point is this:  There is nothing wrong with breaching a contract, in general.  The Courts will make you compensate the other person, but they will not look to punish you for a breach of contract, without more.

There are caveats, of course.  Sometimes, a party can seek 'equitable' relief to force you to carry out your obligations.  (This doesn't apply to notice requirements, though it can apply to restrictive covenants.)  Punitive damages can be sought where there is a separate actionable wrong - i.e. where you did something worse than simply breach the contract.  And you have to take a somewhat expansive view of 'damages' - if it is reasonably foreseeable that the non-breaching party is going to suffer significant mental distress as a result of the breach of contract, you may have to compensate them for such damage as well.  (That's relatively new - it used to also require a separate actionable wrong - but we used to have Wallace damages instead.  For employers, this is a good trade-off.)

When you breach a contract, the measure of compensation for the other party will be whatever is required to put them into the same position they would have held had the contract been satisfied.  In a dismissal context, this means that, if you're entitled to dismiss only on notice, but you dismiss without notice, the damages suffered by the employee will be based on what they would have earned through the notice period - i.e. pay in lieu of notice.  This is the common law framework.  Under the ESA, you're entitled to satisfy statutory obligations via pay in lieu (with continuation of benefits), so that isn't a problem.

Assuming you do terminate an employee without notice, the difference between a contract entitling you to do so and a contract that doesn't is this:  One way, you pay x pursuant to the terms of the contract; the other way, you pay the same x by way of damages for breach of contract.

Not quite right, though.  Mitigation expenses could get added to the tab of the breaching employer, but for reasons I'll go into shortly, the flip side of that is potentially beneficial to the employer.

Also, it is possible that certain sums - bonuses for example - could be excluded from a contractual 'pay in lieu of notice' term, whereas they would be inferred to be part of a damages calculation.  Yet the exclusion from the 'pay in lieu of notice' term could invalidate the termination language itself, as I explained in this recent post.  In reality, it would be no less difficult to craft an *actual* notice clause which excludes bonus entitlements, and doing so one would be more likely to be cognizant of the ESA requirements.

In general, though it requires attention regardless, a party's obligations following a breach of contract will be calculated from the perspective of what the minimal performance of the contract would have been.  So common law damages principles will often, in and of themselves move the employer's liabilities towards the lower end of what is required, without the potentially risky task of spelling out each entitlement specifically.

Problems with Contractual Pay in Lieu of Notice

Formulaic ESA Compliance

Recall that I recently posted about the Superior Court's confirmation that a formula which will not - in all possible scenarios - fully meet the ESA minimums will be void, and not enforced.

What I pointed out in that post is that many contracts are too specific in the employee's entitlements and too broad in excluding the possibility of additional rights.  "Pay in lieu of notice" lacks clear definition in contractual language, and will often be accompanied by a description of what it includes, and language making it very clear that nothing behind the specifics described are included.  If you fail to include something that would be captured by the ESA - benefits, shift premiums, vacation pay, overtime in some cases, bonuses in some cases - that puts the whole clause at risk.

This is an existing problem, but it can be circumvented by a general guarantee that the payment on termination won't be less than the minimum required under the ESA.

Additional ESA Liabilities

This is an interesting point which I've extracted from an argument made by Professor David Doorey.  He argues that all common law pay in lieu of notice is protected by the ESA, because of the expansive definition of wages under the ESA, which includes "monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied".  By operation of this, he argues, the pay in lieu of notice to which an employee is entitled at common law, arising out of an implied contractual term, should be considered wages owing within the meaning of the ESA.

The argument is completely inconsistent with the established jurisprudence, though you have to admit that there's a certain persuasiveness to it at face value.  However, I disagree with it, on the basis that, at common law, there's not really such a thing as "pay in lieu of notice".  There is *actual notice*, and there are damages for failing to provide adequate notice.  The principles of damages are tied into the compensation principle and mitigation principle, and they aren't always owing.  Accordingly, it doesn't seem correct to call them 'wages' within the meaning of the ESA.

However, that counter-argument doesn't extend to written contractual terms expressly entitling the employer to dismiss on 'pay in lieu of notice'.  In such a case, the contract itself says "The employer will pay x to the employee".  Fits pretty neatly into the statutory definition of wages, in that case.

As I said, this is still in conflict with the established jurisprudence.  But there's a persuasive legal argument for it.  In which case an employer with such a written contract would be statutorily obligated to pay out the full contractual notice within the narrow time frames set out by the ESA, and unable to insist on a release being signed in exchange.

Mitigation


I explained part of this in context of the Bowes v. Goss Power case, which has been heard but not yet decided by the Ontario Court of Appeal.  The mitigation principle arises from a breach of contract.  If the contract has not been breached, it seems incoherent to suggest that the mitigation principle arises.  (Again, this is at odds with established jurisprudence, but again, there's a strong argument that the established jurisprudence is wrong.)

If I'm right about this, then a contractual term permitting an employer to dismiss on pay in lieu of notice would require the full amount be paid regardless of mitigation efforts or even of successful mitigation.

In theory, one could draft language permitting salary continuance, which preserved the obligation of the employee to mitigate and preserved the right of the employer to discontinue the payments upon successful mitigation...but this would be complex, and it ultimately may not work.  In particular, I'm concerned about how the employer would enforce the employee's obligation to seek replacement work.  In practice, it would probably be seen as continuing the employment relationship on actual notice and in a different form, and terminating payments because of a failure to mitigate would probably be seen as a termination for "just cause", which is a high threshold for the employer to prove.

Similarly, the possible expansion of ESA protection to contractual pay in lieu of notice would likely lead to the same conclusion, that the contractual pay in lieu of notice is not subject to mitigation, and must be paid regardless.

All things considered, an employer will often be served perfectly well by a contract which makes dismissal without notice into a breach, whereas a contract entitling them to dismiss on pay in lieu of notice is not without its risk.

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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.