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In Alarashi v Big Brother Big Sisters of Toronto ( 2019 ONSC 4510) Sossin J. had to determine the validity of the following termination clause:

Following the probationary period, in the event that it becomes necessary to terminate your employment without cause BBBST will provide you with such notice (or payment in lieu of notice) or severance pay that may be required to meet the requirements of the Employment Standards Act, 2000. Notice is based on the length of service as follows:

            4 years or more but fewer than 5 years – 4 weeks

You understand and agree that BBBST has no obligation to make any additional payments to you or to provide you with additional notice upon termination. You also understand and agree that BBBST would not have entered into this agreement if it were required to provide notice in excess of the Employment Standards Act, 2000.

If your employment is terminated without cause, BBBST will continue your group insurance benefit coverage for such period as the Employment Standards Act, 2000 shall require, provided such coverage is available from the insurer.

Your employment may be terminated for cause and without pay in lieu of notice at any time for serious breaches of the terms of this Agreement and/or BBBST’s policies set out in the Human Resources Manual, and/or for any cause recognized at law

The judge found that the use of the word “or” instead of ” and ” made the clause unenforceable. Here is what he said :

Excluding Termination Pay or Severance Pay

[42]           The third and final area Alarashi raises to invalidate the termination clause in the employment agreement is the reference to a terminated employee’s entitlement to “such notice (or payment in lieu of notice) or severance pay that may be required to meet the requirements of the Employment Standards Act, 2000.” (Emphasis added.)

[43]           The parties agree that under the ESA, BBST would have an obligation to pay a terminated employee both payment in lieu of notice (“termination pay”) and severance pay, if the employee were entitled to it.

[44]           Once again, the challenge to this provision in the termination clause does not relate to Alarashi’s own circumstances, as he received payment in lieu of notice of five weeks which meets or exceeds any interpretation of the minimum requirements for termination pay under the ESA, and he was not eligible for severance pay.

[45]           BBBST argues that this clause is clearly intended to convey that BBBST will be bound by the requirements of the ESA and therefore while the drafting could more clearly convey these benefits are additive rather than alternatives, the provision remains clearly enforceable.

[46]           Alarashi relies on Andros v. Colliers Macaulay Nicolls Inc., 2018 ONSC 1256 (CanLII) (“Andros”) for the proposition that even if the termination provision could be read in a manner which complies with the ESA, it remains invalid where it is unclear or ambiguous with respect to whether the termination benefits included severance pay.

[47]           Writing in Andros, Dietrich J. highlighted the significance of whether the termination clause specifically adverts to compliance with employment standards legislation. Distinguishing the termination clause at issue in Andros from the Court of Appeal’s decision in Roden v. Toronto Humane Society, (2005), 2005 CanLII 33578 (ON CA), 259 D.L.R. (4^th) 89 (Ont C.A.) (“Roden”), Dietrich J. stated (at para. 32), “A key distinction between Roden and the case at bar is that the clause in question in the Roden case made specific reference to the applicable employment standards legislation. No such reference in made in clauses 4a and 4b. In this case, as in Roden, the termination clause makes specific reference to the ESA.

[48]           In Wood, also relied upon by Alarashi, Laskin J.A., writing for the Court, distinguishes that case from Roden as well, stating (at para. 55-56), “The difference between Roden and this case lies in the wording of each termination clause. In Roden, the clause dealt only with the Toronto Human Society’s obligation to give the notice of termination, as required by the ESA, or to pay a lump sum for the notice period. It did not exclude the Toronto Humane Society’s additional obligation to continue to contribute to Roden’s benefit plans during the notice period. It said nothing about that obligation. In this case, by contrast, the termination clause is not merely silent about Deeley’s obligation to contribute to Wood’s benefit plans during the notice period. It uses language that excludes that obligation…”

[49]           Therefore, in light of the Court of Appeal’s analysis in Wood, the question I must address is whether the language of the termination clause excludes severance pay if termination pay is provided.

[50]           In Alarashi’s case, the severance pay clause would not arise as only employees with five years or more experience can be eligible for severance pay under the ESA.

[51]           I do not think BBBST intended to exclude severance pay by this provision. The intent of the parties appears to be to abide by the requirements of the ESA, not contract out of them or waive them.

[52]           Under the ESA, it is possible to be entitled to termination pay and not severance pay (as in the case of Alarashi, who had worked less than five years), but it is not possible to be entitled to severance pay and not termination pay (or notice). In my view, this provision could be read simply as setting out the distinction between two different pathways to entitlement under the ESA.

[53]           In other words, in this clause, BBBST could be conveying to Alarashi at the time he commenced employment that in the event of his termination without cause, he will receive what he is entitled to receive under the ESA, whether termination pay or severance pay. Where his entitlement is to both termination pay and severance pay under the ESA, nothing in the wording of this provision is inconsistent with his being paid both.

[54]           While the clause can be read in a way that is compatible with the ESA, that is not the test for a valid termination clause, as affirmed in Andros. Because the clause could also be conveying to Alarashi that he may not be entitled both to termination pay and severance pay, the clause is at best ambiguous.

[55]           In the face of ambiguous wording, the terminated employee is entitled to an interpretation which would lead to the highest level of benefit. In this case, such an interpretation would be that the reference to “or” in the clause excludes either termination or severance pay, and thus constitutes an invalid termination clause. 

[56]           In light of this finding, Alarashi is entitled to common law damages.

My Comment:

This case again reinforces one of the key elements of Wood v Deeley, which is if a termination clause can reasonably be read two ways with respect to whether or not it complies with the ESA, it  is therefore ambiguous. Ambiguity alone  will invalidate the entire termination clause and thus the common law of reasonable notice applies.

In Manastersky v Royal Bank of Canada ( 2019 ONCA 609) the Ontario Court of Appeal analyzed what happens when the employer terminates a investment fund from which the employee derived a substantial part of his income.

The Plaintiff ran some specific  investment funds for the Bank and received payments over time based on how those funds performed.

The Bank decided that they were no longer going to continue those specific funds anymore and proceeded to wind them down. Part of the wind down consisted of terminating the Plaintiff. The Bank agreed and did pay him the amount that the fund paid out over the notice period, however this number paled in comparison to what he was earning while these funds were active.

The trial judge awarded him damages based on his historical earnings over the 18 month notice period. This came to $953,000 for this compensation item alone.

The Court of Appeal said NO.

They reiterated that the analysis has two steps:

First, what would the employee had earned if he had been permitted to work out the notice period?

Second, is there any contractual language which would limit the employee’s  entitlement to the monies referred to in the first step?

In this case the trial judge held that by cancelling the funds, the employer would have constructively dismissed the plaintiff as it deprived him of the opportunity to earn income from those funds.

This is how the Court of Appeal  dismissed that argument:

67]       With respect, I do not see how RBCDS’ termination of the Mezzanine CIP in accordance with its terms, which were known and agreed to by Mr. Manastersky, could amount to conduct by an employer that evinces an intention to no longer be bound by the employment contract: Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10, [2015] 1 S.C.R. 500, at para. 30. The termination of the Mezzanine CIP did not involve any breach of contract by RBCDS. As the trial judge recognized, the CIP’s termination was “consistent with the terms of the CIP”.

[68]       Nor did the CIP’s termination “more generally [show] that the employer intended not to be bound by the contract” or demonstrate “conduct that, when viewed in the light of all the circumstances, would lead a reasonable person to conclude that the employer no longer intended to be bound by the terms of the contract”: Potter, at paras. 33 and 42. Mr. Manastersky was hired to manage specific funds. At the time of his offer of employment, he was provided with a copy of the 2000 Plan. Mr. Manastersky signed the 2006 Mezzanine CIP.[3] Those plans contained the same Article 9.3, which clearly disclosed that one risk embedded in Mr. Manastersky’s contract of employment was that the Management Committee could terminate the plan effective as of the end of any Investment Period with respect to future Investment Periods.

[69]       By terminating the Mezzanine CIP, RBCDS was not evincing an intention not to be bound by the employment contract. On the contrary, it was exercising a fully disclosed right it had under the contract of employment. Consequently, I see no evidentiary support for the trial judge’s finding that a termination of the Mezzanine CIP would have amounted to a constructive dismissal.

Imagine this somewhat different scenario:

You are a car salesman and paid only commission. 90% of your sales are pick up trucks and only 10% are cars.  Your employer decides one day that they are no longer going to sell pick up trucks after they get rid of the  10 remaining trucks on the lot . Your income drops by 90% .

How is that not a constructive dismissal ?

It is fundamental principle of employment law that in return for one’s labour the employer agrees to  pay  the agreed wage.

Is it also not a fundamental principle that in exchange the employer has to provide one with work from which the employee can derive one’s income?

By cancelling the investment funds upon which the plaintiff  which derived the bulk of  his income how can that not be “ evincing an intention not to be bound by the employment contract.” ?

Applying the Bhasian principle of good faith administration of a contract, is it good faith for an employer to take away the main source of income of an employee and not replace it with something comparable ?

In this case, as in other recent OCA cases that I have blogged about, the Court is now giving greater emphasis to the contractual language of the various bonus and commission plans as opposed to the principles of interpretation generally applied to employment contracts as set out in the seminal case of Wood v Fred Deeley.

I note that this change seems to have accelerated since the retirement of Mr. Justice Laskin, the author of Wood v Fred Deeley.

Perhaps one day the Supreme Court of Canada will weigh in on this issue as to whether employment agreements are to be read like commercial agreements or like consumer contracts given the imbalance of bargaining power that exists in most employment situations.

In Leibreich v Farmers of North America ( 2019 BCSC 1074 ) Russell J., having found that the plaintiff during her 14 years of service was first a dependant contractor and then an employee had this to say about the defendants’ argument that as she was a dependant contractor for some of her time the notice period should be automatically reduced:

106. In my view, there is no principled basis to automatically give less notice to a dependent contractor than an employee; rather, the fact that a plaintiff is a dependent contractor can be analysed in relation to the first Bardal factor: the character of the work. While it may be the case that the character of a dependent contractor’s work will be less integral and structurally or organizationally embedded than that of an employee, it is this substantive connection and character of the employment that ought to be the focus of the analysis, and not merely the plaintiff’s formal status or designation.

In Ontario, this has been settled case law since at least 2016, as noted by the trial judge in this quote:

In Cormier v 1772887 Ontario  Limited cob as St Joseph’s Communications ( 2019 ONSC 587) Justice Perell had to determine the enforceability of the following ESA termination clause:

In Dawe v Equitable Life Insurance Company ( 2019 )NCA 512) the Ontario Court of Appeal struck down a 30 month notice period and reduced it to 24 months .

The Plaintiff hit all the Bardal Factors. He was a senior Vice President. He had 37 years of service. He was 62.

The Court of Appeal reiterated that although there no absolute upper limit or cap, reasonable notice in excess of 24 months is only justified in “exceptional circumstances “.

The Court of Appeal was critical of some of of the factors that the trial judge referred to :

1. Rather than focus on any ” exceptional circumstances” the judge commented that now that we no longer have age 65 mandatory retirement, ” presumptive standards should no longer apply. The OCA noted that mandatory retirement was abolished in Ontario in 2006 so this is by no means a recent event. In any event the Plaintiff testified that he actually planned to retire at age 65.
2. The trial judge said that the termination was a ” forced retirement” when in fact the Plaintiff requested an exit package as a result of a conflict he was having with some fellow executives.

In essence what the Court was saying is that “exceptional circumstances” cannot simply be the same Bardal Factors that you use to figure out the normal notice period.

What are exceptional circumstances that will warrant a notice period of more than  24 months ?

Stay tuned as new cases and creative lawyers will undoubtably come up with new arguments as to what are or are not ” exceptional circumstances “.

Although  plaintiff lawyers may well disagree, I believe that this is a good legal development as it brings a modicum of certainty to a very uncertain world.

By the way, this was the same trial judge who commented in his award that he personally would have awarded 36 months notice but as the plaintiff only asked for 30 months, he was awarding only 30 months. Perhaps the Court of Appeal was using this decision to bring to an abrupt halt this idea of ever expanding notice periods.

In Mikelsteins v Morrison Herschfield Ltd. ( 2019 ONCA 515) the Court of Appeal revised a trial decision where an executive was given 26 months notice. The Plaintiff, in addition to his salary, was a shareholder in this private company and as such received dividends from time to time. The Shareholders Agreement also had a section which said as follows:

A Shareholder whose association with the Corporation and its Affiliates ceases by reason of termination by the Corporation of his/her employment with the Corporation and its Affiliates shall, immediately after such termination, be deemed to have given a Transfer Notice covering all of the Shares held by him/her on a date which is 30 days from the date he/she is notified of such termination by the Corporation.

The trial judge interpreted this clause to mean that the ” termination of his employment ” had to mean his lawful termination, in other words at the end of the 26 month notice period.

The Court of Appeal disagreed. They said that it was an error of law to incorporate a common law employment analysis to a corporate document like a Shareholders Agreement.

      With respect, contractual rights differ from common law rights. Contractual rights depend on the terms of the contract to which the parties have agreed. The principle enunciated in Love, and reiterated in Evans, is that there is a difference between what a dismissed employee is entitled to as damages in lieu of notice upon termination of the employment contract and what the employee is entitled to under the terms of more specific contracts.

What is the policy reason referred to by the Court  for this distinction ?

Similarly here, the Shareholders’ Agreement uses the cessation of Mr. Mikelsteins’ employment as the triggering event for the process to transfer his shares. The termination occurred on October 26, 2017. There is a very plain and obvious reason why a corporation, that is employee owned, and which has terminated an employee who also happens to be a shareholder, would wish to commence the process of repurchasing the employee’s shares the moment that employee is told of his or her dismissal, rather than at the end of the notice period. Understandably the corporation would not wish an employee to be able to exercise all of the rights of a shareholder once their employment is terminated.

This case follows another Court of Appeal case called Love v Acuity Investment Management , ( 2011 ONCA 130) in which a share repurchase agreement was interpreted the same way.

My Comments:

The policy reason set out by the Court seems odd. Of course the Company, aka the Employer, would want to avoid paying dividends to an employee they illegally fired. So what ? Why not ask what the the shareholder, aka the employee, would like ?

Since when is what one party likes a ground for interpreting a contract?

Since the plaintiff’s entitlement to even be a shareholder was tied to him being an employee, why make this artificial distinction between common law employment rights and contractual rights ?

Why do contractual rights override common law rights?

It seems that if instead of being a shareholder per se, the plaintiff had a a provision in his employment contract that his bonus would equal the dividend paid to shareholders, the Court would have allowed him to receive dividends throughout the notice period.

It is important to note that both in  this case and in Love that the employees were shareholder in privately held companies, not publicly traded ones.

Perhaps I could suggest a different rationale for why Courts seem to treat these cases of repurchase agreements differently than the employee owning stock options in public companies type of cases where it is clear that the termination date is the lawful termination date, not the actual date .

1. Private companies require certainty in who the owners are at any given time more than public companies. If the repurchase date were at the end of the notice period then no repurchase could take place until a Court determined that date. This could take years and what shareholder rights would the dismissed employee have during that time? The interests of a current employee/ shareholder are vastly different than those an ex-employee/ soon to not be an ex-shareholder.
2. If the share price fluctuated wildly after the actual termination, then each party would argue the notice period that happened to favour their desired stock price. For example, if 3 months after termination the price dropped and continued to drop for the next 9 month, the plaintiff would argue the notice period was 2 months and the employee would say that the proper notice period was 12 months.

This case reminds me why I used to tell my plaintiff clients not to be enthralled with the idea of being a minority shareholder of their employer. If you want a share of the profits, negotiate a profit sharing arrangement without the necessity of actually being a minority shareholder.

This case accentuates the advantage of being an employee over being a powerless minority shareholder.

In Rhinehart v Legend 3D Canada ( 2019 ONSC 3296) Justice Sanfilippo was faced with a motion by the defendants to stay the action as the employment contract had an arbitration clause that said as follows:

All of us at Legend are very excited about you re-joining our team and look forward to a beneficial and fruitful relationship. However, should any dispute arise with respect to your employment or the termination of that employment, we both agree that such dispute shall be conclusively resolved by final, binding and confidential arbitration in accordance with the Voluntary Labor Arbitration Rules of the American Arbitration Association (AAA) in San Diego, rather than by a jury, court or administrative agency.”

This agreement was signed by the Plaintiff when he worked in California for the US parent. He was then was moved to Ontario and employed by the Canadian subsidiary, but he never signed an agreement with the Canadian company.

The judge ruled on a number of issues:

1. As there was no arbitration agreement between the Plaintiff and his Canadian employer, it was not applicable to his termination of employment from the Canadian company .
2. It is for a Court, not the arbitrator,  to determine the validity of the arbitration clause because the court shall only stay arbitration proceedings that flow from a valid arbitration agreement . ( Heller v UBER Technologies 2019 ONCA 1, appeal pending to the SCC) .
3. As the arbitration clause purports to cover all claims arising from employment , this offends the Employment Standards Act which provides for a complaint and enforcement process that cannot be contracted out of. ( see Heller).

The action was therefore not stayed.

I find the third reason very interesting. The clause in question refers to purporting to  oust  the jurisdiction of any ” administrative agency “.

The same logic would seem to apply to invalidate this type of clause in the following situations:

1. A complaint under the Human Rights Code.
2. A complaint under the Labour Relations Act
3. A complaint under the Occupational Health & Safety Act

All of these statutes have administrative complaint procedures that cannot be contracted out of, thus an arbitration clause that purports to deny access to these tribunals would be additional grounds for invalidating an arbitration clause.

Almost every arbitration clause in an employment contract that I have ever seen would seem to have this fatal defect. Does this mean that they are all null and void?

How  does one  avoid this issue ?

I suppose one way would be to try to limit the arbitration clause only to those matters that would otherwise be determined by a court and not purport to cover those items covered by administrative tribunals or the types of statutes that I referred to above.

In Evans v Paradigm Capital, ( 2019 )NSC 3046) Gans J was called upon to reconsider his trial award of costs after the Court of Appeal reduced the Plaintiff’s damages from $137,000 to $57,000.

At trial the Plaintiff was awarded costs of $171,000 plus disbursements . On the reconsideration of costs, for reasons which are not all that clear, Justice Gans said as the results were mixed, there would no order as to costs.

So originally the Plaintiff the Plaintiff won a total of $308,000.

After her failed  appeal, she is only getting $57,000.

In other words by appealing, she lost over $250,000.

Remember the  old adage:

Quit when you are ahead.

In McKercher v Stantec Architecture ( 2019 SKQB 100) Justice Elson had a situation where at the time of his hiring as a staff architect , the plaintiff signed an enforceable contract limiting his notice to a maximum of 3 months.

When he was terminated 11 years later, he had been promoted a number of times and ultimately  held the position of Business Centre Sector Leader, reporting to a VP.

Applying the change in substratum argument, the judge had this to say :

Further, and as informed by the longstanding authority in Bardal v Globe & Mail Ltd. (1960), 24 DLR (2d) 140 (Ont H Ct) [Bardal], the period of reasonable notice increases with, inter alia, the length of service and the level of responsibility. In my view, it necessarily follows that where an employer wishes to rely on a comparatively short notice limit in the original employment contract, it must take reasonably consistent and meaningful efforts to protect the limit’s enforceability. This means that where an employee advances to higher levels of compensation and responsibility, it is incumbent on the employer to reassert its reliance on the contractual notice limit and to ensure that the employee both understands and accepts the employer’s position.

Having failed to this, the Judge found that the termination clause was unenforceable and awarded reasonable notice of 12 months.

There are three ways that an employer can avoid this from happening :

1. Include a clause in the original contract that the  termination clause continues to apply throughout the employment period notwithstanding any change in position or compensation.
2. Include a line in all promotion and compensation letters reconfirming the termination clause.
3. Have a termination clause which is more reflective of common law reasonable notice.