Wrongful Dismissal Awards - During the Notice Period

Wrongful dismissal 101:  In general, a dismissed employee is entitled to 'notice' of dismissal, and entitled to be put into the position he or she would have occupied had actual notice been given.  In practice, this means pay in lieu of notice, among other things, but is subject to a duty to mitigate - i.e. an obligation upon the dismissed employee to take reasonable steps to obtain replacement employment, which income reduces his/her entitlement to damages.

Here's the trick:  The entitlement to damages accrues upon breach of contract - i.e. upon termination without adequate notice - whereas mitigation occurs in real time.  For longer notice periods, this sometimes has the result that a matter can be adjudicated before the full notice period has run its course:  Suppose I'm entitled to two years' pay in lieu of notice, and I get to a summary judgment motion 12 months into the notice period.  How can I be awarded two years' pay in lieu of notice, when I still have an obligation to mitigate for another 12 months, which could have a substantial impact on my entitlements?

The truth is that this phenomenon is not particularly unique to employment law:  In the field of personal injury litigation, a plaintiff will often seek damages based on a perpetual limitation on earning capacity.  My understanding - though I could stand to be corrected by a PI lawyer - is that this is often resolved by an arbitrary 'discount' to account for the possibility that the plaintiff will earn more than expected at the time of trial.

I've seen that argued in wrongful dismissal contexts.  I've never seen it succeed in Ontario, but that's at least partly because there often isn't a great deal of time left in notice periods at the time of adjudication.  If there are just a couple of months left, a discount seems relatively unnecessary.

This issue arose in the recent case of Donath v. Hughes Containers Ltd..  Ms. Donath was dismissed after 14 years of service as a payroll administrator, at age 64.  The matter was brought to trial 10 months after the dismissal, and she was awarded 12 months' pay in lieu of notice.  (She sought substantially more, and it does seem to me that 12 months is a little on the low-end, given the Bardal factors here.)

So Justice Pollok turned to the question of how to address the not-yet-elapsed portion of the notice period.

The employer argued that an award of pay in lieu of notice was premature, and that the issue of damages should be adjourned and brought back on after the end of the notice period.  After all, she's obligated to mitigate her losses, and awarding the full amount now would effectively relieve her from that obligation.

The plaintiff, by contrast, argued that it was open to the court to find as fact that she would not obtain replacement employment in the remaining two months of the notice period.

Justice Pollak rejected both arguments.  The prospects of re-employment were low, but the evidence didn't establish that re-employment was "not possible", and therefore the employee's pitch couldn't succeed on the evidence.  (Justice Pollak seemed a bit critical of the plaintiff moving so quickly to trial, knowing that she was seeking substantially more notice.)  However, the defendant's argument was regarded as being improper - the trial was complete, and it simply wasn't available to adjourn the issue to a later date.

Instead, Justice Pollak elected to do something similar to Bernier v. Nygard:  In that case, the court awarded the full amount, but impressed the award of damages with a trust - in essence, if the plaintiff earned mitigation earnings, they would be held in trust for the defendant.  In this case, Justice Pollak imposed a continuing obligation to account for mitigation earnings, by ordering judgment be paid at the end of the notice period, less any mitigation earnings.  (Actually, the wording of the endorsement kind of suggests that Justice Pollak may be imposing an ongoing duty to take reasonable steps to mitigate...which is not necessarily an unreasonable order, but has significant practical difficulties.)

Commentary

I like the result in Bernier v. Nygard.  In the right case, 'impressing the award with a trust' is the right solution, and Bernier was the right case for it.  Donath...probably not so much.  Asking the plaintiff to establish that re-employment during the reasonable notice period is 'impossible' is too high a standard - if the prospects of imminent re-employment are low, and we're down to the last two months of the notice period, then find as fact, on a balance of probabilities, that the plaintiff won't obtain replacement employment.

If we're talking about another 6-12 months, that's more difficult to do, and going down the road from Bernier - in the appropriate circumstance - can make more sense.  It's a compromise solution - effectively relieving the employee of the obligation to seek new employment, while holding the employee to the obligation to account for mitigation earnings.  Even then, it's imprecise, though, because 'mitigation earnings' aren't necessarily something you can nail down simply.

But what highlights that Justice Pollak appears to have been coming at this issue from the wrong angle is the treatment of interest:  It started to accrue only at the end of the notice period.  This is consistent with her treatment of the employer's obligations as only vesting after mitigation efforts are unsuccessful...

...and is straightforwardly incorrect on the law.  Interest can be a tricky issue.  It's often argued to start accruing at the date of breach, or sometimes halfway through the reasonable notice period.  But there's simply no basis for starting it accruing at the end of the reasonable notice period.

It's a minor issue, but it couples with her chastising the plaintiff for bringing the matter to trial so quickly, to really highlight the onus she's placing on the plaintiff to prove damages, as including proving that mitigation was or would be unsuccessful.

It dovetails in some ways with the error that I argued marred Justice Wilton-Siegel's decision in Garcia v. 1162540:  The Supreme Court jurisprudence is quite clear that wrongful dismissal damages flow from the breach of contract itself - that is, the employer's failure to continue employing (and paying) the employee through the notice period - and mitigation is a separate and subsequent analysis, with a different burden of proof.

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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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Punching a Co-Worker Does Not Necessarily Constitute Just Cause

As I've often said, 'just cause' for dismissal - that is, firing somebody for misconduct, such that they are not entitled to any notice or pay in lieu - is a high threshold, and always depends on the facts.

There's a recent case, Phanlouvong v. Northfield Metal Products (1994) Ltd., which serves as a pretty good cautionary tale for employers:  Mr. Phanlouvong ("Keg") was dismissed following a physical altercation between himself and a co-worker, in which the judge concluded Keg was the aggressor, which culminated in Keg punching the co-worker in the face breaking his glasses...and Justice Broad concluded that just cause was nonetheless not established.

Facts

Keg was an immigrant from Laos, who worked as a labourer for Northfield for 16 years.  In the last few years, he had some personal conflict with another worker at his station, Bailey.  Keg claimed that there was some racial animus to the conflict - he alleged that Bailey had once called him a "Chink or Korean", to which Keg replied "no I am Laos".  (Isn't that right out of King of the Hill?)  Another witness alleged that Bailey had once referred to Keg as "f*ing Chinese".

In October 2010, Bailey's elbow came into contact with Keg.  There was some dispute as to whether it was intentional or accidental contact - a 'brush' or a 'jab'.  The judge accepted that it was inadvertent.  When challenged on it, Bailey refused to acknowledge the contact or apologize for it, and the matter quickly escalated with pushing, and then Keg punching Bailey in the nose.

Bailey reported to the first aid station, and per employer policy was sent to Grand River Hospital to be examined.  In the mean time, management began to investigate, but they were pretty sure from early on what the result would be:  It appears that, in all previous incidents involving physical assault, they had terminated the offending employee.  So the Plant Manager's instruction to HR was pretty clear, that if it was confirmed that Keg had, in fact, punched Bailey in the face, he would be fired.

The HR Manager interviewed the witnesses, and then Bailey when he returned from the hospital.  The judge noted in his reasons that the HR Manager determined Bailey's penalty - a one week unpaid suspension - before getting Keg's side of the story.  He then interviewed Keg, who claimed to be acting in self-defence.  Afterwards, the HR Manager presented a termination notice indicated that he had 'discussed his findings' with the management team (even though he actually hadn't met with other members of management since conducting the interviews), and "agreed to terminate your employment as a result of your actions today."

Keg sued the employer in wrongful dismissal, claiming pay in lieu of notice aggravated damages, punitive damages, and a declaration that his Code rights had been violated.  He also sued Bailey personally, alleging assault, battery, and intentional infliction of mental distress.

The Decision

As noted above, the Court rejected Keg's contention that he had been intentionally elbowed or was defending himself.  The earlier contact was unintentional, and it was Keg who picked the fight.

However, Justice Broad is concerned that the employer never really canvassed the availability of lesser penalties than termination, concluding from minute one that, if Keg had in fact assaulted Bailey, he would be fired.

The employer argued that Keg's conduct was aggravated by its breach of the Occupational Health and Safety Act, the fact that he failed to take responsibility for his actions, and the fact that his first lawyer (not his trial lawyer) had allegedly prepared false affidavits for witnesses to bolster his story.

On the first aggravating factor (OHS), the Court concluded that this not eliminate the need for a contextual analysis.  The Court accepted that the second factor was relevant, but not necessarily determinative in this case.  And the third factor is rather unusual, and the judge wasn't persuaded that such an issue was appropriate for consideration as after-acquired just cause.

On the flip side, Keg had a long period of unblemished employment, with no prior discipline at all in his 16 years of service.

"In utilizing a contextual approach, and in applying the principle of proportionality, I find that Northfield has not discharged the onus on it to prove, on a balance of probabilities, there were no other reasonable alternatives to termination of Mr. Phanlouvong's employment without notice, and accordingly I find that Mr. Phanlouvong was wrongfully dismissed."

Keg was awarded pay in lieu of 15 months' notice, less mitigation earnings.  However, the other allegations and claims were not made out.

Commentary

It's always fun to sensationalize a story by pointing to the worst facts, in isolation, and say "Look, this guy punched his co-worker in the nose, and still couldn't be fired without a package."  But Justice Broad is absolutely right about at least one thing:  Breach of the workplace violence provisions of the OHSA, while probably an important factor, is not determinative, and still calls for a full contextual analysis.

What's most interesting about this decision is the overall sense that the judge is coming at it from a procedural point of view - it's less about whether or not there was an alternative to dismissal under the circumstances, and more about whether or not the employer had adequately considered the possibility.

Despite the increasing case law suggesting an employer's duty to investigate, it strikes me that it would probably still be an incorrect statement of the law to call it a procedural question:  Regardless of whether or not the employer properly investigated, and properly considered all their options, the question for the court is always going to be, simply (or perhaps not so simply), whether or not the employee's actions, in the circumstances, amounted to just cause for dismissal.

However, I don't think Justice Broad got this wrong, nonetheless:  It's an issue of onus, and the subtext of the decision seems to be that, having failed to seriously consider its other options, the employer can't satisfy its onus that termination was the appropriate response.

This is the trend throughout the 'duty to investigate' cases:  The extent of the obligation to investigate aside, the failure to investigate will create a practical bar to satisfying an employer's onus to prove just cause.  Remember Ludchen v. Stelcrete?  "Having failed to thoroughly investigate this matter at the time, Stelcrete now has great difficulty assembling the evidence to prove the alleged misconduct on which it acted more than five years ago."

Lessons to Take Away

The courts are sending a clear message to employers:  When you're faced with allegations of misconduct, and even of very severe misconduct, conduct a proper investigation with an open mind.  Obtain appropriate expert assistance to do so, if necessary.  Because if you have to go to court on a just cause issue - a very expensive proposition, especially if you lose - having covered off your bases at the start is going to be pretty much essential.

Quite frankly, if the employer had been able to come to court saying "We seriously considered whether or not we could continue the employment relationship in light of Mr. Phanlouvong's misconduct, and determined that, given the nature of the incident and the injuries sustained by Mr. Bailey, returning him to the workplace in any capacity would not have been consistent with our obligations under the Occupational Health and Safety Act", then this could have ended very differently.

As for what employees should take away from this case, that's less significant:  This case certainly does not stand for a proposition that first offenders get "one free punch", or anything of the like.  It's a contextual analysis.

However, this case highlights the importance of getting good legal advice after a 'for cause' termination, even if you did what you're accused of doing.  Because just cause is a two-part question:  Firstly, are you guilty of the conduct alleged to constitute just cause?  Secondly, is the misconduct sufficiently serious, in all the circumstances, to warrant summary dismissal?  And, obviously, that second question is never quite as open-and-shut as many employers would like it to be.

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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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Superior Court Rules that Kumon Franchisee was Entitled to Reasonable Notice

Kumon is a well-established franchise offering after-school math and reading programs.  To my understanding, it has a very successful system for leading its students to excel in advanced content.  And the franchises are all over the place, including two within Newmarket.

But there's a very interesting new case, making new law, dealing with the termination of a Kumon franchise.  The facts are quite unique, as the franchisee (Ms. France) had been operating since before Kumon started using written franchise agreements, and refused to sign the various franchise agreements put to her by the franchisor.  So we're left with the scenario of an oral contract governing a franchise agreement, which is quite exceptional in this day and age.

One of the primary issues for Kumon is that France was resisting shifts to their business model - they've been trying to present a more professional image to the world, including establishing permanent and visible presence in appropriate commercial space, as distinct from - to use France's business as an example - just renting a church basement two nights per week.

With France refusing to sign written franchise agreements, Kumon eventually decided to end the relationship, and provided her with 12 months of notice.  Ms. France sued, taking the position that the contract was 'perpetual' and could not be terminated by the franchisor.  Kumon argued that there was an implied term permitting termination on reasonable notice, and that 12 months was reasonable.

The Decisions

The Court accepted Kumon's argument that a franchise agreement could be terminated on reasonable notice, but found that 12 months wasn't enough, and sought subsequent submissions on the reasonable notice period, rendering a decision on that issue yesterday.

There are some interesting parallels drawn between the franchise relationship and employment relationships, both in finding that Kumon was entitled to terminate the relationship on reasonable notice, and in the assessment of the reasonable notice period, including that franchise agreements are like employment agreements because they "include an element of mutual trust and an element of unequal bargaining power."

And in a context like a Kumon franchise, where many such businesses are run by single operators with minimal employees, it does indeed bear a significant resemblance to an employment relationship, or at least to a dependent contractor relationship.  On the other hand, if you look at a franchisee running, for example, a half dozen Swiss Chalet restaurants, it might be a little bit harder to see the resemblance.

Justice Goldstein assessed the reasonable notice period at 18 months, awarding Ms. France an additional six months' worth of income - quite a modest amount, really.

The judge made new law here, creating a 'test' for the reasonable notice period for terminating franchise agreements, including a non-exhaustive list of factors as follows:

1. The length of the relationship;
2. Whether or not there is a history of bad faith or oppressive conduct by the franchisor;
3. Whether or not the franchisee has a history of poor performance;
4. Whether the terminating party acted in good faith throughout the relationship; and
5. Whether there have been violations of the Arthur Wishart Act.

When applying the factors (Ms. France was a 20-year franchisee, with a good history of performing her obligations, and Kumon had met its obligations of good faith to her), Justice Goldstein went on to apply a 'discount' recognizing that "Ms. France was not an employee, but an independent contractor".

Commentary

Suffice it to say that the test Justice Goldstein has laid out is very different from the employment law test for assessing reasonable notice periods, and in fact is directly inconsistent with that test in certain ways.  Which wouldn't necessarily be a problem, but for two things:  Firstly, he got to the point of applying such a test simply because of the similarities to an employment relationship, and secondly, the application of a 'discount' because she was an independent contractor and not an employee would suggest that the test is somehow supposed to be similar to that in place for employees.  It's also very probably wrong to call her an independent contractor.

In employment law, we look at the Bardal factors, including length of service, age of the employee, character of employment, and availability of replacement employment.  Fundamentally, the test largely addresses the challenges of obtaining new employment.  Performance is arguably irrelevant, so long as poor performance doesn't rise to the level of just cause.  Likewise, employer bad faith no longer factors into the assessment of the notice period in most cases.

Independent contractors are presumptively not entitled to notice.  However, there's an intermediate category of 'dependent contractors', who are treated similarly to employees.  There's little doubt that, if we're going to fit Ms. France into this framework at all, it's as a dependent contractor.

In a circumstance like France's, it's not so difficult to apply the Bardal factors.  As an individual franchisee, her age and ability to obtain similar work are not so difficult to assess.  Again, if we were looking at an owner of several restaurants, that changes things significantly.  But I might suggest that larger and more sophisticated businesses built on the franchise model would require more notice - that the implied term of reasonable notice is designed to give the non-terminating party an opportunity to land on its feet when the agreement is terminated.  So instead of the "availability of replacement employment", you might look at the availability of alternate business arrangements, and the difficulty associated with such a transition.  If you're running a fast food restaurant, and your franchise agreement is terminated, can you turn it into another type of fast food restaurant?  How hard would it take to enter into a new franchise agreement?  How long to physically transition the business and business model to suit the new franchisor?  Is there a non-competition agreement in place?  What long-term liabilities can the franchisee be expected to have?

The way I see it, the analysis has to be premised on the business entity underlying the franchisee continuing to exist and carry on business in some other fashion, and the reasonable notice period should bear the ultimate goal of allowing the franchisee to plan that transition.

Instead, Justice Goldstein seems to want the notice period to balance a series of rewards and punishments for good and bad behaviour in the course of the contract.  I'm not sure I see a principled basis for that.

The reality, though, is that the practical implications of this decision will be limited.  Most franchise agreements these days include detailed written provisions regarding how and when the agreement can be terminated (including fixed term provisions, notice provisions, or both).  This case will be an important precedent only for those few cases where the termination of the contract isn't spelled out in writing.

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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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.