Tuesday, January 13, 2015

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.


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.

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