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By Toronto Employment Lawyer, Karen Zvulony

One of the best, and most cost-effective ways an employer can protect itself from paying costly severance and termination packages is by having a properly drafted and executed written employment agreement with its Employees that limits and outlines how much severance will be payable upon termination. As simple as it sounds, ensuring that enforceable employment agreements are in place is key to limiting an employer’s liability.

Basic Requirements For an Employment Agreement

From the employers perspective, it is crucial that any employment agreement must comply with the minimum standards set forth in the Ontario Employment Standards Act.  Moreover, like all valid contracts, an employment agreement must use clear and concise language.  The agreement should be agreed to before the employee starts working to ensure that there is valid consideration for the employee signing the agreement. A change in position or promotion may necessitate a new agreement being signed.

In addition to limiting the amount of severance payable on termination, employment agreements may also address other issues such as:

  • changes in responsibilities or reporting structure,
  • when (and if) an employer can reduce an employee’s salary
  • whether an employee can be relocated;
  • and any post-employment obligations (such as non-solicitation and non competition).

An employment agreement can also ensure that are no misunderstandings with the employee regarding the terms and conditions of the employment and that no misrepresentations were made to the employee prior to the acceptance of the employment that they employee relied on or that they can claim to have relied on later on.

On the practical side, clearly outlining the expectations of the employment relationship at the very beginning will likely save headaches down the line. No one likes to be caught by surprise.

Don’t Leave Your Business Vulnerable

In my experience of assisting employees, I have come across many poorly drafted employment agreements that have been used against the employer.  It never ceases to amaze me, how many employers neglect to properly protect themselves.

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Karen Zvulony, Employment Lawyer Karen Zvulony was recently cited by the Nova Scotia Labour Standards Tribunal as an authority on employment law in the case of MacDonald v. Quality Cameras & Computers Limited, 2011 NSLST 11 (CanLII).  The case revolved around an issue of constructive dismissal.  In determining the law of constructive dismissal the Tribunal referred to Karen’s popular article called What is Constructive Dismissal? The Tribunal recognized her as a legal authority and agreed with her legal conclusions.

If you believe that you have been constructively dismissed or have an employment law question then please do not hesitate to contact Karen Zvulony for an initial consultation.

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Karen Zvulony, Employment LawyerBy Karen Zvulony, Toronto Employment Lawyer

Generally, a Court will award a terminated employee damages for wrongful dismissal based on their years of service with their most recent employer.  Past service with a previous employer is generally not a factor that is taken into consideration by the Courts. An important exception to this rule is when the terminated employee was induced (i.e recruited or “head-hunted”) to leave  secure long-term employment by their most recent employer.

An Example of Inducement

For example, If an employee was securely employed with  Company A for ten years and was not seeking or looking for other employment.  One day, this employee receives an unsolicited call from a recruiter working for Company B who advises the employee that there is a great opportunity to work with Company B and urges  him to come for an interview. The employee attends the interview and is blown away by the opportunities and promises Company B makes to him. After the interview, Company B makes the employee an offer of employment and continues to actively pursue him until he agrees to accept the position. The employee ultimately resigns from Company A and commences work with Company B shortly thereafter.  After one year of employment, the employee is terminated from Company B.

Based on the facts of the above hypothetical situation, a Court would likely find that the Employee was induced or recruited to leave his secure and long-term employment by Company B and the court would calculate his severance based on his combined service with both employers.

In order for an inducement argument to be successful, the evidence must typically demonstrate that the employee was not looking for other work at the time that they were contacted by the new employer. Also, the weight given to the inducement typically lessons the longer the employee remains employed with the new employer.  In other words, a Court is more likely to give more weight to inducement in the calculation of damages for wrongful dismissal or lack of reasonable notice if the employee was terminated shortly after starting employment with the new employer (typically less than 2 years), as opposed to if the employee remained with the new employer for a longer period.

Other factors the Courts consider include: the reasonable expectations of the parties, if there were assurances of long-term employment, whether the employee did due diligence before accepting the position by conducting their own inquiry into the new employer and whether the discussions between the employer and hiree amounted to more than the persuasion or the normal “courtship” that occurs between an employer and a prospective hiree. An employment agreement may also be a factor depending on its terms.

Keep in mind that the likelihood for success of an inducement argument and the weight given to it  will vary based on the facts of a particular case and is left to the discretion of the Court.  Not all inducements are of equal weight when determining the length of the reasonable notice period. Typically, no two situations are alike and the determination of inducement is very fact specific.  Terminated employees where inducement may be a factor are urged to seek legal advice.

Terminated? Should you sign your Termination Package?

by Karen Zvulony, Toronto Employment Lawyer

Karen Zvulony, Employment LawyerHave you been terminated from your job and offered a severance package? Are you being asked to sign a termination agreement, Final Release, or severance agreement? Are you concerned whether your termination package is fair? I have compiled this List of Things to Look for in a Severance Package and What Terminated Employees need to Know to assist them in making the difficult decision of whether to sign. The information below is general information and should not be relied on legal advice.  I am happy to review your severance package if you would like personalized legal advice.

1. DO NOT PANIC

Employers will often provide terminated employees with only a few days to review the severance package offered and state that if the employee does not sign the offer by the unrealistic deadline unilaterally imposed by the employer, the offer will be null and void. This tight deadline typically causes the employee much anxiety and may force an employee to settle for less than they are legally entitled to. This is what the employer wants.

Do not be pressured to sign off on a severance package without having adequate time to consider the offer and have it reviewed by an employment lawyer.

2. HAVE THE SEVERANCE PACKAGE REVIEWED BY A PROFESSIONAL

The severance package should be reviewed by a lawyer that regularly deals with employment law.

It is crucial that the package be reviewed by an employment lawyer to ensure that the severance package comply with the minimum standards set forth in the Employment Standards Act or Canada Labour Code (depending on which one is applicable) and to ensure that the amount of severance being offered is consistent with the employee’s common law entitlements. The notice periods under the common law are generally longer than by statute and is determined based on factors such as the employee’s age, length of employment, the character of employment and the availability of similar employment.

The employment lawyer will also consider other factors, such as if the employee was recruited to leave secure employment, if the package is based on the employee’s total compensation and any other relevant factors.

3. CONSIDER YOUR OPTIONS

Generally, an employee will have the option to accept the offer as is, try and negotiate with their employer for a better package, make a claim to the labour board or a claim for unjust dismissal (if applicable) or sue their employer in court for wrongful dismissal.  An employment lawyer is in the best position to advise the employee which option is best for them given their particular situation and provide a cost/benefit analysis of each option.

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What is Reasonable Notice of Termination of Employment?

by Karen Zvulony

The amount of notice an employee is entitled to when fired from a job without just cause is dependent on a number of factors. The Ontario Employment Standards Act provides minimum notice periods. Notice periods under the common law are usually longer.

Notice Under The Ontario Employment Standards Act

The Ontario Employment Standards Act provides the minimum notice period that an employee is entitled to based on the length of employment, the Ontario Employment Standards Act also allows for pay instead of notice and, if applicable, severance pay.

Below is an outline of the applicable sections of the Employment Standards Act.

Under to section 57 of the Ontario Employment Standards Act, an employee is entitled to the following notice periods:

(a) at least one week before the termination, if the employee’s period of employment is less than one year;
(b) at least two weeks before the termination, if the employee’s period of employment is one year or more and fewer than three years;
(c) at least three weeks before the termination, if the employee’s period of employment is three years or more and fewer than four years;
(d) at least four weeks before the termination, if the employee’s period of employment is four years or more and fewer than five years;
(e) at least five weeks before the termination, if the employee’s period of employment is five years or more and fewer than six years;
(f) at least six weeks before the termination, if the employee’s period of employment is six years or more and fewer than seven years;
(g) at least seven weeks before the termination, if the employee’s period of employment is seven years or more and fewer than eight years; or
(h) at least eight weeks before the termination, if the employee’s period of employment is eight years or more. 2000, c. 41, s. 57.

Pay Instead of Notice Period

According to section 61(1) of the Ontario Employment Standards Act an employer may terminate the employment of an employee without notice or with less notice than is required under if the employer,
(a) pays to the employee termination pay in a lump sum equal to the amount the employee would have been entitled to receive under section 60 had notice been given in accordance with that section; and
(b) continues to make whatever benefit plan contributions would be required to be made in order to maintain the benefits to which the employee would have been entitled had he or she continued to be employed during the period of notice that he or she would otherwise have been entitled to receive. 2000, c. 41, s. 61 (1); 2001, c. 9, Sched. I, s. 1 (14).

Severance of Employment

What constitutes severance?

According to section 63(1) of the Ontario Employment Standards Act, An employer severs the employment of an employee if,
(a) the employer dismisses the employee or otherwise refuses or is unable to continue employing the employee;
(b) the employer constructively dismisses the employee and the employee resigns from his or her employment in response within a reasonable period;
(c) the employer lays the employee off for 35 weeks or more in any period of 52 consecutive weeks;
(d) the employer lays the employee off because of a permanent discontinuance of all of the employer’s business at an establishment; or
(e) the employer gives the employee notice of termination in accordance with section 57 or 58, the employee gives the employer written notice at least two weeks before resigning and the employee’s notice of resignation is to take effect during the statutory notice period. 2000, c. 41, s. 63 (1); 2002, c. 18, Sched. J, s. 3 (24).

According to section 64 (1) of the Ontario Employment Standards Act, an employee is entitled to severance pay if:
An employer who severs an employment relationship with an employee shall pay severance pay to the employee if the employee was employed by the employer for five years or more and,
(a) the severance occurred because of a permanent discontinuance of all or part of the employer’s business at an establishment and the employee is one of 50 or more employees who have their employment relationship severed within a six-month period as a result; or
(b) the employer has a payroll of $2.5 million or more. 2000, c. 41, s. 64 (1).

At the very least, an employee is entitled to the notice periods, vacation pay or pay instead of notice and, if applicable, severance pay set out in the Ontario Employment Standards Act.

Please note that if your employment is covered by a collective agreement (i.e. part of a union) you cannot make a complaint through the Employment Standards Act, you must bring your claim to grievance arbitration.

Common Law Notice Period

An employee may be entitled to, and is often the case, a notice period beyond the statutory minimum, depending on a number of factors, which include:

– length of employment
– training and experience required to fill the position
– responsibility attached to the position.
– employee’s relevant education, training and experience; and
– employee’s age.

In addition to compensation in lieu of reasonable notice, an employer may be obliged to continue to provide an employee with medical and dental benefits and any other benefits that they received prior to their dismissal for the duration of the notice period.

In the event that an employer has made no offer to an employee or the employee does not agree with the terms offered, an employee has the option of pursuing a claim under the Employment Standards Act or through the civil courts. They cannot elect to pursue a remedy under both. If an employee elects to pursue a remedy under the Employment Standards Act, any award will be limited to the maximum allowed under the Act.

 

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What is Just Cause For Dismissal of Employment?

by Karen Zvulony

Just Cause is a legal term that means an employer is justified in terminating an employee without providing reasonable notice or payment instead of the notice. There is no hard and fast method of spotting what will constitute just cause. Rather, each case is unique and must be determined with attention to the particular facts.

When determining whether there is Just Cause for dismissal without notice in a particular case, courts will look at answering the following two questions: (1) whether the employee misconduct may be proven; and (2) whether the nature and degree of the misconduct is sufficient to dismiss the employee without notice. If the answer to both questions is yes, then there will be Just Cause for the dismissal; however, if an answer to either question is no, then the employer will be obligated to give reasonable notice of termination or payment instead of the notice.

How can you tell whether the nature and degree of the misconduct is sufficient to dismiss the employee without notice? Courts will typically look at a number of factors. First, courts look at whether the employee’s misconduct caused a breakdown in the employment relationship, by either violating an essential condition of the employment contract, or destroying the employer’s inherent faith in the employee. If the misconduct resulted in any of these developments, then there is Just Cause.

Second, courts look at how senior the employee is in the employer organization. The more senior an employee is, the more serious the conduct will be considered to be.

Third, courts look to see whether the employer gave a warning before termination. Where there was no warning before the dismissal that such misconduct could result in termination, except in the most serious of cases, the employer will have a harder time proving Just Cause.

Lastly, courts look at whether the employee’s misconduct was tolerated before the dismissal. Where the misconduct occurred in the past, and the employer said nothing about it, the employer would have to have given a warning that such misconduct will not be tolerated before dismissing the employee without notice. These factors are used as guidelines in answering the second question, mentioned above.

The method of determining Just Cause by asking the two questions outlined above was established by the Supreme Court of Canada in McKinley v. BC Tel, a case involving dishonesty as grounds cited for Just Cause. In this case, an employee experienced high blood pressure resulting from hypertension, and saw a physician about his condition. The physician prescribed medication that would allow the employee to continue working as before, however he recommended that an option might be to seek a less demanding position at work. The employee asked his employer to be transferred to a less demanding position, without informing management of his ability to continue working in the same position with the prescribed medication. The employee was dismissed without notice, after the employer became aware of the employee’s capabilities while on the prescription.

The court came to the conclusion that there was no Just Cause to dismiss the employee, because the employee’s dishonesty was not of a degree sufficient to justify dismissal without notice.

Although McKinley specifically involved dishonesty as a ground for Just Cause, the method outlined above may be applied to all categories of employee misconduct. The determination is the same, involving an examination of the facts in the case, and answering the two broad questions mentioned above.

Some Examples of Just Cause

Ontario case law has pointed to numerous categories of misconduct forming grounds for Just Cause . The following are some examples:

Dishonesty

The category of dishonesty encompasses misconduct that indicates an employee’s disregard for the employer’s inherent trust in the employee. Fraud and theft are examples of dishonesty.

Not every act of dishonesty will give rise to Just Cause . For example, in Geluch v. Rosedale Golf Assn., Ltd., the court held that an employee’s act of taking food and wine home from the golf club he managed without paying for it was not serious enough to warrant dismissal without notice, because the employee’s job involved sampling food and improving its quality for the golf club. Also, where an employer fails to prove an employee’s intention to steal, dismissal without notice will be considered too harsh a response to the misconduct. (See Kidd v. Hudson’s Bay Co., where a manager of industrial engineering was terminated following an incident of alleged shoplifting).

On the other hand, where an employee intentionally covers up for a shortage in the employer’s inventory, and encourages subordinate employees to do the same, as was the case in Alvi v. YM Inc. (Sales) (c.o.b. Stitches), the employer will have had Just Cause to dismiss the employee without notice. In Alvi, the court held that the employee’s instructions to his staff to cover up a shortage in leather jacket inventory had amounted to a fundamental break down of the employer’s inherent trust in the employee. Likewise, where an employee repeatedly lies about leaving during a work shift and only admits to it after being caught leaving on surveillance camera, the dishonesty will form sufficient grounds for Just Cause. (See Noun v. Sterling Trucks, a Division of Freightliner Ltd.)

Breach of Trust

A breach of trust is as it sounds: when someone in a position of trust violates the trust invested by someone else in some way. In an employment context, it typically occurs where the employee exhibits misconduct that promotes his or her interests instead of the employer’s interests. Where the employee’s misconduct was motivated by a conflict of interests, the inherent trust placed in the employee will usually have been destroyed. However, attention must be paid to the particular facts to tell for sure if a breach of trust has taken place.

In Ng v. Canadian Imperial Bank of Commerce, a financial advisor at the CIBC, responsible for securing client loans, mortgages and other investment portfolios, frequently cashed cheques on behalf of her husband into her account and gave him money withdrawn from the bank, without waiting the required time for clearance. The advisor also acted as her husband’s personal banker at a time during which she knew that he had a gambling problem, while using the bank’s money to help him. The court said that the decisions made by the employee while doing favours for her husband were within her understanding that they violated bank rules and procedures; further, the employee’s misconduct violated an essential term of her employment contract, and therefore there was Just Cause for termination.

Similarly, in Dowling v. Ontario (Workplace Safety and Insurance Board), a manager with the Workplace Safety and Insurance Board used his position to obtain financial benefits. He lowered insurance rates for certain clients in exchange for the purchase of computers for personal use at their wholesale price. In addition, he entered into secret arrangements with select clients, whereby he lowered the cost of insurance and split any amounts made as profit over and above the regular price with them. The employer’s Code of Conduct expressly forbade the acceptance of gifts or monetary reward by an employee for a business decision. The court found Just Cause for dismissal.

Insubordination

Insubordination is a kind of misconduct whereby the employee refuses to recognize and submit to the authority of the employer, and refuses to comply with the employer’s clear instructions, policies and procedures without reasonable excuse. Usually, the courts will not allow an employer to fire an employee for a single, minor incident of insubordination, unless it was of some significance.

Daniels v. Canadian Gift & Tableware Assn. was a case involving numerous and extreme instances of insubordination. The employee, an assistant editor and co-publisher of a major consumer gift trade publication, repeatedly exhibited hostility toward her direct supervisor, refused to comply with her supervisor’s instructions, and treated her assistant abusively. The employee also challenged her supervisor’s authority on numerous occasions, going over her head to speak with board members any time she and her supervisor disagreed. The court said that the employer had Just Cause to dismiss the employee without notice. The employee had constantly undermined the reporting structure and had considered herself an equal with her supervisor, and had behaved as though she had the authority to make the decisions she did, even though she had no such authority. Despite several warnings that this kind of conduct would not be tolerated in the workplace, the employee continued her campaign of insubordination. Just Cause was found in this case.

Just Cause was also found in Kontopidis v. Coventry Lane Automobiles, Ltd., where a manager at a body shop started being absent from work and did not account for his absences, despite explicit instructions from the employer to notify management when he was not going to be at work. The employee’s absence affected the productivity of the body shop, as he failed to train a new manager that had been hired. The employee also removed automobiles from the body shop without explanation. The court said that the failure to comply with explicit instructions, together with the impact of the employee’s failure to notify management of repeated absence, amounted to conduct that warranted Just Cause for dismissal without notice.

Absenteeism

An employer would, in most cases, be expected to formally warn an employee before proceeding with outright dismissal under the ground of absenteeism. An employer could not justify firing an employee who was late on only one occasion. On the other hand, persistent lateness and absenteeism may justify dismissal if the employee was given adequate warnings and failed to correct this behavior and did not have a valid reason for the conduct. This was the case in Kontopidis, mentioned above: Because the employee was repeatedly absent from work and did not provide an explanation, the employer was justified in firing the employee without notice. This outcome was also the result because the employer had provided the employee with numerous warnings and written instructions, with which the employee repeatedly had refused to comply.

Incompetence

The category of incompetence encompasses an inability to perform basic work functions as required by the employer. To justify dismissing an employee without notice or payment instead of notice, the level of incompetence must “fall below an objective standard of reasonable competence” and therefore must be blatant. (See Matheson v. Matheson International Trucks Ltd., [1984] O.J. No. 306 (H.C.J.)), a case where the president and general manager of a truck dealer was dismissed for Just Cause after he failed to carry out basic accounting and financial management tasks, for which he was responsible.)

A lack of adequate skill by an employee who is doing his or her best does not typically permit dismissal. However, an employer will likely be justified in dismissing an employee if, after several warnings that the incompetence may lead to dismissal, the employee does not improve. In Matheson, the employee routinely ignored letters sent to him by the board of directors and was seldom able to give them the financial information they requested. His incompetence continued even after receiving failing grades in the employer’s formal evaluation. The court said that the employee would have had reason to know that his employment would end, given that he had received numerous warnings that his level of performance was unsatisfactory. Therefore, there had been Just Cause for his dismissal.

The court in Matheson also mentioned another kind of incompetence that may justify dismissal without notice and also without a warning: gross incompetence. Where the level of incompetence is extreme, an employer may abruptly dismiss the employee without providing notice or payment instead of the notice. The employer in such a case would have to prove a level of incompetence beyond that which would constitute grounds for Just Cause where a warning was given.

Misrepresentation at Time of Hiring

Misrepresentation at time of hiring occurs where an employee was hired on the basis of a skill s/he indicated s/he possesses, but in reality does not. The employee in such a case may be dismissed with Just Cause for misrepresenting the skill. For example, a person who represented that he can swim and was hired as a lifeguard may be dismissed for just cause after the employer discovers the employee’s lack of ability to swim.

Sexual Harassment

The Ontario Human Rights Code protects workers from sexual harassment. An allegation of sexual harassment, if substantiated, is Just Cause to dismiss an employee without notice or payment instead of notice. However, the allegation must be substantiated. Also, except in the most serious of cases involving sexual assault, an employer will have to prove that a warning system was put in place before summary dismissal is warranted. For serious allegations including theft, fraud and sexual assault, the employee must be given an opportunity to respond to the allegations before termination is warranted.

In the Geluch case mentioned above, the employee managed a golf club and had many staff members reporting to him, a few of whom were female. His staff complained of sexual harassment on various occasions, after he had made unwanted comments, and poked two women in the shoulder. The employee was only advised of the reasons for his dismissal four months after being terminated. The court said that the incidents did not amount to Just Cause.  Furthermore, the employee was not advised of the reasons for dismissal until four months following his termination, and therefore the employer was not justified in dismissing the employee without notice.

Cumulative Events Just Cause

Sometimes a court will not find that each act cited against an employee amounts on its own to Just Cause, however, when taken together, numerous incidents of misconduct will amount to cumulative Just Cause. In Daley v. Depco International, Inc., the employee had been employed for 13 years as an industrial operator. The employee exhibited numerous incidents of misconduct, involving fights, drunkenness on the job, incompetent work and behavior causing danger in the workplace. The employer maintained a disciplinary system and documented each incident of misconduct as well as all required disciplinary steps before dismissing the employee, including warnings. The court said that there was cumulative just case when looking at the nine incidents of misconduct together: the employee had demonstrated negligence when carrying out his duties as an operator; the employee had been absent from work, and had only notified management of his upcoming absence on few occasions; the employee’s behavior, on numerous incidents involving drunkenness, had caused workplace hazards. Therefore, the various incidents of misconduct, when observed together, formed sufficient grounds for Just Cause.

Conclusion

Just Cause means that an employer may terminate an employee without notice or payment instead of the notice. In order to justify terminating an employee without providing either of these, the kind of misconduct amounting to just cause will have to be of a serious nature that justifies dismissal without notice, having regard to the circumstances, and the two-part test outlined in the beginning of this article. The determination of Just Cause is very fact-driven, and will involve investigating all of the particular facts, with specific attention to various factors such as: the nature of the employee’s relationship with the employer; the relative seniority of the employee; the degree of trust invested in the employee; the nature of the misconduct; whether the employer warned the employee that the misconduct could lead to dismissal; and whether the misconduct was allowed in the past. If the employer has alleged Just Cause , then the employer will first have to prove the misconduct, and then establish that the misconduct in question was sufficient to result in dismissal without notice.

Employers should be alert to any acts of condonation of misconduct, as there will be no Just Cause to dismiss an employee for misconduct that was tolerated in the past without a subsequent warning that such misconduct could lead to dismissal. Therefore, an incident of misconduct that the employer let slide will not be capable on its own of forming grounds for Just Cause .

The information provided in this article is not applicable to unionized employees and may not apply to employees who work for a federally regulated employer. This article also does not provide an exhaustive list of the kinds of conduct that may be cited by an employer.

 

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Termination Clauses

by Karen Zvulony

What is a Termination Clause?

A termination clause is a statutory compliant clause in a written employment agreement that clearly specifies the amount of notice, or compensation in lieu of notice, an employer will provide an employee upon termination of the employment.

Why is it advisable to have a termination clause?

Every contract of employment has an implied term that, absent just cause, an employer will provide an employee with reasonable notice of termination or compensation in lieu of notice. The Employment Standards Act provides for the minimum notice periods (and severance, if applicable), based on an employee’s length of service, that every employer must provide its employees.   Notwithstanding this, an employee may be entitled to a notice period under the common law that is considerably longer than what is provided for in the Employment Standards Act.

The amount of reasonable notice an employee is entitled to under the common law is based on a number of factors which include: the employee’s age, length of service, character of employment, and availability of similar employment. As such, an employer has the potential to be exposed to giving much longer notice periods than the minimum mandated under the Employment Standards Act. For small to mid-size employers, this exposure could be crippling.  In order to avoid this exposure, it is often in the employers best interest to have a valid and enforceable termination clause as part of their employment agreement with the new employee.  A valid and enforceable termination clause will rebut the common law presumption of reasonable notice and therefore reduce the employer’s liability.

Some Important Things to Consider

In order for an employment agreement (and termination clause) to be enforceable, it is paramount that it be properly drafted and executed. A termination clause must be clear and unambiguous. A clause where two possible interpretations are possible, will likely be interpreted by a court in a manner that is least favourable to an employer.

It is also imperative that the clause comply with the minimum employment standards in the jurisdiction of the employment.  In other words, a termination clause cannot provide for, nor have the potential to provide for a notice period that is less than what the employee would be entitled to under the applicable statute.  If the termination clause fails to comply with the minimum standards of employment it will be unenforceable. This principle was articulated in the Supreme Court of Canada decision in Machtinger v. HOJ Industries Ltd. [1992] 1 S.C.R. 986 and is consistent with section 5(1) Ontario Employment Standards Act, which provides that “no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.”

What happens if a termination clause fails to comply with the minimum standards of employment?

If a termination clause fails to comply with the minimum standards of employment in the jurisdiction of employment the clause will be unenforceable and the common law presumption of reasonable notice will not have been rebutted. In other words, the court will not order that the employer simply comply with the minimum standards, but will find that the common law presumption of reasonable notice has not been rebutted and, as a result, the employee may be entitled to a greater notice period.  There are sound policy reasons behind this. More precisely, Iacobucci, J. speaking for the Supreme Court of Canada in the Machtinger decision addressed the policy rational behind this approach:

[I]f the only sanction which employers potentially face for failure to comply with the minimum notice periods prescribed by the Act is an order that they minimally comply with the Act, employers will have little incentive to make contracts with their employees that comply with the Act……  Employers can rely on the fact that many employees will not challenge contractual notice provisions which are in fact contrary to employment standards legislation.  Employers such as the present respondent can contract with their employees for notice periods below the statutory minimum, knowing that only those individual employees who take legal action after they are dismissed will in fact receive the protection of the minimum statutory notice provisions.In my view, an approach more consistent with the objects of the Act is that, if an employment contract fails to comply with the minimum statutory notice provisions of the Act, then the presumption of reasonable notice will not have been rebutted.  Employers will have an incentive to comply with the Act to avoid the potentially longer notice periods required by the common law, and in consequence more employees are likely to receive the benefit of the minimum notice requirements.

Conclusion

A properly drafted and executed termination clause can limit an employer’s exposure to the common law presumption of reasonable notice. Employers, who are prudent in ensuring that their legal liability is minimized at the outset of their employment relationship with their employees, will undoubtedly, reap the benefits of such.

By BP22Heber (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons
Non Disclosure Agreements, Non Solicitation Agreements and Non Competition Agreements

Non disclosure and confidentiality agreements, are typically used in situations where an employer wishes to protect their confidential information, (i.e. trade secrets, customer lists) from being used by former employees to unfairly compete with them and or be disclosed to third parties.

Non solicitation agreements are agreements that prohibit a departing employee from actively soliciting the clients of their former employer.

Non competition agreements are an attempt by a former employer to restrict an employee’s ability to compete with them. These types of agreements have often been held as being a restraint of trade and thereby void because it is against public policy.

Our lawyers assist both employees and employers with respect to the obligations and responsibilities of departing employees as well as the appropriateness and enforceability of these agreements. We also assist employers in carefully drafting these agreements, with a keen eye to ensure that their interests are protected and, if need be, they would be enforceable.

In addition, we vigorously defend employees who are alleged to have breached their obligations to their former employer.

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A Lesson To Employers – Take Only What You Need

The Ontario Court of Appeal’s decision in Lyons v. Multari (2000) 50 O.R. (3d) 526 (Ont. C.A.) [hereinafter Lyons] has reconfirmed the notion that an employer has an uphill battle in enforcing a non-competition clause in an employment agreement.  MacPherson J.A., writing for the Court, reiterated that generally a non-solicitation clause will provide adequate protection for an employer, and only in exceptional cases will the nature of the employment justify a non-competition clause. The Court sought to strike a balance between the freedom of contract and the public policy importance of discouraging contracts that restrict competition. In doing so, the Court once again warned employers that when drafting restrictive covenants, they should take only what they need.

The facts in Lyons are relatively straightforward.  Dr. Lyons, an experienced oral surgeon, hired Dr. Multari, a recent graduate, as a new associate for his specialized dental practice in Windsor.  Dr. Lyons’ practice depended on referrals of patients from other dentists.  Dr. Lyons and Dr. Multari signed a short handwritten contract of less than one page.  There were three provisions in the contract. The first provision dealt with Dr. Multari’s remuneration and the third provision required him to give six months notice if he decided to leave Dr. Lyons’ practice.  The second provision simply stated: “Protective Covenant. 3 yrs. – 5 mi.”.

After seventeen months, Dr. Multari resigned from his employment with Dr. Lyons.  Less than a year after resigning, Dr. Multari opened a competing oral surgery clinic less than five miles away from Dr. Lyons’ office. At trial, Dr. Lyons sought damages for breach of the second provision in the handwritten contract.  After finding that Dr. Lyons had a valid proprietary interest worthy of protection the trial judge held that the three year/five mile non-competition clause was reasonable and awarded Dr. Lyons damages.  The trial judge stated:

I am of the view that the geographic implications of the covenant were not so broad as to exclude the possibility of Dr. Multari engaging in a meaningful and productive practice in the City of Windsor, and did not preclude the possibility of those who would choose his services over that of Dr. Lyons, or the other competitors being able to seek them out and enjoy them. Neither am I satisfied, that given the nature of the practice, given the fact that Dr. Multari was being given free access and indeed having transferred to him referrals which clearly would be coming to the Lyons practice or Dr. Lyons personally, that a 3 year restriction would in the circumstances be inappropriate. Neither am I convinced, nor do I find that the implication of Paragraph 2 of the Understanding restricted competition generally. For the reasons which I have set out above, I am of the view that there remained portions of the City from which Dr. Multari could practice, that there was no restriction to his seeking referrals from within the 5 mile area, so long as his office was not located there, and there is no evidence put before me based upon which I could conclude, that the net ultimate effect of the 5 mile or 3 year restriction would be to preclude the possibility of Dr. Multari engaging in the practice at all, and as a consequence denying to the public generally access to his expertise and services. [Lyons v. Multari [1998] O.J. No. 5319 (Gen. Div.) at paragraph 47]

The central issue before the Court of Appeal was whether the trial judge’s characterization of the second provision was correct.  In applying the Supreme Court of Canada’s decision in Elsley v. J.G. Collins Insurance Agencies Ltd., MacPherson, J.A., considered three factors (“the Elsley test”). [1978] 2. S.C.R. 916 (S.C.C.) [Hereinafter Elsley] First, whether the employer has a proprietary interest entitled to protection; second, whether the temporal or spatial features of the clause are too broad; and, third, whether the covenant is unenforceable as being against competition generally, and not limited to proscribing solicitation of clients of the former employer.

The Court agreed with the trial judge that Dr. Lyons had a valid proprietary interest in the referral of patients to his practice from other dentists. The Court concurred that these referrals are akin to goodwill and as such, are capable of legal protection.The Ontario Court of Appeal recently cited its decision in Lyons for this proposition, see Infinite Maintenance Systems Ltd. v. ORC Management [2001] O.J. No. 77 (Ont. C.A.) at para. 20.

The Court also agreed that the temporal and spatial limits of the covenant were not in themselves unreasonable. Under this branch of the Elsley test, the Court did not examine the nature of Dr. Lyons’ specialized practice, the position held by Dr. Multari or the location of Dr. Lyons’ practice. Rather, the Court took the position that there was nothing wrong per se with a five mile/three year covenant.

The Court disagreed with the trial judge on the third branch of the Elsley test. It held that the legitimate interest in protecting his own referring dentists and patients could have been protected by a non-solicitation clause. This was not one of those “exceptional cases”, as explained by Dickson J. in Elsley, where a non-competition clause could be justified. In the Court’s opinion, the non-competition clause overreached for several reasons. First, Dr. Lyons did not have a proprietary interest in Windsor dentists who did not refer patients to him. Second, Dr. Lyons benefited financially from his association with Dr. Multari. Third, Dr. Multari was a normal associate and did not play a “special role” in Dr. Lyons’ practice. According to the Court, “in the eyes of the referring dentists, the personification of Dr. Lyons’ practice was the same person it had been for almost 25 years – Dr. Lyons”. Fourth, a simple non-solicitation covenant would have prevented Dr. Multari from soliciting referrals from Dr. Lyons referring dentists. Finally, the restrictive covenant in this case did not uniformly accord with the common practice in the dental profession (where non-solicitation clauses were the norm).

In denying the enforceability of the non-competition clause, the Court sought to maintain the mobility of entry level associates in the various professions:

An established professional person or firm – be it in the field of dentistry, medicine, engineering, architecture, law or other professions – will constantly seek to recruit entry level associates to the practice. Such recruitment is good for the established person or firm and for the young associate. It is natural that many of those relationships will end after a few years. Sometimes the firm will terminate the relationship; in other cases the associate will decide to move on. For professional and personal reasons, many associates will want to continue to work in the same community after they have left their original employer. There is nothing wrong with such a preference. However, the employer has a legitimate interest to protect – namely, its clients. In my view, in the circumstances of this case, a proper balancing of the interests of the employer and the departing employee is struck by the line drawn in Elsley. As a general rule, non-solicitation clauses are permissible; “in exceptional cases” only, non-competition clauses will be upheld.

The above passage was cited with approval in Orlan Karigan & Associates Ltd. v. Hoffman. In that case, the plaintiff employer, Orlan, Karigan was a small computer consulting firm. The defendants, Hoffman and Dasrath, were two former employees who formed a computer consulting firm. The defendants’ new firm accepted a contract from a previous client of Orlan, Karigan. Both former employees had signed agreements that, inter alia: a) prevented them from engaging in the same or similar business as Orlan, Karigan for one year after termination anywhere within Ontario; b) prohibited them from accepting a contract from any client of Orlan, Karigan for a period of one year; and, c) agreeing that these covenants were reasonable. The plaintiff sued the defendants for breach of the restrictive covenants.

The central issue before the Court was the enforceability of the restrictive covenants. The Court echoed the approach taken in the Lyons case. Juriansz J. stated that:

[i]n assessing restrictive covenants in employment contracts the Courts must balance freedom to contract and the right of individuals to earn a livelihood in a free and open market. Such covenants are enforceable only if they protect legitimate proprietary interests of the employer, and are reasonable between the parties and in terms of the public interest.

The Court found that Orlan, Karigan had a legitimate proprietary interest in its trade connections and that the temporal length and spatial area covered by the covenants were not unreasonable. The Court then turned to an examination of whether the covenants covered more than was reasonably necessary. The Court refused to consider the clause in the agreement stating that the terms of the restrictive covenants were reasonable. The reason being that “the public interest is an important consideration in determining the enforceability of restrictive covenants… a private contract cannot foreclose the Court’s consideration of the issues involving the public interest”.

The clause prohibiting the defendants from accepting contracts with the plaintiff’s clients was, in the Court’s words, “clearly extravagantly broader than necessary to protect Orlan, Karigan’s legitimate interest in its clients”. This was because the clause was not restricted to contracts to provide services that Orlan, Karigan provided, but extended to any contract with an Orlan, Karigan client. The Court then considered the reasonableness of the non-competition clause. The Court found that the defendants’ Hoffman and Dasrath were in a similar situation to the situation of the entry-level associates that MacPherson J.A. discussed in Lyons (see above). Juriansz J. states:

the defendants were young when they became employees of the plaintiff. They acquired experience and marketable expertise in their years working for Orlan, Karigan. However, their special knowledge was in software in which Orlan, Karigan had no proprietary interest. Counsel for the plaintiff did not persuade me there was any reason why they should be prohibited from pursuing a livelihood exploiting that knowledge in Ontario even for one year following the termination of their employment by the plaintiff.

The trial judge went on to find that this was not one of those “exceptional cases” in which a non-competition clause was permissible.

It is clear from both the Lyons and Orlan cases that where a non-solicitation clause can protect the legitimate proprietary interests of an employer then a non-competition clause will necessarily fall. Only in “exceptional cases” will a non-competition clause be upheld in an employment context. However, the question remains: what does an “exceptional case” look like?  In a decision, released a short time before Lyons, the Manitoba Court of Appeal provided some guidance on this issue. In Winnipeg Livestock Sales Ltd. v. Plewman(2000) 192 D.L.R. (4th) 525 (Man. C.A.) the Manitoba Court of Appeal, as in the Lyons case, applied the Elsley test in assessing the enforceability of a non-competition clause.

The Court refused to find that the case before it was one of those “exceptional cases” where a non-competition clause was enforceable. It found that the plaintiff did not have a legitimate proprietary interest worthy of protection and that the non-competition clause was unreasonably broad in its scope. The Court then canvassed the authorities on the issue and provided a list of nine circumstances that it thought “will generally be relevant in determining whether a case is an ‘exceptional’ one so that a general non-competition clause will be found to be reasonable”.

The nine circumstances are:

  1. The length of service with the employer;
  2. The amount of personal service to clients;
  3. Whether the employee dealt with clients exclusively, or on a sustained or recurring basis;
  4. Whether the knowledge about the client which the employee gained was of a confidential nature, or involved an intimate knowledge of the client’s particular needs, preferences or idiosyncrasies
  5. Whether the nature of the employee’s work meant that the employee had influence over clients in the sense that the clients relied upon the employee’s advice, or trusted the employee;
  6. If competition by the employee has already occurred, whether there is evidence that clients have switched their custom to him, especially without direct solicitation;
  7. The nature of the business with respect to whether personal knowledge of the clients’ confidential matters is required;
  8. The nature of the business with respect to the strength of customer loyalty, how clients are “won” and kept, and whether the clientele is a recurring one; and,
  9. The community involved and whether there were clientele yet to be exploited by anyone.

In light of this list, and the decisions in Lyons and Orlan, it is reasonably certain that in most employment situations a non-competition clause will be ineffective in protecting an employer from a departing employee who wishes to compete in the same business. The Courts have been relatively consistent in their position that if a non-solicitation clause can protect an employer’s interests, then a non-competition clause is probably unreasonable. Employers (or their solicitors) should avoid the inclination to draft restrictive covenants in broad, catch-all language. Or in other words, when drafting a restrictive covenant – take only what you need!


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What effect does a misrepresentation, made by an employee during the recruitment process, have on the employment contract? Can an employer terminate an employee for lying during an interview or on a resume?

Generally speaking a misrepresentation made by an employee during the recruitment process may allow the employer to terminate the lying employee and may be used as a defence in a wrongful dismissal case. In some cases the misrepresentation may allow the employer to sue the employee for damages resulting from the misrepresentation.

Whether termination is warranted depends on whether the misrepresentation is “substantial”, “material” or “goes to the root of” the contract ( see Guarantee Co. of North America v. Gordon Capital Corp. (1999) 178 D.L.R. (4th) 1 (S.C.C.)). A material representation is one that has induced or been one of the primary factors in inducing the aggrieved party to enter the contract where he or she might not otherwise have done so.

An employer may sue an employee for damages resulting from the misrepresentation. In Queen v. Cognos [1993] 1 S.C.R. 87, the Supreme Court of Canada held that statements made by an employer to an employee during the recruitment process can be the basis for the tort of negligent misrepresentation. The required elements for the tort are:

  1. there must be a duty of care based on a “special relationship” between the representor and the representee,
  2. the representation in question must be untrue, inaccurate, or misleading,
  3. the representor must have acted negligently in making said misrepresentation,
  4. the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and
  5. the reliance must have been detrimental to the representee in the sense that damages resulted.

In Leacock v. Whalen, Béliveau & Associés Inc. (1998) the British Columbia Court of Appeal applied the Cognos analysis to statements made by a would-be employee to an employer. At paragraph 5 Southin J.A. said:

When one looks closely at the events leading up to the commencement of hiring, what emerges is a picture of a would-be employee with an exaggerated opinion of his own money making ability, which opinion he imparted to the officers of the appellant, a Montreal private brokerage house with a branch here. They, for their part, were pursuing with blinkers on the idea of adding commodity trading to their lines of endeavor in the stock market. They believed that he was a “hot-shot” with the qualifications to build such a business for them.

In assessing damages, the Court applied the “but for” test and asked, “what would have happened if the misrepresentation had not occurred”. The Court held that the employer would have hired the employee but at a reduced salary.

It should be noted that not all misrepresentations have legal consequence. Misrepresentations relating to the following types of statements will not give rise to the remedy of rescission or a cause of action:

  • Promises
  • Intentions – The general rule is that a mere statement of intention (as opposed to a misstatement of fact) is not actionable on the basis that such intention was not carried out. However to state one’s intention as being X, when in fact it is Y, is really a misstatement of fact or a misstatement of intention and is actionable.
  • Opinions
  • Mere puffing

In conclusion, substantial or material lies made by an employee during the recruitment process can be the basis for an action in negligent misrepresentation.