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Terminating Senior Executive Employees

As we have discussed in various posts, a termination from employment in Ontario can occur in one of two ways; (i) a termination without cause; and (ii) a termination for just cause. As we have noted here, the threshold to establish a termination for cause is very high and the test for establishing just cause was discussed as length by the Supreme Court of Canada in McKinley v. BC Tel 2001 SCC. As noted in McKinley, a contextual interpretation to the employees alleged misconduct is considered in determining whether the employer had just cause for termination, rather that considering the sole instance of alleged misconduct in a vacuum. At paragraph 33:

The courts do not consider an act of misconduct, in and of itself, to be grounds for dismissal without notice, unless it is so grievous that it gives rise to the inference that the employee intends no longer to be bound by the contract of service. There is no definition which sets out, precisely, what conduct, or  misconduct, justifies dismissal without notice, and rightly so.  Each case must be determined on its own facts. . . .

Thus, according to this reasoning, an employee’s misconduct does not inherently justify dismissal without notice unless it is “so grievous” that it intimates the employee’s abandonment of the intention to remain part of the employment relationship. In drawing this conclusion, the Nova Scotia Court of Appeal relied on the following passage in The Law of Dismissal in Canada (2nd ed. 1992), at p. 124:

What constitutes just cause in a specific situation is particularly difficult to enumerate because it depends not only on the category and possible consequences of the misconduct, but also on both the nature of the employment and the status of the employee . . . .

The existence of misconduct sufficient to justify cause cannot be looked at in isolation. Whether misconduct constitutes just cause has to be analyzed in the circumstances of each case.  Misconduct must be more serious in order to justify the termination of a more senior, longer‑service employee who has made contributions to the company.

The last point is the most relevant for the purposes of this discussion. Longer service more senior employees who have a demonstrable history of strong performance and dedication with a company will have more latitude when it comes to alleged misconduct. In other words, it is harder to establish just cause for terminating the employment of a senior executive that a short-term entry-level employee.

Where a senior executive is terminated from their employment without cause, the typical factors as enunciated originally in Bardal v. Globe & Mail Ltd., 1960 CanLII 294 (ON SC) continue to apply; including (i) the age of terminated employee, with employees of more advanced age typically entitled to more severance pay given the challenges for older workers to obtain new jobs; (ii) the years of service with the company, with longer service employees being entitled to more severance on average; (iii) the specialization of the job and the corresponding time it is anticipated for the employee to obtain a new job, with more specialized employees likely to have more difficulty obtain comparable employment, thereby entitling them to enhanced notice periods; among other factors.

For senior executives with long lengths of service, they can typically be entitled to severance pay at the high-end of the range awarded by Courts in Ontario. Other considerations including the payment of variable incentive pay, commissions accrued but unpaid to the termination date, continuation of RRSP or pension plan contribution matching, employee benefits coverage continuation, contributions to legal fees, provisions of letters of reference, and outplacement counselling to assist employees with obtaining a new job. These are all requests made in the ordinary course while negotiating severance packages for terminated employees.

Temporary Lay-Offs due to COVID. Employer & Employee Rights and Obligations

Where an employer changes a fundamental term of employment, this may constitute constructive dismissal. It is difficult to imagine a more fundamental term of employment than that the employee be paid his or her salary. Since COVID-19 has resulted in significant business closures, many employees have been temporarily laid-off and are no longer being paid their salary.

Typically, where no agreement (employment contract) exists that expressly indicates that the employer was entitled to layoff the employee for any period of time, the employer cannot simply place an employee’s employment status on hold without pay and without substantial benefits and expect that this will not constitute constructive dismissal. If the demotion of an employee or a reduction in pay and responsibilities of an employee constitute constructive dismissal, then surely indefinite suspension with no guarantee of recall, no salary and virtually no benefits must also qualify for the same treatment at law.

In its clear and plain wording, the Employment Standards Act (ESA) allows for temporary layoffs and an employee is not terminated (for the purpose of the statute) until and unless his or her temporary layoff exceeds the time frames allowed by s. 56(2), prior to which time he or she is not entitled to termination or severance pay pursuant to O.Reg 288/01. If the layoff does exceed the timelines, then the employee has been terminated.

That said, the temporary layoff provisions of the ESA operate separately from an employees common law rights. The ESA provisions are intended to provide protection to employees in situations where layoffs are otherwise permitted as an express term of the employment contract by limiting temporary layoffs to the maximum time periods stated in the ESA.

“Temporary layoff” is a defined term[8] in the ESA, as follows:

A layoff of more than 13 weeks in any period of 20 consecutive weeks, if the layoff is less than 35 weeks in any period of 52 consecutive weeks and,

                                       i.              the employee continues to receive substantial payments from the employer;

                                    ii.              the employer continues to make payments for the benefit of the employee under a legitimate retirement or pension plan or a legitimate group or employee insurance plan;

                                   iii.              the employee receives supplementary unemployment benefits; and

                                   iv.              the employee is employed elsewhere during the layoff and would be entitled to receive supplementary unemployment benefits if that were not so,

Section 56(4) allows an employer to layoff an employee without specifying a recall date without being considered to have terminated the employment unless the period of layoff exceeds that of a temporary layoff.

Section 56(1)(c) provides that an employer terminates the employment if it lays the employee off for a period longer than the period of a temporary layoff.

Section 54 provides that no employer shall terminate the employment of an employee who has been continuously employed for three months or more absent written notice of termination under the act or having made appropriate payment in lieu of such notice.Section 56(1) provides that an employer terminates the employment of an employee for purposes of s.54 if:

a)         the employer dismisses the employee or otherwise refuses or is unable to continue employing him or her;

b)        the employer constructively dismisses the employee and the employee resigns from his or her employment in response to that within a reasonable period; or

c)         the employer lays the employee off for a period longer than the period of a temporary layoff.

 s. 56(1) of the ESA operates to terminate an employee’s employment in law, so that the employee may claim for common law wrongful dismissal damages. The evident purpose of s. 54 is to prevent employers from avoiding the liabilities that flow from terminating the employment of employees under the guise of placing them on indefinite layoff. The legislature has provided that when a layoff reaches 35 weeks in 52, the employee is terminated.

At common law, an employer has no right to layoff an employee. Absent an agreement to the contrary, a unilateral layoff by an employer is a substantial change in the employer’s employment, and would be a constructive dismissal.

More specifically, a proper reading of the ESA layoff provisions requires the conclusions that:

a.         it is not a termination of employment to temporarily lay off an employee so long as that temporary layoff does not exceed the definition of “temporary” – s.56(4);

b.         an employer may not contract below the Act and therefore may not contract for provisions that allow that temporary layoffs exceed the timeframe set out in s.56 of the Act;

c.         once a layoff exceeds the definition of temporary it is a termination of the employee’s employment pursuant to the Act and pursuant to the common-law, as the Act no longer protects the employer by displacing the common-law jurisprudence and the Act itself also deems a termination; and

d.        the common-law doctrine of constructive dismissal is suspended until such time as the layoff exceeds the definition of  “temporary” in the Act.

TAKEAWAYS

  • Always seek legal advice before deciding to temporarily layoff an employee.
  • Review any relevant contracts or documents pertaining to the employee you are considering laying off before doing so.
  • If there is no contractual right to temporarily layoff the employee, consider speaking with the employee beforehand and document in writing any agreements made.
  • If you are considering being temporarily laid off, or have been laid off by your employer, be aware of the maximum time period a lay off can last under the Employment Standards Act, and what obligations the employer has to you during the layoff itself.

If I Am Subject to Temporary Lay-Off Due To Coronavirus, Am I Entitled to Severance Pay?

The coronavirus (COVID-19) has resulted in business closures and downsizing, in some cases temporary and others on a permanent basis. The Employment Standards Act in Ontario expressly enumerates in s.56(2) the requirements for a temporary lay-off to occur. Specifically, the criteria include the following:

A temporary layoff is,

(a) a lay-off of not more than 13 weeks in any period of 20 consecutive weeks;

(b) a lay-off of more than 13 weeks in any period of 20 consecutive weeks, if the lay-off is less than 35 weeks in any period of 52 consecutive weeks and,

(i) the employee continues to receive substantial payments from the employer,

(ii) the employer continues to make payments for the benefit of the employee under a legitimate retirement or pension plan or a legitimate group or employee insurance plan,

(iii) the employee receives supplementary unemployment benefits,

(iv) the employee is employed elsewhere during the lay-off and would be entitled to receive supplementary unemployment benefits if that were not so,

(v) the employer recalls the employee within the time approved by the Director, or

(vi) in the case of an employee who is not represented by a trade union, the employer recalls the employee within the time set out in an agreement between the employer and the employee; or

(c) in the case of an employee represented by a trade union, a lay-off longer than a lay-off described in clause (b) where the employer recalls the employee within the time set out in an agreement between the employer and the trade union.  2000, c. 41, s. 56 (2); 2001, c. 9, Sched. I, s. 1 (12).

Generally, the common law in Ontario has held that a temporary lay-off is not permitted in Ontario unless it is expressly authorized in a employee’s employment contract and the employer follows the specific requirements outlined above. At this time, the Courts have not rendered a decision on whether a temporary lay-off constitutes a constructive dismissal (i.e., termination of employment) absent an express term of an employment contract permitting such a lay-off, which has been the law to-date.

Rather, it is probable that a Court may find that an economically required lay-off is not deemed to be a termination of employment because of the unique financial circumstances and constraints that have been posed by the virus. Nevertheless, each case is fact-dependent, and it is best to consult with an employment lawyer to discuss the potential outcomes should you pursue a claim for constructive dismissal.

Can an Employer Terminate My Employment Due to a Business Down-Turn Resulting from the Coronavirus (COVID-19)?

In Ontario, it is a well-established principle of employment law, that an employer can terminate an employee at any time without cause for any reason, so long as the reason is not discriminatory or a breach of a human right. Typically, where an employee is terminated without cause, they are not provided with any advanced notice of dismissal. With ongoing concerns associated with the COVID-19 pandemic, large contracts and business relationships have been terminated that will inevitable result in a paring down of the workforce without advanced notice.

At law, there is no difference between the right of an employer to provide working notice (i.e., advanced notice of termination) or payment in lieu of notice of termination (i.e., a lump sum severance payout). Accordingly, in many cases businesses will prefer to immediately terminate an employee without cause while providing pay in lieu of notice to avoid the potential morale drain, transfer of confidential information, solicitation of clients or colleagues, or other potential implications of providing working notice to a disgruntled employee.

If you have recently been terminated from your employment in Ontario, it is likely that you have received a termination letter from your employee which outlines the specific severance package. The employer does not need to provide any specific reason for the dismissal, though more recently many employers are terminated employees due to the business realities caused by the global COVID-19 pandemic.

An employer who terminates an employee without cause is required to make the employee whole during the period of reasonable notice. In other words, at common law, the employee is entitled to continue to receive all the compensation (including commissions, bonuses and stock options) and benefits that he or she would have enjoyed if still actively employed with the employer throughout the notice period.

If you have been terminated from your employment, contrary to what most employment lawyers will tell you, it is generally a very straightforward and simple process to negotiate an enhanced severance package, and where litigation is required – the substance is simple (i.e., it does not require a law degree, let alone a high school diploma to determine how much severance you may be entitled to) – it is merely the unfortunate procedure that lawyers have developed in order to protect their profession and demand unjust and punitive hourly rates that make the process challenging.

If you are contemplating hiring a lawyer, be very careful in understanding the retainer agreement. Under no circumstances, unless for senior executives with potentially 100’s of thousands of dollars of severance pay outstanding, you should not pay more than $2,000.00 as an up-front retainer to a lawyer. Again, these matters are very simple and straightforward. The work is typically done by template and the system is often designed to enrich the lawyer to your benefit. At Goldstein Law, we believe that we put the client first by acting transparently and only taking on cases where there is a real economic benefit to be realized by all parties involved. Thanks for reading.

Fixed Term Contracts – Termination Clauses

Employers may wish to enter into fixed-term employment contracts for various reasons, most commonly where the employee is hired to complete a specific project or task for the employer with a defined deadline or where the employee has been hired during another employees leave of absence (i.e., maternity leave, sick leave, disability-related absence, etc.). When the full-time employee returns from leave, the services of employee that is working on a fixed-term contract will no longer be required.

Substantial litigation in Ontario has surrounded the early termination of fixed-term employment contracts. In other words, how much is the fixed-term employee owed if the employer opts to terminate their employment prior to the end of the expiry of the fixed term? In some cases, a clear and unambiguous termination clause will obligate the employer to only pay the amounts indicated in the clause (i.e., typically, 2 weeks of advanced notice of early termination or payment in lieu thereof); however, where these restrictive early termination clauses are ambiguous, they will be interpreted and construed in favour of the employee, in accordance with the principle of contract law referred to as contra preferentem.

As noted in Howard v. Benson 2015 ONSC 2638, in the absence of an enforceable (i.e., unambiguous) contractual provision, a fixed term employment contract obligates an employer to pay an employee to the end of the term and the obligation will not be subject to mitigation.  Where the language of a termination clause is unclear or can be interpreted in more than one way, the court should adopt the interpretation most favourable to the employee (Wood v. Fred Deeley Imports Ltd. 2017 ONCA 158).

Ambiguity can relate to any number of factors. In one case, our clients fixed term employment contract stipulated a minimum notice requirement but not a maximum. In other words, there was no language that clearly indicated that the 2 weeks notice represented all obligations of the employer to the employee on termination.In addition, it is a complete contradiction in terms to suggest that a contract is for one-year and then say it may be for just two weeks, at the whim of the employer. 

It is arguable that all fixed term contracts that purport to allow early termination for unspecified reasons ought, in principle, to be considered ambiguous, and interpreted contra proferentem.   However, there does not yet appear to be any jurisprudence which goes quite so far.  The point wasn’t raised in Benson, which looked instead for technical ambiguities in the wording of the termination clause itself.  It seems to me to be a contradiction in terms to state that you have a contract for a year, and then say that it might be a contract for just two weeks, at the whim of the employer.  

In any event, if you are an employee that has been terminated prior to the end of a fixed term contract, it is in your interest to have the severance package reviewed by an employment lawyer to determine whether the employer has provided you with your full entitlements based on the wording of your employment contract.

Updating and Amending Employment Contracts

After you have worked for a company for a period of time, your employer may request to update or amend your employment contract for any number of reasons. These reasons typically include an update to reflect a promotion or change in job position, a demotion, a restructuring of the organization, change in the amount of compensation earned (i.e., from salary to commission or vice versa), a change in the location of where job duties are to be carried out (i.e., at home or remote, or a new company office) and any other changes.

In order for an updated or amended employment contract to be considered enforceable by the Courts in Ontario, it must be accompanied by fresh consideration. In other words, and as noted in the BC Court in the case of Krieser v. Active Chemicals Ltd, 2005 BCSC 1370, an updated employment contract will only be enforced if there is a further benefit to both parties.

One of the common and relevant terms that employers attempt to include in updated employment contracts are restrictive termination clauses. We have written about the impact that a restrictive termination clause can have on your severance entitlements in the event of a without cause termination from employment here. A restrictive termination clause, if properly drafted, and compliant with the Employment Standards Act (“ESA”) in Ontario, will limit a terminated employees severance entitlements to the minimum amounts prescribed by the employment standards legislation in the province.

The minimum termination entitlements of an employee terminated without cause in Ontario is equivalent to one-week of termination pay per year worked up to a maximum of 8 weeks pay; and one-week of severance pay per year worked up to a maximum of 26 weeks, in the event a certain eligibility test for severance is satisfied, as further described here. These represent an employees minimum entitlements, which are applicable in the event a restrictive termination clause is included in an employment contract.

Absent such a termination clause, terminated employees are entitled to “reasonable notice” of termination, further described here. Severance packages calculated on the basis of reasonable notice are substantially higher than those that are merely based on the ESA minimums. These packages can amount to awards of 1 month of more per year of service, rather than the one week per year enumerated in the ESA. Accordingly, it can amount to a huge financial gain for the employee to receive reasonable notice on termination rather than the statutory minimum. Accordingly, an updated employment contract with the inclusion of a restrictive termination clause can be of immense benefit to the employer and detrimental to the employee. As such, Courts will not enforce such updates absent fresh consideration (or benefit) flowing between both parties.

Reasonable notice is calculated based on a host of factors recognized by Ontario Courts over the years, including but not limited to the following:

-Age of the employee (more advanced age employees are entitled to larger severance packages, all else equal);
-Years of service (the longer duration of employment will justify a larger severance award);
-Specialization and availability of comparable employment (as severance packages are designed to bridge the gap during a period of unemployment, employees with highly specialized jobs may find it more challenging to find comparable employment after a termination);
-Income level;
-Other unique circumstances.

Clearly there is a large benefit to receiving reasonable notice on termination. As such, if an employer attempts to update your employment contract, it is best to contact a qualified employment lawyer for a review.

Termination for Cause – High Threshold

We are often contacted by employees that have been terminated from their employment for cause.  Employers give any number of reasons to form the basis for a just cause dismissal; however, a Court will only uphold a decision to terminate an employer for just cause in the most extreme situations.

In many cases, where an employees performance is below average, if they have been subjected to limited discipline in the past, or if an employer policy indicates that they will be terminated for cause if you engage in “X, Y, or Z” behavior, the employer attempts to rely on these factors to justify a dismissal for cause.  Courts will assess the facts of each particular case and are not overly concerned with the specific employer policy.  Court precedent and its application to the particular case at bar determine whether there is just cause for termination; not the employer’s arbitrary policy.

It is critical that you consult an employment lawyer following a termination for cause to ensure your right are protected. At Goldstein Law, we offer a free consultation to assess your severance package and termination letter to determine whether the employer has provided for your full legal rights on the termination of employment.  Please contact us today for an employment law consultation.

Employment Considerations in the Sale of a Business

The liabilities of vendor and purchaser for employee entitlements upon termination can become a major issue in negotiating the sale of a business.

Section 64 governs statutory severance pay, which is payable only to an employee severed without cause, as defined, who has five or more years’ service and is either employed by an employer which has a payroll of $2.5 million or more or where there is a permanent discontinuance of all or part of the employer’s business at an establishment which results in 50 or more employees having their employment terminated within a six month period. Statutory severance pay is equal to one-week per completed and partial year of service, up to a maximum of 26 weeks.

Share Purchase Agreement

There is no termination of employment upon the sale of shares of a company.

Asset Purchase Agreement

Where a purchaser expressly recognizes past service in its new employment contract with the employee, no issue arises. An employer may make the choice to recognize past service in consideration for the valuable skills and experience it is receiving with a long-service employee. In the case of such an explicit recognition by the purchaser, the vendor would normally have no further liability at common law.

A purchaser can avoid liability for the employees’ prior service by requiring the vendor to provide common law reasonable notice of termination or pay in lieu thereof before the purchaser hires the employees.  Therefore, a purchaser wishing to try to insulate itself from employee termination liabilities should include a provision in the purchase and sale agreement requiring the vendor to provide reasonable notice of termination at common law, as well as require the vendor to indemnify it for any future termination payments for those employees, or at least for that portion of future termination payments attributable to the employees’ pre-sale service. Of course, if the purchaser declines to offer employment to the employees of the vendor, the vendor remains liable to the employees for common law reasonable notice.

Negotiating Business Purchase and Sale

As legal counsel for a purchaser, it is important to ensure that the vendor is contractually obliged to disclose as much information as possible about the employment aspects of the business and the age, tenure, compensation terms and character of employment of the employees. Potential common law and statutory employment liabilities must be considered in full and financially accounted for, through payment and/or indemnities, in any purchase and sale negotiation by both parties.