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.

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.

*****

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.

Employment Contracts - All the Small Things

I recently posted about the growing body of case law suggesting that a failure of a contractual notice formula to at last meet the statutory minimum notice period in all possible scenarios renders the provision void.

In that case, I noted that statutory severance can complicate matters, but I did not elaborate on the point.

Under Ontario's Employment Standards Act, employees with more than three months have entitlements to minimum notice periods.  This caps at 8 weeks for an employee with at least 8 years of service.  We call this "statutory notice".

In addition to statutory notice, some employees are entitled to additional amounts, which we refer to as "statutory severance".  In order to be so entitled, an employee must have at least 5 years of service, and the employer must have an Ontario payroll of at least $2.5 million per year.  (Mass layoffs can trigger the severance obligation for employers who don't meet the payroll threshold, too.)  This accrues at 1 week per year of service, rounded down to the month (so if I have just over 10 years and 5 months of service, my severance pay is 10 and 5/12 weeks).  This caps at 26 weeks, for those with 26 or more years of service.  (Naturally, in the event that the ESA definition of 'just cause' is made out, statutory severance doesn't apply.)

So, for some long service employees, statutory minimums can reach as high as the equivalent of 34 weeks' pay.

However, the difference in the nature of these entitlements requires some attention in drafting employment contracts.

You see, if a contract says that an employer can terminate an employee on 8 weeks notice, that will likely be ESA compliant, and may be enforced by a Court.  An employee with 10 years of service, who is entitled to severance, will be able to insist on the 8 weeks' pay in lieu of notice, as well as the 10 weeks' severance pay, but may not be able to claim for additional common law notice, because the contract gave the employer the entitlement to fire on a fixed amount of notice.  Other entitlements - outstanding wages, commissions, vacation pay, etc. - are all fair game to pursue, but not notice.

However, employers and their lawyers want to make the termination clause final and certain, ensuring that the employee knows, "This is what you're getting, and you won't get anything else beyond it."  The concern is that there have been cases where Courts have decided that language along the lines of "If you are fired, you will be given x notice or pay in lieu of notice" fails to actually displace the presumption of reasonable notice, because it fails to clarify that the employee won't get more than that.

In my view, framing the notice period in terms of the employer's entitlement should solve this problem:  Saying that the employer is entitled to terminate the relationship on x notice clearly displaces any obligation on the employer to provide greater notice.  Yet even I tend to err on the side of caution and disclaim further obligations.

And if you drafted the language to clarify that the employee isn't getting any more notice or pay in lieu than x, that's still not going to be a problem.

Where you start running into problems, however, is when you start getting too specific as to what the employee will receive, and too broad as to the entitlements that satisfies.

The Wright Case

In the 2011 case of Wright v. The Young and Rubicam Group of Companies (Wunderman) from the Ontario Superior Court of Justice, the employment contract at issue included a relatively complicated formula:

The employment of the Employee may be terminated by the Employee at any time on 2 weeks prior written notice (one week’s notice during Probationary Term), and by the Company upon payment in lieu of notice, including severance pay as follows:

a)         during Probationary Term – one week’s notice;

b)         within two years of commencement of employment – four (4) weeks Base Salary;

c)         after two and up to three years after commencement of employment – six (6) weeks’ Base Salary;

d)         after three but less than five years after commencement of employment – eight (8) weeks' Base Salary;

e)         five years or more and up to ten years after commencement of employment – thirteen (13) weeks' Base Salary, plus one (1) additional week of Base Salary for every year from 6–10 years of service up to a maximum of 18 weeks;

f)         after more than ten years but less than 19 years from the commencement of employment – six months’ Base Salary;

g)         After 19 years or more from the commencement of employment – 34 weeks' Base Salary (or eight months)

This payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.

The employee was terminated after just over five years, giving him a contractual entitlement to 13 weeks' pay, whereas his statutory minimum was 5 weeks' notice and 5 weeks' severance.  So it would have been fine.

But what you need to remember, and what the Court decided (relying on the Shore v. Ladner Downs case which I sometimes allude to), is that you need to look at the language itself - and not the specific context - to determine whether or not it is enforceable.

And there are two glaring problems with this language.

Problem 1:  Partial Years of Severance

There's a problem for employees with certain lengths of service.  The trouble happens once you hit 8 years and 1 month.  At that point, the contract says that you get 16 weeks.  The ESA says that you get 16 and 1/12 weeks.  Likewise, at 9 years exactly, you're fine again, but throughout the following year the contractual term would short you by your partial year of severance.  (The judge says that the same is true of 10.5 years.  I don't think that's correct - paragraph (f) is fine until you get over 18 years of service.  (Six months is 26 weeks.  At 18 years of service, notice plus severance is 26 weeks.  Once again, the partial year's severance up to 19 years gets shorted by the contract.

In other words, over the course of a 19 year+ career, there will have been three 11-month periods of time in which an employee would be left marginally short of his statutory entitlements.  This is a big enough problem to void the contract.

Problem 2:  Benefits

Whenever the employee's entitlements are limited to "base salary", that should raise red flags.  It doesn't mean that there actually is a problem, but that's the starting point for a lot of difficulties.

In this case, the issue is that the contract doesn't provide for a continuation of benefits.  Under the ESA, benefits must be continued through the statutory notice period.  In the event that they aren't continued, the employee is entitled to the money the employer would have applied to the benefit plan.  The employer argued that it doesn't *displace* the continuation of benefits either, and pointed out that the employee's benefits were actually continued through the statutory notice period.

The judge, however, disagreed on the interpretation of the contract.  There's some discussion of the contra proferentum rule, but I'm not sure that's quite correct.  (Ambiguity is to be decided against the party that drafted the contract.  However, it seems odd to apply that rule in such a way that decreases the liability of the drafter so as to make the agreement void.)  The Court concluded that employers commitment to not provide "other payments" extended to payments to the benefits provider.  Whether or not you agree with that, I would argue that, with the agreement silent as to benefits, at a minimum there's a prospect that the employee could be entitled to monetary compensation under the ESA for the cancellation of benefits.

Other Thoughts

The benefits problem arose in large part because of the broad language disclaiming "other payments".  I've often seen language indicating that a sum would be inclusive of all entitlements to everything under the sun, including all entitlements under the ESA, the Human Rights Code, the Occupational Health and Safety Act, etc.  (I've also seen contracts use such vague language as "the applicable laws", which would likely be too vague to be enforced.)

There's little doubt that a provision in a contract waiving rights against subsequent breaches of the Human Rights Code would be disregarded, so the language is of little value, but the attempt to lump them all together might undermine the rebuttal of the presumption to reasonable notice.

One other interesting thought:  Whether or not an employee is entitled to severance is contingent on contextual factors.  All employees will be entitled to statutory notice of termination after three months, but only under certain circumstances with an employee be entitled to severence.  It's a contingent entitlement, and I don't think the Courts have ever considered how that fact interacts with this doctrine.

Many employers will never be on the hook for severance - their business models just wouldn't bring them to that point.  It would seem silly to say that they need to account, in their contractual language, for the purely hypothetical possibility that they might someday have to pay severance.  But consider the employer whose payroll varies from year to year between 2.4 million and 2.6 million.  What is clear is that a termination clause is either valid or it isn't.  It won't flip back and forth between being enforceable and not being enforceable depending on the staff complement.  So language which rules out the prospect of severance pay may not be enforced, regardless of whether or not severance pay may be required of the employer.

The twist is that there are really easy fixes for this sort of thing.  Lawyers try to be fancy, and implement complicated formulas to show off, but minor defects can be fatal.  Keep it simple, ensure that the contract expressly guarantees minimum compensation in accordance with the applicable employment standards, and the contract - in that sense, at least - should be fine.

*****

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.

Further Difficulties with Fixed Term Contracts

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

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

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

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

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

The truly striking issue on this case is the damages.

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

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

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

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

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

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

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

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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.

Notice Formulas and Employment Standards

I've often discussed written employment contracts, and how a good and binding termination clause in a contract can reduce an employer's liabilities on termination from substantial "reasonable notice" to the relatively constrained statutory minimum notice, or anywhere in between.

However, termination clauses are closely scrutinized by the Courts in several ways, which is why it is of the utmost importance to have a good employment lawyer involved in drafting the contract at the outset.

One of the key problems that such clauses frequently suffer is statutory non-compliance.  The Employment Standards Act sets out minimum entitlements on termination, and the Act is express that any attempt to contract out of the minimum standards is void.  So when you get a contract saying that an employee can be fired at any time without notice, the Courts will usually disregard that language, and find accordingly that the employee is entitled to "reasonable notice".  (The Supreme Court has been very clear:  You don't read in an intention to limit the notice period.  If the clause is void, it is ignored.  The message is clear to employers:  If you want to limit your liabilities, you have to do it properly.)

Under Ontario's Employment Standards Act, an employee with 3 months of service is entitled to a minimum of one week notice.  An employee with 12 months of service is entitled to a minimum of two weeks' notice.  An employee with 3 or more years of service is entitled to 1 week's notice per completed year of service, up to a maximum of 8 weeks.

In addition, in some contexts there may be statutory 'severance' payable as well.  That's distinct from notice, but let's leave it aside for now for the sake of simplicity.

First, suppose my contract entitles the employer to fire me at any time on 8 weeks' notice or pay in lieu thereof.  That should be fine, at least from an ESA perspective, because unless the ESA is amended at some point the contract will never entitle me to less than the statutory minimum.

Next, suppose instead that I have a contract entitling my employer to fire me at any time on only 4 weeks' notice or pay in lieu thereof, and I get fired after 6 years of service.  My statutory minimum entitlement is 6 weeks; the contract says I only get 4, so the contractual provision is void and I get to claim "reasonable notice" - several months, depending on the exact circumstances.

What happens, though, if I have a contract promising 4 weeks' notice and I get fired after only 2 years?  Statutory minimum is 2 weeks; the contract says I get 4.  That should be fine, right?

Wrong.

This issue isn't frequently explored in the jurisprudence, but there have now been a few cases across the country dealing with it, and the results are pretty one-sided.  If the formula doesn't comply with the Employment Standards Act formulaically, the clause is void "ab initio" (from the start).

In Shore v. Ladner Downs in 1998, the British Columbia Court of Appeal dealt with this issue:  The contract permitted termination on 30 days notice, and even though the statutory minimum notice for the dismissed employee was two weeks at the point of discharge, the employer could not rely on the provision.

Many employers prefer to simplify matters, keying the notice payable to the employment standards minimum themselves.  This is theoretically fine, but still not without its risks.  The language used must still be precise in order to accomplish its objective.  Using language like "the applicable law" probably will not be clear enough, yet being too specific can be a problem, too.  In Waddell v. Cintas Corp, another B.C. case, the initial employment contract had been entered into in Ontario, and the employee later transferred to B.C.  His contract, however, tied his entitlements to Ontario's Employment Standards Act, which calculates entitlements slightly differently from B.C.'s employment standards regime, which could theoretically result in a conclusion that the contractual entitlements (as determined with reference to Ontario's ESA) would be less than the minimums to be determined under the B.C. statute (which now governed the employment relationship).  Therefore the contractual provision was void and the employee was entitled to "reasonable notice".

It's a tricky area of law.  Occasionally a contract will use language creating a formula for notice based on each "completed year of service".  Most of the time, when you see this language, there's a minimum, or else an additional/alternative tie-in to the employment standards minimum.

For example, Obaidi v. Home Depot deals with a contractual provision offering 2 weeks pay in lieu of notice "per completed year of service", but no less than 2 weeks notice and no more than 26 weeks notice.  (Though that case deals with lack of consideration - it's a different issue.)  Likewise, in Ahmed v. Athabasca Tribal Council Ltd., the language promised the employment standards minimums plus one month "for each completed year of service".

This type of language is generally fine.

However, I have also seen contracts drafted by lawyers which only deal with notice "per completed year of service", with no other minimum.  Meaning that a person fired after 364 days of service has, under the contract, no entitlement to notice.  Despite the fact that, under the ESA, there's a minimum notice period of one week.  See the problem?

Obviously, an employee fired after 364 days would not be held to the contractual term if the statutory entitlement was greater.  But the point is that it's a bigger problem than that.  Even if, at the point of dismissal, the contractual entitlements exceed the statutory minimums, the termination provision in its entirety would likely be seen as being void, with the result that the employee would be able to seek reasonable notice.  So if I'm entitled only to two weeks notice per completed year of service, and I'm fired after 18 months, then my contract says I get two weeks, and the ESA says I get a minimum of two weeks, but regardless, I'd be able to seek common law reasonable notice, which would usually be much more substantial.

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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.

Fixed Term Employment Contracts

It's an increasingly common practice these days to hire employees for a fixed term only.  There seems to be a conception that it provides an employer with more flexibility and protection against significant liabilities.

I think that, in most contexts, there are better ways for an employer to protect its interests, which are more reliable and more certain, because fixed term contracts have shortcomings.

Here's the basic principle:  You hire Joe for a one year term.  At the end of the year, if you haven't renewed the contract, the contract expires and he is no longer employed.  No need for any notice of termination, severance, etc.  Pretty nice, right?  Well, for a public sector or charitable organization with uncertain long term funding, it makes sense.  For an employer with a specific time-limited task to be completed, it makes sense.  You want the employee to go away once the funding runs dry or the task is completed.  Or if you're filling the position of a person on parental leave, that's eminently reasonable.

But what if you're not in that situation?  Increasing numbers of employers have a position which needs filling on a permanent/indefinite basis, but will hire on a fixed term contractual basis.  The logic seems to be quasi-probationary - if you're not happy with Joe's performance at the end of the first year, you can let his contract expire and hire someone new.  And if you do renew for a second year, and a third, and a fourth, then you continue to keep your options open to refuse to renew at any given time.

There are a few problems with this approach:  Firstly, it doesn't always work.  The case law is clear that a fixed term contract is created only by "unequivocal and explicit language", and there is case law where language contemplating renewals undermines its clarity.  In the Ontario Court of Appeal's 2001 decision in Ceccol v. Ontario Gymnastics Federation, Justice MacPherson made the following observation:

It seems to me that a court should be particularly vigilant when an employee works for several years under a series of allegedly fixed term contracts.  Employers should not be able to evade the traditional protections of the ESA and the common law by resorting to the label of 'fixed term contract' when the underlying reality of the employment relationship is something quite different, namely, continuous service by the employee for many years coupled with verbal representations and conduct on the part of the employer that clearly signal an indefinite term relationship.

Thus, the Courts frown upon the 'perpetually renew a fixed term contract until we don't' approach.

Secondly, it can actually limit an employer's flexibility.  It requires regular attention to an employee's contract, and prevents the contract discussions from being, for example, delayed to accommodate a busy period.  If the 'fixed term' arrangement is to be anything other than a farce, it must be strictly adhered to.

Perhaps more to the point, if the relationship has not developed to the point that the employee has an expectation of renewal (thus raising in full measure Justice MacPherson's concerns in Ceccol), a prudent employee will begin seeking new employment months before the expiration of the contract.  That's not something an employer usually wants, and to head it off the employer will have to decide relatively early whether or not the contract will be renewed.  Which kind of defeats the point, given the alternatives.

Thirdly, there are better ways.  ESA minimums are generally fairly modest.  A contractual clause limiting an employee's entitlements to the ESA minimums will provide the same flexibility and usually more.  If I hire somebody for a one year fixed term contract, he'll be looking for a new job after 9 or 10 months if I haven't renewed.  If I want to keep him, I have to make a new offer at that point - I have to decide then whether I want to be tied in with this guy until the end of two years.  A good termination clause, on the other hand, means that I have until one week before the end of his first year to decide whether or not I want to keep him past the end of the year...but more to the point the end of the first year has very little significance.  If I don't make my decision by then, but decide after 13 months that it isn't working out, I can give him two weeks' notice.  On the other hand, if I do decide after only 6 months that I want to be rid of him, again, I can send him off with one week's notice.

Fourthly, a fixed term contract displaces the common law implied term of 'reasonable notice', and this can be a bad thing under certain circumstances.  With your standard 'indefinite term' contract, even without termination language, the common law implies an entitlement upon the employer to terminate the relationship upon provision of "reasonable notice".  But in a true fixed term contract, that entitlement doesn't exist.  In other words, let's suppose you hire a person for a relatively low-level position in a one year fixed term contract, and decide after 6 months that you don't want them anymore.  If it's an indefinite term contract with termination language, you'll owe as little as a week.  If it's an indefinite term contract without termination language, you might owe a few weeks, give or take, depending on the specific facts.  In a fixed term contract without termination language, you may have to pay out the remainder of the contract - six months - subject only to the employee's duty to mitigate.

You want flexibility?  Forget fixed term contracts; go with a good termination clause.

Much of the jurisprudence regarding fixed term contracts involves an employer trying to enforce it - you let the term expire, sent Joe on his way without notice, then Joe came back and sued for 'reasonable notice'.  But there are also cases where an employer wanted out of the contract before the end of the term, where they didn't put in another termination clause, and they think they can fire on modest notice because it's a short-service employee, and they run into the fourth problem above.

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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.

Dismissing Long-Term Employees

I had someone find my blog recently through a search for how to get rid of long-term employees.  It's actually a good question, and calls to be addressed.  I've had a number of small employer clients come to me with such issues.

Long-service employees can have very significant entitlements.  Even at lower levels, this is true now - in the wake of the Court of Appeal's Di Tomaso case last year (discussion here), long-service clerical and unskilled labourers can now be entitled to notice periods up to two years (and possibly higher in exceptional circumstances).

These concerns can be avoided, with advance planning.  If you implemented a written contract with the employee at the point of hire with a good termination clause, then your liabilities might be limited to those in the termination clause.  In some cases, the issue arises for successor employers, where a business was purchased with the employment relationships intact - if this is a concern, make sure that the vendor severs the employment relationships involved first, and you'll need further legal advice if you intend to make new offers of employment to their employees, because such a severance may not work.  Whether it's an asset purchase or share purchase, if the purchaser just assumes the employment relationship without more, they'll be buying into potentially dysfunctional employment relationships with the prospect of significant liability.

But, without advance planning, sometimes you have to take the cards you end up with, and do the best you can.

The first thing to know is that there are ways of bringing in employment contracts even after the point of hire.  But you need legal advice to do so, and by the time you know you want to get rid of the person, it's probably too late to do so.

So let's look at how you can get rid of a long-term employee, while trying to avoid a hefty payment in lieu of notice:

(1)  Dismissal for Just Cause

It's an option, but usually not a good one.  If an employee has engaged in misconduct rising to a certain threshold, you are entitled to terminate summarily without notice.  (Depending on the nature of the misconduct, a trail of progressive discipline is often necessary.)

If the reason you want to be rid of the employee tracks to a singular (and recent) egregious episode, such as theft (which you can prove), then this may be prudent.  If there has been an ongoing series of more minor problems, with documented discipline, but the misconduct has continued, then this could be an option.

However, in most of these cases that I see, the employer's decision that they want to be rid of such an employee is based on a series of minor incidents which the employer accepted, permitted, and tolerated, but there's a recent "straw that broke the camel's back".  The employer now wants to be rid of the employee, and the employee doesn't realize he or she has done anything wrong in the first place.

In such cases, a dismissal for cause becomes a project, not an action, and one that's usually impractical.  The first thing that you need to do is clarify expectations for conduct and make sure that the employee knows that, moving forward, the various shenanigans which may have gone on in the past are not permissible.  (This needs to be done carefully, too.  Employers have a wide range of power in the workplace, but unilateral changes which go to the heart of the employment relationship may generate a constructive dismissal, triggering notice obligations - the very thing you're trying to avoid.  Also, there are times when, while implementing these changes, you need to bear in mind your human rights obligations.)  Then you need to start disciplining if the employee fails to meet these new standards of conduct.  At some point, maybe soon or maybe not, you may have built a case sufficient that a Court might find just cause.

If you've already decided that you want to be rid of the employee, this is not an easy approach.

(2)  Convince the Employee to Quit

This is one that I usually file away with "bad ideas".  Taking actions against an employee simply for the purpose of trying to get them to leave is almost constructive dismissal by definition.  But it's seldom that simple.  For instance, in the situation where the employer has lost control over the employee, the employer might just be able to hope that its legitimate efforts to get the employment relationship back under control might persuade the employee to look elsewhere.  It's unwise to count on this, though.

It's also possible to offer a voluntary separation package of less than an employee's full common law notice entitlements.  (Essentially, paying the employee to resign.)  The employee may or may not accept this, and trying to be too...persuasive...can amount to constructive dismissal.  (Indeed, you need a lawyer's assistance for this approach:  When you're implicitly telling an employee that you don't want him around anymore, you need to be careful with you do it.)

(3)  Dismissal on Actual Notice

This is unusual, and carries with it risks and problems, but in some scenarios can be effective.  Indeed, this is an employer's obligation when it wants to fire somebody without just cause.  (It doesn't usually happen; normally, an employer prefers to breach this obligation and provide pay in lieu of notice instead.)  But for an employer unable to afford to pay the departing employee *and* the departing employee's replacement, it's an option to consult a lawyer about.

One of the major practical difficulties with this is that you're then relying on an individual for a lengthy period of time who knows that they aren't going to be there long.  You run the risk of misconduct, whether intentional or through carelessness.  To that extent, you need to monitor the employee's performance to make sure they're still doing their job, and go down the 'discipline' road if necessary and appropriate.

(In some cases, statutory severance will still be owed at the end of the notice period.  This isn't usually true of smaller employers, however.)

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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.

Differences between Employees and Contractors

Theoretically speaking, there's a world of difference between an employee and a contractor.

Why Does It Matter?

Let's start by looking at the legal consequences of the distinction, before we start looking at the legal differences between them.

An employee, unlike an independent contractor, gets protection of various statutes like the Employment Standards Act.  Minimum vacation entitlements, minimum wage, limitations on hours of work, mandatory breaks, etc.

An employment relationship also requires the employer to withhold and remit income taxes to the CRA on the employee's behalf, as well as EI and CPP contributions.  (Employers are also required to make EI and CPP contributions of their own in respect of employees.)  By contrast, an independent contractor has to make his own CPP contributions (in the full amount, including what would otherwise be the employer portion), doesn't get EI, and collects the full amount of his bill plus HST, with no obligation on the payor to withhold and/or remit taxes to the CRA.

The independent contractor, unlike the employee, is seen as a business owner, and is therefore able to write off  business expenses for tax purposes.  

Thus, all other things being equal, there are advantages and disadvantages to workers of being employees versus independent contractors.  (Contractors don't get protection of employment standards nor EI, and the framework on termination is often less favourable, and there's also more personal administrative responsibility for accounting and payment of taxes, etc.; on the other hand, there are often tax savings to being an independent contractor.)

For businesses, it's generally better to have contractors than employees.  Yes, I may pay 13% HST for the services I'm buying, but I get that back through credits based on the HST I'm collecting from my own customers.  In the mean time, I'm saving on EI, CPP, and potentially on other things like overtime costs, public holiday pay, vacation pay, etc.

So many payors want to structure their contracts as contracts for service (i.e. independent contractors) as opposed to contracts of service (i.e. employment contracts).  To do so, they put terms expressly saying that the worker is an independent contractor, not an employee, and will be responsible for their own CRA remittances, and will provide accounts to the payor for services rendered, with HST, etc.  (At least, the more elaborate ones go down that road.)

And workers will agree to this, partly because of an imbalance in bargaining power, but also partly because there's something attractive about being able to write off expenses as business expenses like a wealthy business-owner does.  Particularly on the termination of the relationship, though, a contractor may be in a much worse position than an employee.

The Legal Test

I know many experienced and sophisticated businesspeople, some of whom are extremely successful, and among them there seems to be a belief to the effect that the contract is God.  They are often quite surprised when I tell them otherwise.  (I recently had a dinner conversation with such an individual where he was quite surprised to learn that the minimum statutory notice cannot be contracted out of.  He doesn't like this reality, because of the prospect that a sophisticated employee could take advantage of an employer by negotiating terms he knows are unenforceable.  This is possible, but I would never recommend an employee do that for reasons of poor predictability, and it's certainly the minority case for employment contracts that a sophisticated employee is able to pull the wool over the eyes of a less sophisticated employer.)

The contractual terms aren't irrelevant.  How the parties have chosen to characterize the relationship is not completely devoid of legal meaning, but nor is it determinative - it is one among several factors that Courts will look at to determine whether an arrangement is a contract of service or a contract for service.

There are other factors, too:

(1)  Control:  To what extent is the worker directed by the payor?  Does the payor control the hours of work?  How and when the work will be performed?  Is the payor able to discipline the worker?

(2)  Ownership of tools:  Who actually owns the tools and other devices necessary for the work to be completed?  If I actually had to invest in my own business by purchasing the tools of my trade, then it's much more likely that I'm a bona fide business owner.  If I rely on my client to have the tools of my own trade for me to use, then...less so.

(3)  Chance of profit:  In general, most employees will have the bulk of their remuneration calculated by a pre-established formula based on a salary or hourly wage.  Contractors, on the other hand, tend to get paid by the job, and while hourly billing isn't unheard of, especially in certain industries, there's certainly a per value element to the calculation.

(4)  Risk of loss:  Most employees pay virtually nothing out of their own pockets.  If a job goes south, an employee loses income, but hasn't usually invested much more than time into it.  On the other hand, a contractor may have incurred out-of-pocket expenses, wages for other employees, and other overhead costs, meaning that if the job ends up taking longer or more resources to complete than anticipated, or the payor doesn't end up paying, the contractor has potentially suffered a loss of more than just time.

At its core, factors such as these are designed to flesh out the essential question, posed by Lord Wright in 1947:  Whose business is it?

Then What Happens?

There are a few contexts in which these disputes get fleshed out.  Sometimes, the CRA lifts up the rug on a 'contractor' relationship and reassesses the parties on that basis.

More often, the worker comes back at the payor after the end of the relationship wanting entitlements based on an employment relationship - EI remittances, pay in lieu of reasonable notice, unpaid overtime or holiday pay.

Even though the parties may have governed their relationship as a contract for service for an indefinite period of time, it remains open to the Courts - at the instance of the CRA or either party - to re-evaluate it.

One should note that, where termination of the relationship is involved, there's also what sometimes gets referred to as the intermediate category, or "dependent contractors", who are not employees yet still get employee-style rights such as reasonable notice of termination.

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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.

Wrongful Dismissal and Restrictive Covenants

Here's an interesting decision from the Alberta Court of Appeal, released last August:  Globex Foreign Exchange Corporation v. Kelcher, which discusses, among other things, the effects of wrongful dismissal upon restrictive covenants.  So suppose I sign an agreement that I will not solicit clients of my employer within two years after the end of my employment, and then my employer eventually fires me without cause and without notice.  What happens to that non-solicitation agreement?

I think it's important to highlight, at the outset, the definition of "wrongful dismissal":  You've seen me refer to Love v. Acuity Investments on a couple of occasions before to note that an employer's actual obligation on termination is to provide actual notice, and that firing without notice but providing pay in lieu is still a breach of contract; the pay in lieu is an attempt to compensate the employee for the breach.

The Alberta Court of Appeal similarly references Love v. Acuity Investments, with the result that we can safely understand that, when they're talking about "wrongful dismissal", they're talking about just about any termination without actual notice.

The conclusion the Court comes to is this:  An employer who wrongfully dismisses an employee is not entitled to rely on restrictive covenants.  They have repudiated the contract, and are not entitled to continue to hold the employee to his obligations thereunder.

There doesn't appear to be much jurisprudence on the point.  A similar, but not quite the same, argument has been raised in respect of termination clauses:  Some have argued that a failure by the employer to honour its contractual obligations means that it cannot rely on contractual language limiting pay in lieu of notice.  The general conclusion is that this argument must fail:  When you're fired without notice, but you're only entitled to a certain amount of notice, your employer's liability is still going to be limited to the notice that they should have provided you if they had complied with the contract.

But restrictive covenants are different.  Termination clauses are about obligations of the employer (even though they usually work to the employer's benefit by contrast to common law), whereas restrictive covenants relate to obligations of the employee.  So the jurisprudence on termination clauses essentially says:  Employer, you breached the contract, so now you have to compensate the other party on the basis of what your contractual obligations were.  For this restrictive covenant case, the logic runs much differently:  Employer, you repudiated the contract, so now you are not entitled to expect the employee to continue to perform his obligations under it.

Pretty simple when you think about it that way.

The Alberta Court of Appeal relied on a rather old British case - General Billposting v. Atkinson - from 1909, which involved an employer trying to rely on a restrictive covenant after firing an employee with insufficient notice.  The House of Lords concluded that the employee was relieved of obligations under the restrictive covenant by the breach of the contract.  The case has been cited favourably by the Supreme Court of Canada in the past, but not in a restrictive covenant context.

The logic underlying this case isn't automatic, however:  Not every breach of contract will relieve the other party of ongoing responsibilities, nor are all collateral covenant terminated even by a fundamental breach.  There is a strong dissent in this case, pointing out that some covenants are clearly indicated to survive the end of an agreement, and that the body of Canadian case law suggests that - notwithstanding a breach of other contractual duties - these will survive.  (The dissenting judge, Justice Slatter, points out that the employee is not relieved either of other obligations - for example, it's probably uncontroversial that it would still be wrong for him to misuse confidential information of the employer.)

My Thoughts


This is a close one.  Justice Slatter has some very good points - it's hard to deny his logic.  (He is also quite critical of some Ontario law jurisprudence on "fresh consideration", and as much as I think the fresh consideration doctrine in Ontario is useful law, his criticisms of it as being "artificial" are not unfounded.)

The majority points out several good reasons why an employer who dismisses without notice should not be entitled to rely on the restrictive covenant, yet they aren't necessarily persuasive on a closer look.  The first two are from other British jurisprudence; the third is an addition of their own.

(1)  Otherwise an employer could hire a potential competitor and dismiss them shortly thereafter just for the benefit of the restrictive covenant.  This is true, and concerning, but not solved by the majority's approach here.  The unfairness is not caused by the wrongfulness of the termination.  Particularly if the employer used a well-drafted employment agreement with a good termination clause, the employment could be terminated shortly thereafter with very minimal responsibilities, without actually breaching the contract.  Thus, the majority's solution...isn't a solution.  Justice Slatter argues that enforcing a restrictive covenant in such a case would be unconscionable, which seems like a cleaner way of dealing with the problem.

(2)  Enforcing a restrictive covenant in the face of a wrongful termination negates the consideration for the acceptance of the restrictive covenant.  This one doesn't seem right:  If I accepted a job with a restrictive covenant attached, the consideration was "the job", not "continued employment".  If I performed services and received remuneration under the contract of employment, it's hard to say that, just because it's terminated without appropriate notice, the original contract is now devoid of consideration.  The principle is framed separately as suggesting that the premature termination of the contract will deny the employee the "extra amount of remuneration" for having agreed to the restrictive covenant.  Still seems wrong.  Contracts are whole entities.  You don't need separate consideration for each and every covenant in a contract.  If there were, it isn't necessarily true that the employee would be denied it.  ("Okay, I'll agree to the restrictive covenant, but in that case I'll want a premium on my wage rate throughout the employment.")  Even if the consideration were tied to the termination of employment...well, let's run with this for a second.

Let's clear out the rest of the contractual terms, and discuss only contractual notice of termination and the restrictive covenant.  Suppose I have a contract that entitles me to 3 months notice of termination, with no restrictive covenants.  You're my employer, and you ask me to agree to a non-competition agreement for one year after the end of my employment.  I answer, "Well, it will be harder for me to find a new job in a different field.  I'll tell you what, I'll agree to the non-comp if you extend my contractual notice period to 9 months."  We agree on those terms, and you later fire me without actual notice.

Okay, so I've lost the benefit of the extension of the notice period, right?  No, still wrong.  Because in fact, I am still entitled to a remedy for that breach, now being three times what it would have been but for my agreement to the restrictive covenant.  That still smells like consideration to me.

(3)  Mitigation.  This is actually a good point, and the first thought that came into my head.  The duty to mitigate by finding new employment, triggered by the wrongful dismissal, is in conflict with a restrictive covenant which limits the prospects of new employment.  To wipe restrictive covenants off the plate where the duty to mitigate is triggered...well, it's a nice clean solution.

But it isn't the only solution.  Indeed, where an employee is prevented from working in his/her field for a period of time, it would make more sense to argue that the duty to mitigate should be largely lifted through the running of the restrictive covenant.

Let's put these beside some of the legitimate concerns raised by Justice Slatter, namely that an employer can, without blameworthy conduct, fail to provide the necessary notice - for example, in a scenario where the notice provided falls slightly short of the notice period a court finds, or where the assessment at the time of "just cause" falls slightly short of the threshold at trial.  It does indeed seem unjust to deny an employer of the benefit of such a clause under such circumstances.

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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.

Bowes v. Goss Power Products Ltd. update

Last August, I posted about the decision in Bowes v. Goss Power Products Ltd., in which Mr. Bowes was terminated from his position as Vice-President.  Under the terms of his contract, he was entitled to 6 months' notice or pay in lieu thereof.  He found a new job with equivalent income 12 days after his termination.  Essentially, he was trying to enforce the contractual term requiring the employer to pay him the 6 months' notice anyways.

The Court said No, because he had mitigated his loss based on the loss of employment.

I noticed recently that an appeal is scheduled to be heard next month.  Should be interesting to see.

Bowes is definitely the underdog here.  He lost his job, suffered no loss, presumably already received a modest windfall in the form of his statutory minimum notice, so he's suing for damages he hasn't really incurred in any meaningful sense.  The body of employment law jurisprudence is against him.

But, on more basic principles of contract, I'm not so sure that he's actually wrong.

When I'm rooting for the employee here, it isn't because of a pro-employee bias.  I think of myself as being fairly balanced.  I fight vigourously for the interests of my clients, be they employee or employer, in specific files.  But outside of my files, I'm on the side of law which makes sense.

Wrongful Dismissal:  The Usual Case


Normally, at common law, an employer is entitled to dismiss an employee on reasonable notice.  Contractual language can define the reasonable notice period, or change the reasonable notice period, within limits.  Notionally, an employer is entitled to say to an employee:  "Your employment will end on date x, which is y months out."  Then the employee would keep working until date x, looking for a new job for afterwards.

In practice, this never happens.  Most employers send home a dismissed employee immediately, preferring instead to provide "pay in lieu of notice".

However, under the common law default, an employer is not contractually entitled to fire without notice notwithstanding a payment in lieu.  As much as we might tend to conflate reasonable notice, notional notice periods, and pay in lieu of notice, the actual default obligation is to provide actual notice.  The Court of Appeal made this clear recently in Love v. Acuity Investments.  When an employer fires without notice (and without just cause), this is a breach of contract, and pay in lieu is "an attempt at compensation for the breach."  Pay in lieu is, in essence, damages.

This is important to understand, because then we start to understand why the mitigation principle applies.

There are two very fundamental principles in damages for breach of contract.  The first is the compensation principle, that the non-breaching party should be put in the position it would have been in had the contract been honoured (i.e. had actual notice been provided), to whatever extent this can be achieved by the payment of money.

The second is the mitigation principle, that a loss which is avoidable cannot be recovered.  This principle essentially creates an obligation on a fired employee to seek new work.

These are principles of damages, not of contractual interpretation.  They presuppose that a party has been wronged and suffered damage as a result.

If I get fired on actual working notice which is reasonable, then the contract hasn't been breached.  These principles don't apply.  I keep working, and once the notice period runs its course we go our separate ways.  There's no obligation to look for a new job during working notice - though it's just good sense to do so.

If I get sent home, however, without notice, then my contract has been breached.  I'm entitled to continue to be paid as I would have been had notice been given (compensation principle), but that doesn't mean that I'm entitled to sit at home and watch soap operas for y months.  I need to get out there and take reasonable steps to find another job.  If I don't do so, then my entitlements get reduced accordingly.

If I actually find a new job, with new income, then my income through the new job gets deducted from my entitlements from my old employer, because that goes partway to putting me back into the position I would have been in but for the breach.  This is what we're talking about when we describe "mitigation income".

Put into this framework, Bowes clearly shouldn't recover much:  After all, he earned mitigation income sufficient to put him back into the position he would have been but for the breach...but wait...what breach?

How this Case is Different


Goss Power Products was entitled by the employment contract to dismiss on provision of pay in lieu of notice.  Therefore, by terminating him without actual notice, there was no breach of contract.

No breach of contract, no duty to mitigate.  No duty to mitigate, no need to account for mitigation earnings.

Essentially, the language in the contract appears to have been quite simple:  We can fire you without notice, and we'll pay you this much for it.  In fact, this type of contractual language is not uncommon.  Which is why there will be an impact if Bowes wins.

Bowes' position is almost elegant for its simplicity.  The contract says the employer should pay, so the employer should pay.

The Superior Court's response was quite complex, actually, finding that the contractual language was not intended to displace the obligation to mitigate that exists in the usual case, and therefore does not do so.  But that seems not to be quite right, either:  Obligation to mitigate what?  If one supposes that Bowes had not obtained new employment, and the pay continuance had continued through the notional notice period, there would have been no breach of any contract at all, such that an obligation to mitigate is triggered.  In other words, the contract on its face suggests that Bowes could have spent six months watching soap operas, and the employer couldn't say anything about it.

To sum up:  Unlike the usual case, in which the termination without notice is a breach of contract requiring the employee to mitigate his loss, Bowes' termination without notice was not a breach of contract, meaning that he suffered no loss thereby which he could be required to mitigate.

Indeed, in order to get to the Superior Court's conclusion, one would have to actually read mitigation into the contract as an obligation of Bowes' in his performance of the contract.  That is problematic:  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.

At the end of the day, I would argue that Bowes has a point:  If an employer wants a contract to include a right to provide pay in lieu of notice while still preserving the employee's duty to mitigate, it should expressly include that in the contract language.

*****

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.