“Pursuant to the ESA ” Not Good Enough To Oust the Common Law of Reasonable Notice :

In Movati Athletic ( Group) Inc v Bergeron ( 2018 ONSC 7258) the Divisional Court heard an appeal regarding the following termination clause :

Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time.

The Analytical Process :

What is interesting about this case is that the Court sets out in detail the issue how you go about analyzing whether a ESA contractual provision rebuts the presumption of common law entitlement to reasonable notice. This is what they say :

The steps to be followed in determining whether a contractual provision can rebut common law notice are as follows:

1.      All contractual provisions must meet the minimum notice requirements for termination without cause set out in the ESA: Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC)[1992] 1 S.C.R. 986[1992] S.C.J. No. 41, at p. 998;

2.      There is a  presumption that an employee is entitled to common law notice upon termination of employment without cause;

3.       Provided minimum legislative requirements are met, an employer can enter into an agreement to contract out of the provision for reasonable notice at common law upon termination without cause: Nemeth v. Hatch Ltd., 2018 ONCA 7 (CanLII), 287 A.C.W.S. (3d) 291 (Ont. C.A.) at para. 11 citing Machtinger at pp. 1004-1005;

4.      The presumption that an employee is entitled to reasonable notice at common law may be rebutted if the contract specifies some other period of notice as long as that other notice period meets or exceeds the minimum requirements in the ESA: Machtinger supra, at p. 998;

5.      The intention to rebut the right to reasonable notice at common law “must be clearly and unambiguously expressed in the contractual language used by the parties”: Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII)134 O.R. (3d) 481, at para. 40;

6.      The need for clarity does not mean a specific phrase or particular formula must be used, or require the contract to state that “the parties have agreed to limit an employee’s common law rights on termination”. The wording must however, be “readily gleaned” from the language agreed to by the parties: Nemeth at para. 9;

7.      Any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause in accordance with the principle of contra proferentum: Miller v. A.B.M. Canada Inc., 2015 ONSC 1566 (CanLII)27 C.C.E.L. (4th) 190, at para. 15 (Div. Ct.); Ceccol v. Ontario Gymnastic Federation (2001), 2001 CanLII 8589 (ON CA)55 O.R. (3d) 614 (C.A.), at para. 45; and

8.      Surrounding circumstances may be considered when interpreting the terms of a contract but they must never be allowed to overwhelm the words of the agreement itself: Sattva at para. 57.

Why the Clause is Unenforceable:

Applying those above  principles the Divisional Court found that the ESA clause was not enforceable for the following reasons:

  1. [36]           The words “pursuant to the ESA” may be interpreted to mean that the notice period in the termination clause complies with the minimum requirements in the legislation, but they do not clearly provide that reasonable notice at common law no longer applies.
  2. The contract must be read as a whole. In this case the parties used different language in the probationary clause  than they did in the termination clause. The fact that they used different language for different clauses means that they desired different results . In the probationary clause they were careful to use the words ” only ” and “minimum ” whereas in the termination clause they used ” pursuant to the ESA “
  3. The judge found that there was ambiguity in the termination clause:

[45]           The words in this termination clause provide that “the notice provision” is “pursuant to the Employment Standards Act” and group benefits coverage payments must be in accordance with the “minimum period required by the Employment Standards Act”.  Read together, the minimum period required by the ESA could refer to both the notice provision and the group benefits coverage, or only to the group benefits coverage.

[46]           The rule of contra proferentum provides that, where there are two plausible interpretations, the courts should prefer the interpretation that grants better rights to the employee, who did not draft the provision:  Wood at para. 28.

4.  The trial judge said that the situation would have been different if the clause had used the word “only” as that would have brought home the concept that the employee would only get his ESA minimums and not any common law entitlements.

The Divisional Court noted that ” there is no requirement at law to include a warning sign in a termination clause. ”

The judgement notes that the parties agreed that the ESA clause complied with the ESA, however the Court found that it did not sufficiently rebut the common law term of reasonable notice .

I disagree that this clause complies with the ESA for the following reasons :

  1. The clause is applicable to terminations without cause. Presumably that means that for terminations with cause the employee gets zilch. The ESA  has a different and higher standard which is ” an employee who has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer ” ( see ESA Reg 288/01 sections 2(1) 3 and 9 (1) 6 ) . This makes the clause illegal as it offers less than the ESA . In other words an employee can be terminated at common law for just cause and not receive any reasonable notice but still be entitled to their ESA minimums.
  2. Vacation pay is payable on termination pay but not on severance pay. The clause makes no reference to that separate entitlement and by not requiring this to be paid , it pays out less than the ESA, thus the clause is illegal.

I note that neither of these arguments have been been yet adjudicated upon by the Courts.


OCA Says Shares Held by Employee Valued at Date of Termination, Not End of Notice Period :

In Evans v Paradigm Capital ( 2018 ONCA 952) the Court had a situation where the plaintiff held private shares in the defendant which, pursuant to a shareholders agreement, were deemed to be sold back to the defendant upon termination of employment. From time to time the defendant would issue bonuses to shareholders, which I assume were like dividends. The trial judge awarded the plaintiff the bonuses that would have been paid to her had she been employed during the 11 month notice period that was awarded.

The appeal court said no way. Citing Love v Acuity ( 2011 ONCA 130) they held that the proper date for valuing shares that the employer had the right to repurchase upon termination was the actual date of termination, not the end of the notice period. The Court seemed to assume that it would be unfair to give the Plaintiff her return of share capital immediately and also give her the bonuses over the notice period without her capital being at risk .

I think that this is wrong.

The plaintiff is entitled to be in the same economic position as if she had been permitted to work through the notice period. Only at the end of the notice period should  she get her capital back and thus she should get whatever dividends would have been paid to her ( and was paid to other shareholder who fired her).

Now the OCA has created an difference between a employee who has stock options ( these will generally continue during the notice period ) and the employee who actually owns shares that are subject to redemption upon termination.

Both of these mechanisms are part of an employee’s total compensation. Why should they be treated so differently upon a wrongful termination?

There is only one rational reason that I can think of for making this distinction.

If one owns stock options and the strike price is below water throughout the notice period, then the lost options are worthless.

However if the market  price exceeds the strike price, then  once you determine the notice period and assume that the employee would have exercised the options and sold the underlying shares immediately, the calculation of the loss is simple.  You  calculate the difference between the strike price and the price on the day of sale and that is the measure of damages.

If the employee holds the stock and the repurchase price is set at the end of the notice period, then the parties position on the appropriate notice period may be driven not by the Bardal factors but by the share price on a given day .

Imagine a stock whose price fluctuates significantly from day to day. Since the notice period is determined by the Court well after the event, if the stock price dropped 50% from month 6 to month 9 , the plaintiff would be arguing for the shorter  notice period and the defendant for the longer period.

In the current case, if the share price had dropped from date of termination to the end of the notice period and no dividends were paid, then the parties would have reversed their arguments.

In other words, for purposes of commercial certainty and legal predictability, it may make sense to treat stock options differently than stocks held by the employee that are subject to repurchase upon termination of employment.