Contractual Interpretation: Bonus Formulas

There's an interesting new decision, Hillman v. Bedford Consulting Group Inc., dealing with an argument over an employee's bonus eligibility.

Mr. Hillman worked as an executive search consultant, and was hired in 2009 by Bedford as a senior level recruiter.  In 2012, his compensation structure was changed, to a commission structure, plus a bonus contingent on achieving certain thresholds.  Exactly what those thresholds entailed, and whether or not they were reached in 2013, was the central issue in the litigation.

Basically, if Hillman billed and collected a million dollars or more, then he was entitled to a bonus of 3% of his billings.  However, the employer argued that there was another condition - that he also needed to collect a minimum of 5% in 'admin fees' over and above the placement fees.

And there was a basis for it in the contract language, too, with language fairly clearly stating that the admin fees were a precondition for the bonus.  However, one of the paragraphs in the contract added some uncertainty:

A Partner must achieve a minimum of 5% admin fees. *We still need to discuss if the bonus is affected for underachieving on this minimum threshold.

That's a problem.  It very much suggests that underperforming the admin fee target isn't meant to disentitle the employee to his bonus (or, at least, not completely), but might be the subject of a subsequent agreement.  Justice Stinson applied the doctrine of contra proferentum, interpreting the resulting ambiguity against the party who drafted the contract - i.e. the employer.

Yet another reason why having a lawyer review your contracts is important.

Equitable Setoff

Perhaps the most interesting element of this case was the treatment of the employer's claim for equitable setoff.

When the employee resigned, he started his own competing business, and before departing he advised a client of his plans.  That client subsequently ended its relationship with the employer, and moved over to Mr. Hillman.  Accordingly, the employer made a counterclaim for the lost revenues - $43,200, on its calculation, and relied on the doctrine of equitable setoff.

This is important, because the decision itself is in the context of a motion for summary judgment by the plaintiff:  The plaintiff is seeking judgment on his claim, while the employer is not seeking judgment on its counterclaim, but is nonetheless claiming an entitlement to apply the amount of the counterclaim against any judgment the plaintiff may obtain.

After the employee left, the employer withheld a large sum in commissions owing - over $129,000 in undisputed commissions, according to the decision.  After litigation was commenced, the employer paid the commissions owing (not including the bonus), less $43,200.

Justice Stinson wasn't convinced that this scenario was appropriate for equitable setoff - in essence, that wages owing are appropriately connected to damages for alleged misappropriation of an opportunity.  However, it appears that his decision to deny the claim for equitable setoff arises more from his distaste for the way that the employer conducted itself:

Initially, the defendant refused to acknowledge or pay the undisputed amounts owed to the plaintiff, with the result that the plaintiff had to commence litigation. The defendant then forced the plaintiff to go to the further trouble and expense of bringing a motion for summary judgment. Only then, faced with the prospect that it had no real defence to the majority of the claim, did the defendant finally pay the undisputed amounts. In my view, such conduct should be discouraged and fully justifies the refusal of the discretionary remedy of equitable set-off. This situation would appear to fall squarely within the examples given by Palmer, above, in which equitable relief may properly be refused where funds have been wrongfully retained or not dispersed as agreed.

Therefore, the plaintiff essentially has a judgment for the full amount of his claim, and can enforce that claim, even though the employer may maintain an action against him seeking payment of $43,200.

What Should the Employer Have Done Differently?

At a glance, the equitable setoff decision reads a little oddly:  The employer felt it was entitled to claim against the employee, and unilaterally withheld money from the employee to offset the claim, and that was wrong, so we're not going to let the employer continue to withhold that money.  If there were a legitimate claim to equitable set-off in the first place, then surely the employer is entitled to withhold the amount of that claim in the first place.

But it seems that the judge is more concerned about the unjustified amount withheld.  Had the employer simply withheld the $43,200, then it is likely that the judge would have regarded the employer's conduct as more reasonable.

That being said, I suspect that Justice Stinson was also right that this wouldn't be an appropriate case for equitable set-off anyways - and indeed that application of the doctrine is precluded by statute.  The unpaid commissions are likely 'wages' within the meaning of the Employment Standards Act, and there are very limited scenarios in which employers can withhold amounts from wages.  The "pay the wages, and then pursue your own remedies separately" approach is very often the legally mandatory approach for employers who feel they are owed money by departing employees.

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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.

Three Year Employee Awarded $345k in Lieu of Notice

Every so often one comes across a case where the sheer numbers make you do a double-take.  The recent case of Rodgers v. CEVA is one such case.

Prior to starting with CEVA, Rodgers had been president of Sameday Worldwide, where he had worked for over a decade.  An acquaintance of his who worked for CEVA approached him about potentially joining them to run their Canadian operations, and after seven interviews, including two in Texas, CEVA made an offer of employment.  He didn't accept the first one, but when they revised the offer, he did accept, starting in September 2009.

His annual salary was $276,000, plus a signing bonus, plus other benefits.  As well, as a condition of his employment he was required to make a substantial investment ($102,000) in CEVA Investments (senior managers were expected to have "skin in the game"), and sign a shareholder's agreement that came together with non-competition and non-solicitation obligations.

He was dismissed in June 2012, on a not-for-cause basis.

After his dismissal, he inquired about the status of his investment in the company, and was basically told to go away:  "The investment remains in the care of the company.  There is not currently a process that would enable you to exit the plan by selling your CEVA Investments Limited stock."

He later received a mass shareholder mailing indicating essentially that his stock in CEVA Investments was worth nothing.

Rodgers sued in wrongful dismissal.  The decision on the merits was made in November, and the costs award was released last week.

The Decision

Rodgers took the position that he had been 'induced' away from his previous employer, and therefore was entitled to a longer notice period.  The Court was satisfied that there was 'some' inducement, but not at the level of some of the other case law on the point.

He was 55 years old, and in a position of very significant responsibility, but also not a long-service employee.

As well, there's a morally persuasive question of what to do about the investment.  It's not necessarily the case that there's a legal remedy for the loss of an investment - that's the risk you take when you buy stock.  But the Court regarded the investment as indicative of the expectation of the parties that this would be a longer-term relationship - presumably, if he's investing six digits into the company, there's an expectation that he's not going to be summarily dismissed on minimal notice.

On the basis of the factors, the Court awarded 14 months' pay in lieu of notice.  After mitigation, this was over $345,000.

Commentary

Overall, while the numbers are a little surprising at a glance, there's little to criticize about the decision.

Inducement - the notion that an employer might be on the hook for representations made to draw the employee away from other secure employment - is always a little bit tricky.  As the late Justice Echlin once put it:

Recruitment is akin to "the dating game".  Employers and employees both preen themselves, put on their best faces, sometimes overstate themselves, and try to look attractive to the other.

If employees were not interested in moving, they would not even give the recruiter the time of day.

Typically, the courts are looking primarily for representations of job security.  If I already have a secure job, and I jump ship because you're offering more money, then that may not be regarded as inducement.  However, if I'm reticent to give up a sure thing for a company I don't really know, and you convince me that the new job is just as sure...then that's another matter.

On the facts of this case, the finding of some inducement seems fair.  It was the employer who initiated discussions; the employer facilitated multiple interviews; and the employee declined the first offer by the employer, being satisfied with his current secure position.  But it's also fair to temper the impact of the inducement, because there don't appear to have been any express representations about job security.

What's particularly novel here is the Court's dealing with the investment.  There's an overarching feel here that Rodgers got a bit of a raw deal.  He's hired away from a secure job, he's asked to put up over $100,000 as an investment, and then he's fired less than three years later...and can't even redeem his investment.  On the 'traditional' Bardal factors, you'd probably be looking at a notice period in the single-digit months, which after tax may not even cover the lost investment.

But yes, it's highly unusual for an employer to ask for a sizeable up-front investment, and I agree with the Court's decision to treat it as indicative of an expectation that the relationship would be long-term.  Which both stands as a relevant factor on its own, and also dovetails somewhat with the concept of inducement.  On all the facts, it seems that the parties anticipated a long-term relationship.

Avoiding Such a Mess

It may be that both parties are at fault for ending up having to litigate this.  The reality is that you don't often see wrongful dismissal litigation on this scale, because employers looking to hire senior employees like Rodgers are *usually* going to have the forethought to hire a lawyer to draft the contract, who will clarify expectations as to the end of the relationship.

It's not so unusual, however, for US-based employers to fail to do so.  US law is very different.  If they use the same contractual frameworks for their Canada-based employees as they do for their American ones, then they're indeed likely to run into problems that way.

Likewise, I would never recommend that an employee entering into an employment relationship rely on concepts of 'inducement'.  They're often factually and legally messy, turning on things like 'off-the-record' conversations, etc.  One of my rules of thumb of contract negotiation:  If you want me to rely on a representation, put it in the contract.  (Likewise, when I ask for a change to language and get the response, "Well, I thought that was implied", then my response is always "Then you shouldn't mind making it express.")

There are ways of papering job security.  No employer will ever guarantee a job for life (well, no rational employer will), but termination clauses can be built in such a way as to compensate the employee in the event of early termination.  If I'm getting induced away from secure employment, and I'm worried that the new job might not be as secure as it looks, I'm going to ask for a substantial sum of money on termination, even in the early stages of the contract.

And it isn't just about compensation for me, either - it's about incentives for the employer.  Let's suppose you hire me on, and I negotiate a base golden parachute of 12 months' salary.  Six months down the road, for some reason you think about dismissing me.  Maybe the 'fit' isn't quite right.  Maybe there's been a downturn in the company's business.  Maybe the president's son finished school, and wants you to hire him into my role.  If you decide to fire me, then I'm okay - I get 12 months' wages for my soft landing.  But, more to the point, it's far less likely that you'll decide to fire me, knowing what it will cost you, unless it's absolutely necessary.

An employer may not be prepared to agree to the terms you want for the desired level of job security.  But if they aren't, then that's fine, when you already have secure employment.  "Fine, you aren't prepared to give me what I need?  No problem, I'll stay where I am."  The power to walk away is a very strong negotiating tool...but to properly utilize it, that sometimes means actually walking away.

As well, while there is indeed something to be said for an employee having "skin in the game", I for one would be pretty uneasy about having to pay up front for the privilege.  It isn't uncommon for a senior employee to receive compensation by way of stock and/or stock options, to accomplish exactly that goal.  But the reality is that, by the nature of the employment relationship, employees *always* have skin in the game.  When you have to put in a hefty investment of your own money, you're failing to diversify your own interests.  (The folks I know who get the employer's stock unload it as quickly as they can:  If the business *does* go south, then you might be out of a job *and* your shares will be worthless.)

Ultimately, there are two points that I cannot emphasize enough:

(1) Employers should routinely obtain legal advice on their employment contracts; and
(2) Employees should *always* get legal advice before signing an employment contract.

*****

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.

Pilling v. Lowerys Limited - Motion to Correct

Back in September, I made an entry about the costs decision in Pilling v. Lowerys.  Plaintiff's counsel, Sean Bawden, kindly provided the link to the decision on the merits.  (Incidentally, congratulations to Sean for winning a 2014 Clawbie for Best Employment Law Blog for his Labour Pains blog.)  In the comments, I expressed some surprise about the decision on mitigation...

Background - The Decision on the Merits

You see, the Deputy Judge, when summarizing the facts, indicated that the plaintiff had confirmed having received consulting income of $7,458.17 from the date he was dismissed from employment (in August 2013) to December 2013.  Presumably, the plaintiff was seeking pay in lieu of notice for roughly that period, which would have the effect that the $7,458.17 sum would be backed out of his entitlements as 'mitigation earnings'.

However, the Deputy Judge did not award four months' pay in lieu of notice, rather making a surprisingly low award of two months.  From which the Deputy Judge proceeded to deduct the entire $7,458.17 sum (i.e. the earnings over the 4 or 5 month period) as mitigation earnings.

The only way for that result to be in line with the legal entitlements of the parties would be if the entire sum was earned during the first two months after his dismissal.  This, on its face, is highly improbable.  (In fact, based on evidence led in the subsequent motion, it appears that the sum earned through the two month period was $4,378.25.)

Nonetheless, in the absence of a breakdown as to when the sums were earned, I would have understood had the Deputy Judge simply pro-rated the mitigation reduction.  It would be imprecise, but the Small Claims Court permits some 'rough justice'.

However, applying four-five months of mitigation earnings to two months of pay in lieu of notice?  That simply seemed to get it wrong.

The New Development - A Motion to Correct

The Plaintiff brought a motion to correct the decision.  Such a motion, under the Rules, can be brought under only two circumstances:  Firstly, that there was a "purely arithmetical error in the determination of the amount of damages awarded"; or secondly, that there "is relevant evidence that was not available to the party at the time of the original trial and could not reasonably have been expected to be available at that time."

The second criterion clearly wasn't met, so the plaintiff had to try to characterize the mistake as a "purely arithmetical error".

The judge rejected the argument, stating that "[c]ounsel necessarily need to anticipate the broad range of possible outcomes and introduce evidence accordingly during the course of the trial" - basically, that it was the plaintiff's (or his counsel's) fault that the evidence of two months' mitigation earnings wasn't on the record at the trial, and not the judge's mistake for calculating mitigation based on what was on the record.

Commentary

I might think that the Deputy Judge has a point about the necessity of counsel anticipating the range of outcomes and leading the appropriate evidence, but not in this case, for three reasons:

(1)  The Burden of Proof

It's well-established law that the burden to establish mitigation (or failure to make reasonable efforts to mitigate) is upon the defendant.  What exactly this proposition means has been the subject of some debate, as I discussed last June, but the proposition itself is not in question.

In other words, the failure to call evidence as to the mitigation earnings through the notice period actually granted...is the defendant's failure.  (In practice, the defendant should have asked about it on cross-examination.)

In the absence of any evidence as to what mitigation earnings were made during the two-month notice period, the principled answer would appear to be that the defendant has failed to meet its burden, and therefore there should be no deduction for mitigation earnings.

(2)  The Obviousness of the Problem

On a cursory review of the decision, the problem jumped out at me.  The Deputy Judge's result was clearly not supported on the evidence he described. Yes, the evidence on the record was incomplete, but that puts the Deputy Judge in a position of having to recognize and resolve the incompleteness, providing some rational basis for why he resolved it in a particular way:  Something to the effect of "No evidence was led as to what mitigation earnings were made specifically during the two month period following dismissal, and therefore..."  There are three logical possibilities:  Deduct the whole amount, deduct zero, or deduct somewhere in the middle.  As I've said, the third option - infer as fact that the earnings were distributed over the August-December period, and deduct an amount accordingly - would probably have been acceptable rough justice in a Small Claims Court setting.  If he wasn't prepared to make such an inference, then - again, as I've said - it seems to me that the principled response would have been the second one.

However, while I could perhaps understand selecting the first option (an error though I think it would be), the Deputy Judge seemed to be actually oblivious to the fact that there *was* an omission in the evidentiary record.

While I think the plaintiff's efforts to characterize the error as being 'arithmetical' were a stretch, this, if anywhere, is where that proposition finds a bit of support.  Simply, he applied 4-5 months of mitigation earnings against 2 months of pay in lieu of notice, and appeared not to have been aware that the equation didn't balance.

(3)  The Nature of the Small Claims Court

Yes, it is a part of any lawyer's job to anticipate the range of possible outcomes, and prepare accordingly.  However, this would not likely have happened in the Superior Court, because the evidentiary record is, by design, much more full.  The actual paper trail supporting mitigation earnings would probably have been entered into evidence, meaning that the calculation of mitigation earnings would have been simply an arithmetic extrapolation from the evidence.

It is in this way - through a rigourous review of the material evidence - that lawyers prepare for such a range of outcomes at the Superior Court.  Could we do the same at the Small Claims Court?

Well, yes, but it would kind of defeat the point of having a Small Claims Court, if the expectation of production of evidence remained at the same high level as in the Superior Court.

Caveat

While the plaintiff's 'arithmetical error' argument was not totally groundless, it was tenuous, and I have to comment that the Deputy Judge probably got one thing right:

If I have erred in principle, that is a matter for an appellate court to determine. I lack jurisdiction to sit on an appeal from my own decision.

It does indeed seem to me that it's easier to characterize the trial judge's failure to account for the timeframe of the mitigation evidence as an error in principle, and he's likely correct that this means that he can't simply reverse it.  Sadly, that means an expensive Divisional Court appeal for a low-dollar-value issue, if the plaintiff chooses to pursue it.  It's not really where the 'justice' of the case lies, in my respectful opinion.

*****

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.