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.

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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.

Bonuses and Active Employment

Back in September, I made this entry about the enforceability of a contractual or policy term which requires the employee to be "actively employed" as of a certain date to be eligible for a bonus.

For example, if the year's bonuses are announced and paid out in December, and I work the whole year until being dismissed at the end of November, and my notice period would carry me past the bonus date, but there's a term in my contract saying that I must be "actively employed" when the bonuses are announced in order to be eligible for a bonus...am I still entitled to the bonus?

The answer was "Sometimes".  It depends on the circumstances.  In Poole v. Whirlpool, which I discussed in that entry, the employee was not bound by the requirement for "active employment" because the company had inadvertently neglected to ensure that he was aware of it.

I went on to comment that I believe there is room for refinement of this doctrine in light of the requirements of the Employment Standards Act, and that such language should be unenforceable if it purports to deprive a dismissed employee of a bonus which is not "purely discretionary" though the vesting date may occur during the statutory minimum notice period.

More recently, the Superior Court decided the case of Sandhu v. Solutions 2 Go Inc., dealing with a motion for summary judgment on a similar issue, and moving a large step in the direction I proposed in my earlier post.

The Facts

Ms. Sandhu was employed by Solutions 2 Go from November 2005 until her dismissal on May 25, 2010.  The parties settled all issues except for her entitlement to participate in the company's profit-sharing plan in respect of the company's fiscal year which ended March 31, 2010.

The company had implemented this profit-sharing plan in 2006, and it entailed declaration of a total bonus amount, which was then divided up into 'full shares' and 'half shares', employees who had been there for the full fiscal year getting a full share and employees who had been there between six and twelve months of the fiscal year getting a half share.  (New employees, hired in the last six months of the fiscal year, would receive nothing.)

The bonus in respect of the 2010 fiscal year was declared and paid June 18, 2010, with a full share being slightly over $16,000.  Ms. Sandhu, in her employment, earned $13.50 per hour.  $16,000 would be pretty substantial for her.  But, having been dismissed 24 days earlier, she received nothing.

The company took the position that (a) it was a discretionary bonus and management was not under a contractual obligation to pay it at all (though it was acknowledged that, once the bonus was declared, its distribution was fixed), and (b) in any event it was only payable to people still actively employed.  While it had not been put in writing at first, the 'active employment' requirement never came to Sandhu's attention until a memo was posted to that effect in 2009.  (The Court also notes that the employer attempted to get all employees to sign a contract implementing that language in December 2010, but Ms. Sandhu didn't sign it.  That date is seven months after Ms. Sandhu's dismissal, so I'm not sure how it would even be relevant if the date's right.)

The Decision

The Court applied s.61 of the Employment Standards Act and found that, even if the employer's position were accepted regarding the preconditions for payment of the bonus, the fact that the bonus was paid within her statutory minimum notice period meant that she could not be deprived of it.  Describing the requirements on the employer through the notional statutory notice period, the Court noted that the employee must receive "what the employee would otherwise have been entitled to receive from the employer".

The Court goes on to note that this provision not only includes wages, "but also precludes an employer from altering any term or condition of employment which is of financial benefit to the employee during the statutory notice period".

The definition of 'discretionary' as it had been applied to the profit share was vague, and at its highest the discretion extended only to whether or not to announce a bonus and the aggregate amount thereof.  The Court therefore applied a simple but-for test:  Had Ms. Sandhu been given the notice contemplated in the Act, she would have been there on the date the bonus was declared and paid, and therefore entitled to receive it.

Thus, Ms. Sandhu was awarded the amount of the bonus.

My Thoughts:  Bonuses are often "Wages"

The Court's approach to s.61 of the Act is interesting, but there`s something missing.

The section guarantees payment of termination pay "in a lump sum equal to the amount the employee would have been entitled to receive under section 60".  Section 60 contemplates actual notice and sets out obligations on the employer through the notice period, including that the employer "shall not reduce the employee's wage rate or alter any other term or condition of employment", and pay the employee all the "wages" the employee is entitled to receive (and at minimum the amount the employee would receive in a "regular work week").  Both sections 60 and 61 require the employer to continue to make "whatever benefit plan contributions would be required to be made in order to maintain the benefits" of the employee through the notional notice period.

Nowhere is the phrase "financial benefit to the employee" used, and I'm not sure the Court was correct to interpret that into the section.

What is really interesting is that the Court doesn't seem to be interpreting the term "wages" as capturing this bonus, but nonetheless considers the bonus to be caught by the catch-all prohibiting the employer from altering "any other term or condition of employment".

Now here's what's missing:  At s.1(1) of the Act, there's a definition of wages, which is expansive and includes, among other things, "monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied", but specifically excludes "any sums paid as gifts or bonuses that are dependent on the discretion of the employer and that are not related to hours, production, or efficiency."

Does this change the analysis?  It's arguable.  In statutory interpretation, when there are two possibly-conflicting provisions, one should generally look to the more specific (as opposed to more general) provision.

It's clear that, when a bonus is not "dependent on the discretion of the employer" and/or related in some way to hours, production, or efficiency, that bonus falls within the definition of "wages".  Thus, there is an argument to be made that bonuses should not fall within the scope of "any other term or condition of employment".

That being said, I also believe that the disposition of the case is correct; I doubt that the entitlement to participate in the declared bonus could fairly fall within the exclusion for purely discretionary bonuses.  The trial judge is very astute to the policy issues involved:

The logic for these provisions is obvious.  Otherwise, an employer could take advantage of an employee by terminating the employee immediately prior to a large payout and paying the employee just the wages portion during statutory notice period.  This could apply in many situations such as profit sharing, stock options, commissions, Christmas bonus and so on.

(NB:  Commissions would clearly fall within the statutory definition of wages.)

More Thoughts:  The actual length of the statutory notice period shouldn't matter

There's something else missing here, too:  The trial judge finds that enforcing the 'active employment' requirement would have a result which is inconsistent with the ESA, and appears to conclude that because the bonus was declared within the minimum notice period, she was entitled.  This isn't going far enough.  A contractual provision which is not consistent with the ESA is void ab initio, regardless of whether or not its application in the specific case would yield a result which is permissible under the ESA.

That's the argument I was making in my earlier entry, at least, and it is much less hypothetical now.  This case is a precedent for the basis of that argument, that an "active employment" clause is subject to scrutiny under the framework of the ESA.

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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.

Buying a Business, and Employment Liabilities Too

This is an issue I've seen several times for small employers who have bought businesses, and ended up having problems with a long-service employee of that business.  They want to be rid of the employee, but probably can't meet the high threshold for just cause, and they're quite surprised to hear that the employee's "length of service" for the purpose of calculating termination entitlements includes their service before the business was bought.

With share purchase transactions (where the corporation remains intact but the shares are transferred to the purchaser), it's a really straightforward framework:  The employer is the corporation, the corporation is a legal person, and that same legal person continues to be the employer.  (There are ways of structuring the purchase to require the existing employees to be actually terminated, with holdbacks and/or indemnities for potential liabilities resulting therefrom, but barring such an arrangement, the employee's actual employment arrangement is unchanged by the transaction.)

Asset purchase transactions are a little more complicated.  I buy your facility, I buy your equipment, I buy your trademarks, intellectual property, and goodwill...what happens to your employees?

Well, I can decline to offer them jobs, in which case you're on the hook for wrongful dismissal damages.  Or I can make them offers of new employment.  But if I do so, and it doesn't work out with some of them, I don't want to have to pay them months and months of pay in lieu of notice.  So can I offer them a contract that stipulates that they won't get credit for their service with you for termination purposes?

The short answer is No.  Or at least, not usually.

The common law on the point suggests that it would be possible.  There's a common law doctrine which holds that it is an implied term of an employment contract, where a successor employer is involved, that the employee will be credited for service with the prior employer, unless the new employer advises the employee otherwise at the point of hire.  That made it possible for the new employer to start with a clean slate.

However, this had some adverse consequences from a policy perspective.  You take an employee who has been employed for decades in a given position, who would be entitled to many months of notice, except that the company changed hands a couple years ago - a transition which the employee barely even noticed, because her job remained otherwise unchanged.  So she gets shortchanged on termination for reasons which are essentially arbitrary, and completely disconnected to any of the relevant factors for calculating notice.

So, in Ontario, we now have s.9 of the Employment Standards Act, 2000:

If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee's length or period of notice.

Remember, the ESA sets out minimum notice periods for termination of employment, based entirely on length of service, and trumps any inconsistent terms from common law or contract.  In other words, if I enter into a contract with the employees that they won't get credit for prior service, that would be in conflict with s.9, and therefore be void.

It's commonly believed - and I've even heard this from experienced employment lawyers - that the problem can be solved by requiring the vendor to formally sever the employment relationship.  So the seller fires the employee, pays out statutory notice and severance if applicable, the buyer offers a new contract on essentially the same terms of employment to start on the next day, and the seller is protected from further common law liabilities because the employee can be expected to mitigate her loss by accepting the new job. The theory is that this is a way of 'resetting' the length of service clock.

This does not work.

In fact, unless the break in the employment relationship is at least 13 weeks (i.e. from when the transaction closed to when the employee is re-hired), s.9 will apply in full force, deeming the employment relationship not to have been severed, regardless of whether or not notice/severance was provided.

So what can I do to protect myself from major employment-related liabilities?

Well, there are always options.  The first is to simply not hire the employees.  Of course, needing to restaff (and train the new staff for) the entire business is often not a practical solution.

So another option is to accept a certain continuity in the employment relationship, and to take the more established approach for limiting your liabilities with existing employees, because liabilities can be limited to as little as the ESA minimums, if done correctly.  Unless severance pay is required, ESA minimums are usually relatively modest, maxing out at 8 weeks notice.

However, to implement such a contract in a way that maximizes its possibility of being enforced by a Court, an employer will certainly need legal assistance.

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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.

Truck Salesman was not Constructively Dismissed

The Court recently released its decision in McMillan v. Selectrucks.  Mr. McMillan worked for Selectrucks as a salesman from 2004 to 2007, at which point he gave two weeks' notice.  Selectrucks sent him home immediately and paid him out the two weeks' notice he had given.  (This is a common practice for many employers.)  Mr. McMillan started another job within two weeks.

McMillan developed a strong customer base and was successful in his role.  Then, a fellow salesman (Mr. Kenny) was promoted to a managerial role over him.  It is not uncommon that such a change in reporting structure can foment such conflict as to make the continued employment relationship untenable, generating a constructive dismissal.  Mr. McMillan contended, unsuccessfully, that this is what happened in this instance.

His arguments included several factors:

(1)  Mr. Kenny breached company policy by permitting alcohol consumption in the workplace, and this made Mr. McMillan uncomfortable because he has had alcoholics in his family.  The Court did not accept that such conduct by Mr. Kenny would really affect the contractual relationship with Mr. McMillan.

(2)  Mr. Kenny gave preferential treatment to another employee by assisting him to develop a client base, thus hurting Mr. McMillan's earning potential.  Perhaps true, yet in context it was evident that Mr. Kenny usually assisted new salespeople (and this other employee was new to the sales role) - and that had included Mr. McMillan when he started - to develop a client base.  Ultimately, given that Mr. McMillan's earnings were still increasing, it was pretty clear that Mr. Kenny wasn't seriously undercutting Mr. McMillan's earnings, even if he was perhaps showing favouritism to this other employee.

(3)  Mr. McMillan accused Mr. Kenny of abusive and improper treatment.  The Court dealt with most of these as being symptomatic of a difference in style - Mr. McMillan was accustomed to a more civil atmosphere in car dealerships, and was unaccustomed to the 'macho' atmosphere in a commercial truck dealership:  The Court ultimately seems pretty accepting of Mr. Kenny's "rough" management style in context.

I also note that the employer made an argument that Mr. McMillan's failure to complain should bar allegations of constructive dismissal, whereas Mr. McMillan explained that he was afraid of reprisals if he had gone over Mr. Kenny's head.  The Court embarks on a thorough analysis of that issue: The fear of reprisals is understandable, and it is a matter of common sense that an employee should not complain lightly about their manager.  That being said, if Mr. Kenny's conduct was already making the employment relationship intolerable, there was little to be lost by doing so.  (I have had occasions to give employee clients exactly the same advice.  While employees are often more afraid to complain than they are to simply quit, if the alternative is quitting then there is absolutely nothing to be lost by pursuing a complaint first.  If they get recourse, then that is great.  If not, then they're in the same position, except with perhaps a somewhat stronger constructive dismissal argument).

However, in the full context of a small work environment in which Mr. McMillan was an outsider, the Court concluded that it was understandable that he hadn't complained, and this wasn't a full bar to a constructive dismissal claim.  I note that these events all took place prior to Bill 168, and I wonder how that Bill would change the analysis.

There was more serious misconduct.  Mr. Kenny brushed off Mr. McMillan's concerns about not getting proper statutory holiday pay, and then was upset when Mr. McMillan did go over Mr. Kenny's head.  However, with no evidence of actual reprisal (perhaps just a souring of the relationship), it was hard to say that it constituted constructive dismissal.

Worse, Mr. Kenny once took Mr. McMillan in "a bearhug or a headlock", after Mr. McMillan understandably said something unflattering about the Habs.  It was horseplay, but unwelcome horseplay, and therefore an assault.  The Court is highly critical of this behaviour:  "it is hard to imagine a professional work environment where that would be appropriate.  These people were not adolescent boys in the schoolyard."

Yet, given the full context, including the fact that it was not close to the time of Mr. McMillan's resignation, and that Mr. McMillan could not be said to fear further violence, this assault did not create a constructive dismissal despite its seriousness.

None of the conduct could be said to go to the heart of the employment contract, so there was no constructive dismissal.  While the relationship may have soured, giving rise to Mr. McMillan's decision to find employment elsewhere, none of Mr. Kenny's conduct repudiated the contract.

My Thoughts

I very much like Justice Corbett's analysis in this case.  The one aspect that cause me concern is that there is, perhaps, too much casual acceptance of otherwise inappropriate conduct as being acceptable machismo in the context of the specific work environment.  Where an employer dismisses an employee for just cause, it is a defence for the employee to respond that the alleged misconduct was "condoned" by the employer, that it was common practice within the workplace.  So if there's a culture that condones profanity, it's hard to fire an employee for swearing.  Yet this decision seems to apply the principle in reverse:  It was acceptable to treat Mr. McMillan in harsh and unprofessional ways because it was common in the culture of the workplace?  The subtext is that an employer can expect its employees to grow thicker skins, depending on the culture of the workplace.  Especially in light of Bill 168, that is clearly not true now, but I don't really think it was true then, either.

Yet, at the end of the day, the conclusion that Mr. McMillan was nonetheless very successful in his position, and that the overall tension between him and his manager did not amount to a constructive dismissal, appears to be well-supported on the facts.

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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.

Summary Judgment Motion Fails Against HBC

Aileen Thorne worked for HBC for about 37.5 years before she was terminated without cause on February 1, 2011 at age 59.  At the time of her termination, she was making just under $40,000 per year and was an "allocation associate", whatever that means.

It turns out that the meaning of "allocation associate" is pretty contentious.

She has sued in wrongful dismissal, seeking pay in lieu of reasonable notice.  The usual factors are length of employment, age of the employee, availability of replacement employment, and character of employment.  Length of employment and age of the employee are usually pretty uncontroversial (though occasionally there's a fight about the former), and availability of replacement employment is not often closely analysed.  But character of employment...that is more difficult:  Front-line employees with no significant responsibility don't get much; skilled labourers and managers get more.  So there's often a fight about what the employee's duties actually entailed.

The facts of this case are like looking into a file of my own from last year, that settled this winter.  Similar employer, comparable length of service, and the most significant fight being over the level of responsibility exercised by the employee.

Let me explain that, on files such as these, the margins are often very small for a plaintiff.  For old employees with such incredible lengths of service, you can probably expect a notice period at a minimum of 12 months, ranging up as high as 24 months (seldom higher), depending on level of responsibility and other factors - so $40,000 to $80,000, right?

Wrong.  For an employee with such long service in an employer as large as HBC, the statutory minimum entitlements max out both termination pay and severance requirements, being a total of 32 weeks pay on termination.  8 months, roughly.  So if you walk away with 12 months at the end of the day, that actually only means an additional 4 months, which would mean $13,000 in this case.  Minus taxes.  Minus any EI overpayments that might be generated.  Minus any mitigation earnings.  Minus legal fees.

I've occasionally used contingency fee retainers for employee-side files, but I don't like to, for a couple of reasons.  Between EI and taxes, an employee's take-home entitlements on additional pay in lieu of notice is fairly modest.  If the lawyer then takes a percentage of the gross, then the employee often doesn't get anything - or occasionally actually still comes out behind.

In the Thorne case, Ms. Thorne brought a motion for summary judgment, presumably to try to deal with the matter expeditiously and save on legal fees.  And recently, the Rules of Civil Procedure expanded the scope of motions for summary judgment, allowing motions judges to assess factual disputes in limited ways.  In this case, however, the motions judge found that this was not an appropriate case in which to do so.

However, the judge reserved costs to the trial judge (rather than awarding them to HBC, the successful party on the motion), which is a real mercy to a plaintiff under such circumstances.  As well, HBC's affidavits had suggested that, since it wasn't taking the position that the notice period would be less than 12 months, they were contemplating a further voluntary payment to the plaintiff, which the judge suggested that this was something that should be "carefully considered by a fair and compassionate employer".  Shades of Brito v. Canac Kitchens, no?


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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.

Withholding Unearned Vacation from an Employee's Final Pay

This topic recently came up in a discussion group I'm part of on LinkedIn, and I thought it deserved some attention on this blog.  Essentially, the question is this:  If your employee takes unearned paid vacation then quits before earning it, can you withhold the pay from his final pay cheque?

The answer is, in true lawyer's form, a firm "Maybe".

It happens often enough, sometimes because an employer just wants to be generous, but more often where employees are permitted to take vacation in the year in which it is earned.  Suppose I earn three weeks of vacation per calendar year, and am expected to take it in the year earned:  Unless my last week of the calendar year is a vacation week (which would unduly restrict the scheduling freedom of both the employee and employer), it's inevitable that some of my vacation will be pre-taken.

So supposing I took all three weeks of vacation in the first part of the year, and quit at the end of August...I've received three weeks of vacation pay, but only earned two weeks, so I've gotten a week's pay out of my employer that I'm not entitled to.  Of course, my last pay will usually contain a week or two (or more) worth of wages, so my employer can just take what I'm owed out of that, right?

Usually, the Ontario Labour Relations Board is really finicky about employers withholding sums owing out of money owed.  There are certain circumstances in which it is permitted.  But outside of those specific circumstances, it is not.  So there have been cases in which the employer has suspected an employee of theft, fraud, or damaging employer property, and fired the employee, withholding any wages due as partial compensation for the damages the employer has suffered.  The employee goes to the Ministry of Labour, and the Ministry then tells the employer something to the effect of, "As far as payment for wages earned goes, we don't care if he walked away with a full cash register; you still have to pay him the money.  If you want to sue him separately, that's your own business."  And the OLRB will come to the same conclusion.

Withholding an overpayment of vacation pay is different, however, because vacation pay is *also* a form of wages.  In essence, cutting my vacation overpayment from my last pay is like saying, "Oh, we've already paid you that portion of your last pay."  And the OLRB will frequently accept that.

But not always.  There's a line of cases in which the employer never suggested that overpayments of vacation pay would be recovered until after the employee made a complaint to the Ministry regarding other unpaid amounts - essentially making an ex post facto assertion that their obligations were satisfied or offset by those vacation overpayments.  The OLRB rejected the employer's asserted entitlement to withhold the overpayment in these cases, and there's a certain logic to it.  When the relationship was working well, the employer was perfectly happy to let the employee take a couple of extra vacation days in a year without feeling the need to conduct a reconciliation of it.  It's the same underlying logic as a discretionary bonus - you give the employee more than they're entitled to because you're happy with the job they're doing, and you want them to be happy to stay in the job.  Then, down the road, the relationship breaks down, and the employer goes back and says, "Oh, you remember all those perks I gave you?  I want you to compensate me for them now."  It seems wrong.

There's an easy way around this, however.  Keep track of vacation entitlements on a regular basis.  Maintain a good vacation policy that asserts that overpayments must be reconciled, and will be deducted from the employee's final pay if the employee leaves before earning the vacation taken, and have the employee agree to that policy.  When an employee requests vacation time that isn't already earned, make sure that, if you approve the request, the approval contains a reminder of the policy, that if they leave before earning the vacation pay they'll be responsible for the overpayment and it will be deducted from their wages.

I've heard HR and bookkeeping professionals say that this sort of policy is *necessary* to recover an overpayment - i.e. it's inappropriate to withhold an overpayment unless you have such a written policy in place or told the employee in writing that it would be the consequence.  That's not strictly true.  It probably arises from the Carlisle case, in which the employee was entitled not to have a deduction for vacation pay that she overtook *right before her effective resignation*, and the OLRB justified the "harsh" result by pointing out that the employer could have avoided the situation through proper use of a policy.  (Or by refusing the vacation she had requested after putting in her two weeks notice.)

However, I would opine that the current state of the law is set out more concisely by Brown Bear Day Care case, in which there was an 'understanding' of pre-taking vacation, once discussed in a staff meeting but never reduced to writing.  The Board summarized the existing case law on the point and came to the following conclusion:

The circumstances before me most closely resemble the situation in MenuPalace.  On the evidence before me, Hollander (and all other employees) were made aware well before Hollander’s employment ended that there would be an annual reconciliation of vacation days taken and vacation days earned.  It cannot be said that she was lulled into thinking that the overpayment would not be recovered, which is a consideration that seems to have affected the decisions in Modern Niagara and Hillis, and which also finds currency in the comment in MenuPalace that the reconciliation of the overpayment must occur “within a reasonable time”.   I find that the Employer here was permitted recover the overpayment it had made to Hollander, and did not require her written authorization to do so.  On the basis of the same reasoning, it was also permitted to recover the overpayment it had made to Hollander in respect of paid sick leave, and did not require her authorization to do so.

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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.

Back to Basics: Is this contract enforceable?

Having yesterday posted about why you should use an employment contract, it's worth noting that there are a lot of ways to go wrong when drafting or executing an employment contract.  In addition to making sure that the terms of restrictive covenants are enforceable, there are issues that can invalidate termination clauses or even entire written contracts.  This is not an exhaustive treatment of the subject, but just some of the red flags.

(1)  Lack of Consideration

In law, a contract requires "consideration" - something of value flowing from each party in exchange for the promises of the other.  Now, you might think that, in an employment relationship, consideration is easy.  The employee gives the employer his labour; the employer reciprocates by giving the employee a paying job.

Not so much.

Oh yes, in theory, that's fine.  The challenge arises, however, when the employee already has the job, whether they've just recently created an oral contract or the employee has been there for 20+ years.  Because when the employer puts a contract to an existing employee, unless there is "fresh consideration" in the contract - something they're getting now that they weren't getting before - even the signed contract is, in law, just a meaningless piece of paper for lack of consideration.

It's quite common for a written contract to be put to an employee after they've already started in the job, and accordingly to be of no force and effect.  However, the difficulties are more onerous than that: even having the employee sign on day 1 or earlier doesn't necessarily get you around the consideration problem.  An agreement that is capable of forming a contract (i.e. with consideration and sufficient certainty as to its terms) is formed simply by offer and acceptance.  So there are cases, such as Alishah v. 1582557 Ontario Ltd., in which the employer offered a position, the employee accepted it, and the contract that was subsequently, though still before the start date, put to the employee and was signed was unenforceable.  (In that case, Alishah had quit his previous job after getting the job offer but before getting the contract.  That kind of reliance isn't strictly necessary, but is strong evidence of the existence of a contract.)

What about the employer argument that "Well, I didn't fire the person, as I would have had he refused to sign the contract."  Isn't that consideration?  The Ontario Court of Appeal has wrestled with this question a few times.  In the 2001 Techform decision, the Court found that, where the employer has at least tacitly promised to forbear from exercising its right to terminate the employee for a reasonable period of time, that constitutes consideration.  However, in the subsequent Hobbs v. TDI Canada Ltd. and Braiden v. La-Z-Boy Canada Limited cases, the Court construed that decision very narrowly.  It isn't enough that, in hindsight, the employer didn't fire the employee for a time after the signing of the contract, but rather it is necessary that the employer make a promise in advance not to fire for a reasonable period of time.

So what should an employer do?  With new hires, never communicate an offer without making it clear that the offer is subject to them accepting the terms of the written contract.  The best way is to make sure that the offer is in writing, with the contractual terms appended.  It's okay to call and say "We're sending you an offer with a written contract."  It is not okay to call and say "The job's yours if you want it" and then to unexpectedly send them the contract afterward.

With existing employees, give them something.  It doesn't have to be much - a small raise, a token signing bonus, even a peppercorn would do.  That said, it is theoretically possible that, with nominal consideration depriving the employee of substantial rights, there may be an argument to be made that the contract is 'unconscionable'.

(2)  Statutory Non-Compliance

If the termination clause does not adhere to the minimums under the Employment Standards Act, 2000 (again, speaking of Provincially-regulated businesses in Ontario), it is void.  If it's going to be a fixed amount of notice that doesn't change over time, it has to match or exceed the highest statutory minimum that might arise (i.e. 8 weeks).  If there's a formula, it has to match or exceed the statutory minimum in every instance.

Indeed, I think it's best to key the language to the statute directly, but even then you have to be careful:  In the British Columbia case of Waddell v. CINTAS Corporation, the employee had started employment in Ontario and his contract tied his entitlements to the Ontario ESA...then he transferred to B.C., where he worked until the termination of his employment.  The B.C. minimum entitlements are defined slightly differently from Ontario's and in some instances may be greater.  Thus, keying the entitlements of a now-B.C. employee to Ontario's statutory minimums had the result that the provision was void.

Conversely, in another B.C. case, Boule v. Ericatel Ltd., language keying the entitlement to "the applicable provincial law" was found too vague to be enforceable.  These are tricky, which is why it's very prudent to hire a lawyer with employment law expertise to draft your employment contracts.

(3)  The "Substratum" Argument

This is a less common issue (and becoming less so), but far easier to deal with.  Picture this classic scenario, where a person who started off in the mail room rose through the ranks to eventually become an executive.  Now imagine that, when starting in the mail room, he signed a contract with minimalistic entitlements.  The substratum argument is that the character of the employment has changed so much over the course of the relationship that the parties can no longer be held to the original contract; the parties could not have reasonably expected when signing the contract for a mail room assistant that it would apply to an executive.

But, as I said, it's easy to deal with:  Every time a person gets promoted, they should sign a new contract.  It should be made into a practice.  Of course, keep in mind the tips above about fresh consideration, but it shouldn't be too difficult since the promotion (and raise that would usually accompany it) would constitute fresh consideration.

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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.

Back to Basics: Why should we use an employment contract?

Most sophisticated employers use (or should use) written contracts for their employees.  The advantages are myriad, in terms of setting out expectations for how the employment relationship should move forward, including remuneration, yet the most significant advantages arise upon termination of the employment relationship.

Termination by the Employee

This is a minor point, but not unimportant.  Many employees wrongly think that 2 weeks notice of resignation is just a courtesy.  Only in certain narrow circumstances is it statutorily required in Ontario, but under common law an employee must give "reasonable notice" of resignation.  That's contextually based, and not the subject of much case law, but it's safe to say that 2 weeks isn't always the magic number.  (If you have a great deal of responsibility, and you expect the employer to need time to assign your duties elsewhere, you might consider giving more notice.)

So the advantages of having a clause addressing this in the contract are two-fold:  Firstly, it tells the employee in no uncertain terms that they are, in fact, required to give notice, rebutting the myth that they can leave at will if they want to.  Secondly, it determines how much notice is required.  If the employer thinks that 4 weeks is necessary to make the transition, 4 weeks notice can be required.  Or longer, in the right case.  Employees seldom feel very empowered to negotiate the terms of an employment contract, and even less so as regards termination clauses.  (See this earlier entry regarding negotiating termination clauses.)

That being said, insisting on too much notice may send the wrong message to the employee.  I have seen contracts requiring employees to give three months of notice, but in one of those contexts (being a contract that was being put to me personally by a prospective employer) it was coupled with other red flags that told me that the firm was having difficulties with employee retention, which factored significantly into me not accepting the offer.

Termination by the Employer

This is, by a large margin, the most common issue to arise from employment contracts.  As I discussed in detail in this recent entry, when terminating an employment relationship without just cause, an employer is likewise obligated to give notice or pay in lieu thereof.  There's the statutory minimum, which creates a floor for most employees, yet the implied term requiring an employer to give "reasonable notice" usually makes for much more significant liabilities.

So, once again, there are two advantages to the termination clause:  It can be used to reduce liabilities to as low as the statutory minimum, and it also provides some degree of certainty.  Calculating "reasonable notice" is not an exact science, and an employer shouldn't be surprised if the employee's lawyer is demanding a significantly higher amount of money than the employer's own lawyer opines they should need to pay.  Just negotiating a settlement is going to drive up legal fees, and it gets even more expensive if it has to go to litigation.

As well, there are related advantages in terms of limiting the employer's responsibilities.  When setting out the terms of the remuneration package in the written contract, Courts have held in some circumstances that terms requiring 'active employment' as of certain dates for bonus eligibility can be enforceable.

Post-Employment Obligations

A written contract at the outset of employment is really the best time to set out any restrictive covenants.  If you're going to require non-solicitation or non-competition clauses, that's the place for them.  Of course, there are certain requirements for restrictive covenants to be enforceable (which I previously discussed here).

Tomorrow, how to make a written employment contract binding.

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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.

Back to Basics: I've been fired for no reason! How can they do that?

Occasionally in this blog, I start talking about things like reasonable notice in fairly cursory ways.  And judging from the search terms people use to find this blog, I'm fairly confident that many of my readers don't need any further elaboration of the concept.

However, it's also clear that some of my readers are not experienced in employment law, and are looking for information about the legal framework surrounding dismissal.  So let's back up for a moment and talk about what a dismissed employee, without just cause, is entitled to.

As a beginning qualification, let's be clear that I'm talking here about the non-union context.  In union contexts, not-for-cause terminations are usually limited to layoffs, and have a different framework.

Practicing employment law, it is not at all uncommon to get a call from a prospective client who says, outraged, "They fired me without any reason at all!  They even said they didn't have a reason!  How can they do that?"

People like to think that they have job security, that they can't get fired unless they do something wrong.  That's not true at all; without just cause, an employee can be fired on notice (or pay in lieu thereof).  I would say that upwards of 85% of the terminated employees I have seen were terminated on a not-for-cause basis.  (It's also true that the *vast* majority of not-for-cause terminations involve some employer dissatisfaction with the employee - poor productivity, poor chemistry with co-workers or managers, misconduct that the employer isn't confident rises to the level of "just cause"...it is exceedingly rare to have a purely economic decision for a layoff.  But that doesn't really matter to the analysis.)

Employment as Contract

Even when there isn't a formal written contract, the provision of service in exchange for wages is still contractual in nature.  Let's suppose I hire you to work for me, and all I tell you is the job title, a brief summary of the job duties, your wages, your hours, and where you have to go to report for work in the morning.

That's all the important stuff, right?  That's enough for you to accept the job, show up for work, and start doing the job.  But what about other matters?  The tools that will be made available to you to do your job?  The extent of contact you're going to have with clients, or the extent to which you will be supervised in your duties?  What about vacation time?  Overtime?  Breaks?  And, importantly for our purposes, how does either party terminate the contract?

These things are defined by a couple of different sources.  So let's start with the most authoritative source, the Employment Standards Act, 2000.  This is the Provincial statute that applies to employment relationships within the jurisdiction of the Province - some employers are Federally regulated, and they fall under a different statute (the Canada Labour Code), but the principles are largely similar.

The Employment Standards Act, 2000

The ESA sets minimum entitlements for employees.  There are provisions in the ESA that state that any contractual provision giving more than the minimum to the employee is enforceable, but any contractual provision giving less to the employee than the minimum is void.  The easy example to understand is "minimum wage".  If I offer to pay you $8/hour, yet the minimum wage under the circumstances is $10.25/hour, then you could take the job, then insist on $10.25 even notwithstanding that you agreed to $8.

So the ESA sets minimums for paid vacation, unpaid lunches, overtime pay.  It also creates entitlements for employees in the sense of creating maximum numbers of hours that can be worked over a period of time.  And it sets a minimum standard for notice of termination and severance pay, based on a formula taking into account length of service and, in some cases, the size of the employer's Ontario operations.  (See below.)  Note that the Regulations under the ESA create a number of exemptions to these entitlements.

The Common Law

Where the government hasn't enacted a law speaking to a point (i.e. in the ESA), and where the parties haven't reached a binding contract in respect of the point, the point is governed by the common law.  Over centuries, judges have looked at fact-patterns and decided the most just resolution.  These cases become precedents, and subsequent cases are likely to be determined similarly.

So the Courts have looked at a lot of employment relationships, and they have read in certain "implied" terms, and in particular an implied term that neither party will terminate the employment relationship without giving the other party "reasonable notice".  (While the employee is, strictly speaking, required to give reasonable notice, it's relatively rare that there is any litigation flowing from this, and what's "reasonable" for the employee to have to give is very different from the "reasonable" notice required of the employer.  So from here on in, when I discuss "reasonable notice", it's the notice required of the employer.

Let's be clear that the common law can be displaced by a binding contract.  So if there's an enforceable termination clause in the contract (see my discussion of the ESA above...there are other pitfalls to enforceability as well), then that will have replaced the "implied" term with an express term, and there will be no entitlement to "reasonable notice" as defined by common law.

Reasonable notice of termination is defined with reference to several factors.  The usual four (though they are not an exhaustive list) are age, length of service, character of employment, and availability of replacement employment.  So a young person who has spent a few months in a front-line service position has fairly minimal entitlements, whereas an older person who was fired from a CEO position held for many years will likely have significant entitlements.  Either way, common law reasonable notice entitlements are usually measured in months (seldom exceeding 2 years).

One more important point is that common law notice entitlements are subject to an obligation to "mitigate".  Suppose an employee is terminated without cause and without notice, and has a reasonable notice period of 12 months.  During the notional notice period, the employee is obligated to try to find equivalent replacement employment.  (Failing to take reasonable efforts can result in a loss of entitlements.)  Now suppose that the employee obtains a new position at 90% the pay rate after 4 months.  He is entitled only to be 'topped up' to what he would have received over the whole notice period.  (So the first four months pay in full, and then over the remaining 8 months he gets only the 10% extra that he would have gotten in his old job.)

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer

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Ontario's Employment Standards Act, 2000:  Minimum entitlements on termination for most employees

The first entitlement (again, provided no exemption applies) is notice of termination.  This minimum entitlement can be satisfied by either actual notice or pay in lieu thereof - they can tell you, "Your employment is terminated effective x weeks from now", or they can say "Your employment is terminated effective immediately, but we will continue paying you for x weeks."

This is entirely based on length of service:

Nil to 3 months of service:  No minimum entitlement.
3 months of service to 1 year of service:  1 week notice
1 year to 3 years of service:  2 weeks notice
3 years to 4 years of service:  3 weeks notice
4 years to 5 years of service:  4 weeks notice
5 years to 6 years of service:  5 weeks notice
6 years to 7 years of service:  6 weeks notice
7 years to 8 years of service:  7 weeks notice
8 years of service and up:  8 weeks notice.

(For simplicity, I've abbreviated the language.  In truth, 2 weeks notice is what you get if you have 1 year of service but less than 3 years of service, meaning that if you're fired without cause on your 3rd anniversary, you get three weeks notice.)

The second entitlement, in some cases, is to severance pay.  This cannot be satisfied by notice, but must be provided by way of pay, though it too is measured in terms of number of weeks, meaning that entitled employees must be paid the equivalent of x weeks pay, in addition to their notice entitlements.

Eligibility for severance entitlement, again subject to various exemptions in the regulations, requires two criteria be met:

(1)  The employee must have five years of service or more, and
(2)  The employer's Ontario payroll must be in excess of $2.5 million, OR the severance is part of a mass layoff where the employer is terminating all or part of its business at an establishment resulting in 50 or more layoffs in a six month period.

The quantum of severance pay is one week's pay per completed year of service, up to a maximum of 26 weeks.

Contractual Termination Clauses

One of the best pieces of advice for employers is to include a termination provision in any employment contract. Specifically what the calculation of the notice period must be set out in the provision itself. There are a few rules for making them enforceable: They can't, in any circumstance, provide for notice less than the guaranteed statutory minimum, and if signed after the formation of the initial contract there must be "fresh consideration".

They can be keyed directly to the Provincial statutory minimum, but even then a large employer has to be cautious: In one case where an employee was transferred from Ontario to B.C., and his contract referred to the Ontario Employment Standards Act, the provision was found void in B.C. because in some circumstances Ontario's minimums are less than B.C.'s.

The advantage of these clauses is two-fold for an employer: Firstly, they usually reduce liability. Common law "reasonable notice", which can be displaced by these clauses, is often quite significant. Secondly, regardless of how much contractual notice is provided for, there is an advantage to having certainty: If the clause is enforceable, then how much is owed is simple arithmetic, and litigation is likely unnecessary.

I recently had a reader find one of my blogs through a search to the effect of "Is an ESA termination clause reasonable for a management position?" Which is an interesting question, and I'd like to discuss it.

The reasonableness of a clause isn't really a legal question. It's hard to argue unconscionability of notice clauses, given that there's a statutory standard set. That being said, there is a line of jurisprudence saying that the termination provisions set for an employee when he signed on with the mail room probably weren't intended to continue through to his rise through the ranks to the executive level. (There are ways of dealing with that scenario, as well.)

Rather, the reasonableness is a practical market question. Does the employee have the bargaining power to go back and say "Please change this"? If the employee does so, will the employer just say "No, forget it, we're withdrawing the offer."

This is the simple reality of employment contracts: The employer often has an immense amount of bargaining power at hire. Canadian law limits the employer's bargaining power after the hire, limiting the employer's ability to change the terms down the road, but the initial contract...well, freedom of contract goes a long way. Few employees will be in a position to dictate the terms of their employment.

The notice provision is particularly difficult to negotiate, because for the employee it means going back and effectively saying "In the event that I fail to prove to you just how invaluable I am, I want more significant entitlements." Still, sophisticated commercial actors should be aware that the notice provision is a reality that needs to be addressed, and that there are plenty of different circumstances that could lead to it being triggered, many of them not being performance related at all. So for an employee taking a high-level position, it's fair ground to bargain the notice provision.

Employees: Remember, it's not about "getting fired", it's about "job security". And that's a key phrase especially for employees leaving existing employment situations - it's pretty natural to want some assurances of job security, and an ESA termination provision is no assurance of job security at all.

It's also worth noting that there are management positions and management positions. I've had employee clients from different organizations with almost identical managerial titles, one of whom supervised from zero to four employees, and the other of whom routinely supervised in excess of fifty employees.

So there's no "one size fits all", and it's impossible to say in general whether or not a specific clause is reasonable. Suffice it to say, however, that if you accept it, you could well be stuck with it.

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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.

Firing for Cause, but Hedging Bets

In light of the Oosterbosch case hitting the media again (which I discussed to some extent in this post), this time on the Star's Moneyville blog, another comment on it seems appropriate.

First, though, some background.

It has long been the law in Ontario that an employer who provides any amount of pay in lieu of notice of termination is blocked from later arguing that the termination was for just cause.

In 1964, in a decision upheld by the Court of Appeal (in Tracey v. Swansea Construction Co. Ltd., [1965] 1 O.R. 203), Justice Thompson held as follows:

The simple position appears to me to be this. The defendant desired to dismiss the plaintiff. If there was misconduct or default sufficient to justify discharge it had one of two courses open to it. It could have summarily dismissed for cause or it could have decided to overlook, waive or condone the misconduct and terminate upon notice, or payment in lieu of notice, in accordance with the provision of the contract for termination implied by law. It could not do both, for one would operate as a repudiation of the contract for a breach thereof, and the other, conversely, would operate as an affirmation of the contract and the adoption of its provisions for termination. The fact that the defendant was in error as to the length of, or sufficiency of, the notice given could in no way alter the effect of its intention as expressed by its conduct.

The legal jargon aside, the practical effect is that an employer who says "Yeah, there's misconduct, but it'll be easier to make this go away if we put money on the table" will not generally be able to retract that position if the employee isn't happy with 'a bit' of money.

Considering that (a) many employers don't realize that employees might have entitlements in excess of the statutory minimums; (b) the threshold for just cause is often very high; (c) employers can get hit with moral damages for alleging cause improperly and/or failing to promptly pay the statutory minimums; and (d) the doctrine of 'near cause' - reduced notice periods due to misconduct - has been thoroughly rejected in Canada (though there is still some judicial murmuring from respected sources otherwise), this Swansea doctrine put employers in a very difficult position at the point of termination. There were a lot of reasons to pay the statutory notice except in the clearest cases of just cause, and doing so meant they'd be on the hook for the whole reasonable notice cost.

But now we have the Oosterbosch case which, if it holds up, seems to undermine Swansea. Recall in Oosterbosch that we have an employee who was found to be overly careless justifying summary dismissal, but that the misconduct wasn't wilful so as to disentitle him to the $25,000 in statutory minimums. It seems pretty employee-friendly, but when you turn it around you realize that employers can now use the Oosterbosch decision as a precedent for the proposition that there is nothing inconsistent with terminating for just cause and still having paid statutory minimums. Directly contradicts Swansea, and could end the doctrine that has given employees a great deal of bargaining power for nearly fifty years.

This turnabout isn't uncommon in employment law. Take, for example, the constructive dismissal doctrine that says that, under some circumstances, a constructively dismissed employee might reasonably be expected to stay in the job to mitigate his or her losses (see, for example, Mifsud). Seems pretty employer-friendly, aye? Enter Russo v. Kerr, in which an employee took a significant pay cut, and successfully sued to be topped up through the reasonable notice period while still working for the employer.

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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.