Ontario Court of Appeal Says Any Defect in a Termination Clause Voids the Entire Clause:

In Andros v Colliers Macauley Nicolls Inc ( 2019 ONCA 679) the Ontario Court of Appeal considered the legality of the following termination clause:

4. Term of Employment

The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act or, at the Company’s sole discretion, either of the following:

a. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.  

b. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary. 

In beginning their analysis, the Court went back to first principles, which they set out as follows:

[20]      It is not possible to simply void the part of a termination clause that offends the ESA. If a termination clause purports to contract out of an employment standard without clearly substituting a greater benefit in its place, the entire termination clause is void: North v. Metaswitch Networks Corporation, 2017 ONCA 790 (CanLII), 417 D.L.R. (4th) 429, at para. 24; Hampton Securities Limited, at para. 7. As Laskin J.A. said in Wood, at para. 21: “Contracting out of even one of the employment standards and not substituting a greater benefit would render the termination clause void and thus unenforceable”: see also paras. 64, 69. This is true even if the employee actually receives his or her statutory entitlements after termination. Accordingly, the enforceability of a termination clause is determined by the wording of the clause alone, not by an employer’s conduct after termination: Wood, at paras. 43-44.  

The Court then on to find that paragraph 4 (a) was illegal because it did not mention severance pay and paragraph 4 ( b) was illegal because it did not include either benefits or severance pay .

The Court then went on to say that because paragraphs 4 (a) and (b) were illegal, the whole termination clause was void.

[27]      Strictly speaking, given her finding that the ESA had been contracted out of under clauses 4(a) and 4(b), it was unnecessary for the motion judge to consider ambiguity. The termination clause was unenforceable given that it contracted out of statutory entitlements without substituting a greater benefit: Wood, at para. 21.

In other words, the first part of the clause guaranteeing the employee no less than the ESA ( which would seem to  be enforceable ) was in effect ” poisoned ” by the second illegal clause.

So you do really throw out the entire  baby with the dirty bathwater.

This case should have a dramatic impact on the analysis  of termination clauses because all the employee has to do is find one defect and the whole clause gets thrown out.

There are many types of ESA defects that creative lawyers have already litigated and some ideas that are yet to be tested. This case makes this search for these defects extremely important and reiterates that an all embracing ” clean up cause” may not ward off an attack.

Of course all of this could be avoided if employers drafted termination clauses that provided for somewhat more than the ESA but less than the common law.

 

Fired Articling Student Gets $50,000 for Being Bullied by her Boss

In Acuman Law Corp v Ojanen ( 2019 BCSC 1352) the plaintiff was 4 months into her 12 month of articles when she was fired because her boss thought that she and her boyfriend ( another articling student at a different firm ) were trying to compete with his lucrative DUI practice .

First the judge found that there was no just cause an awarded her the balance of her term, which only came to $18,934.

He then went on to award her $50,000 of aggravated damages because of the severe emotional effect the termination had on her and her career.

This is a partial list of what the employer boss did that upset the judge:

  1. He did not give the articling student any chance to explain her side of the story before he fired her .
  2. He sued her first claiming theft, and trespass. He then decided to serve her with the Claim in front of her classmates while she was attending the bar admission course put on by the Law Society.
  3. He falsely accused her of deceit and dishonesty.
  4. Given these allegations, she was unable to complete her articles and thus was rendered her unemployable in the legal profession.
  5. The employer persisted in these false allegations for 3 years including at trial .

This is the part of the judgement that I love :

[129]     The usual power imbalance between employer and employee was accentuated in this case.  Ms. Ojanen was a young woman without local contacts in the legal profession.  Mr. Doroshenko was the head of an established law firm.  Ms. Ojanen was terribly vulnerable.  Mr. Doroshenko was possessed of reputational capital and financial resources.  He was not content simply to fire her but took full advantage of his favoured position to launch a campaign against Ms. Ojanen through this lawsuit.

[130]     In short, Mr. Doroshenko’s response on discovering the Blog was disproportionate and bullying.  I find that he was determined to protect Acumen’s competitive position by making an example of Ms. Ojanen.

These are the judge’s findings on the effect of these actions on the students’ life:

132]     Ms. Ojanen testified that her dismissal and this lawsuit have visited profound emotional consequences upon her.  She was shocked and humiliated when she was served in front of her class.  After that, everything changed at PLTC and she felt embarrassed just being there.  She was distracted by the lawsuit and unable to focus on her studies.  As I have noted, she did not successfully complete PLTC.

[133]     Ms. Ojanen blames the dismissal and the lawsuit for the break-up of her marriage to Mr. Dominato.  She feels herself an outcast from the legal profession and unqualified for other employment.  In applying for work, she has had to disclose the allegations of theft and trespass.  As she put it, it’s a lot for an employer to take on.  Since her termination, she has mostly been unemployed.  She could not afford her rent and lived out of a car for three months. The car belonged to Mr. Dominato and he repossessed it and moved back to Ontario.  Ms. Ojanen lived on the street for a week or so after that before she was able to persuade her parents to take her in; she now lives in an apartment they own.  Pending the resolution of this lawsuit, her life has been on hold.

[134]     Ms. Ojanen testified that her experience with Acumen has changed who she is.  She suffers from anxiety, depression, inability to focus, irritability and loss of appetite.  These were not issues for her before her termination.

[136]     I accept Ms. Ojanen’s evidence concerning the effects of the dismissal and this lawsuit on her.  In the circumstances in which Ms. Ojanen found herself, it was natural for her to suffer serious and prolonged emotional distress in consequence of the way she was treated by Mr. Doroshenko and Acumen.  I find that she suffered serious and prolonged emotional distress that is well outside the norm for dismissed employees.

One last amazing fact.

Ms Ojanen, the fired student, represented herself at the trial.

Not bad for a beginner.

Employer Loses Case Because it Used ” or ” Instead of “and”:

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. (4th) 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.

OCA Denies $953,000 “Commission ” Over Notice Period:

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.

 

Dependant Contractors Do Not Get Less Notice Than Employees:

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:

105      Similarly, in Keenan v. Canac Kitchens Ltd., 2016 ONCA 79, the Ontario Court of Appeal upheld a reasonable notice period of 26 months for each of the two dependent contractor plaintiffs with 32 and 25 years of service respectively. There, too, there was no automatic “deduction” due to their dependent contractor status, either at the trial level or on appeal. In fact, the plaintiffs were given two of the highest notice periods ever awarded in Canada up to that point — two months over the general upper limit of 24 months which courts have stated is only to be exceeded in “exceptional circumstances”: see Dawe v. Equitable Life Insurance Company of Canada, 2019 ONCA 512at paras. 31-33, citing Lowndes v. Summit Ford Sales Ltd., [2006] O.J. No. 13 (O.N.C.A.) and Keenan; Ansari v. British Columbia Hydro & Power Authority (1986), 2 B.C.L.R. (2d) 33 (S.C.) at 42, aff’d (1986), 55 B.C.L.R. (2d) xxxiii (note) (C.A.).
Conflict and Proud Father Alert: My son, Matthew Fisher of Lecker & Associates, was counsel for the plaintiff in Keenan v Canac .

Progressive Discipline Leads to Termination For Cause for Poor Performance:

I sometimes hear lawyers tell the clients that upholding just cause for poor performance is almost impossible .

Not so, if the employer does it right.

In a recent Canada Labour Code adjudication entitled Bott v Shaw Cablesystems ( 2019 CarswellNat 3038) Adjudicator Gunn had a situation where a Project Manager was terminated for consistent poor performance over an extended period of time.

This is how Mr Gunn summarized his findings:

111      The conclusion I have reached might have been very different had Shaw not communicated their expectations of Mr. Bott, or not allowed him an opportunity to improve, or fired him in a peremptory manner, without using the progressive discipline steps. Instead, Shaw management used progressive discipline including a verbal warning, a written warning and then an unpaid suspension before dismissing Mr. Bott. At each stage in the process there was culpable conduct on Mr. Bott’s part. Mr. Bott’s supervisor, Mr. Jammu, met with him on several occasions to discuss incidents with him and to go over what was expected of him, such as not doing side projects. Mr. Bott ignored him and kept on working on side projects. Mr. Bott was told to keep stakeholders in the picture and be transparent about dates and changes to projects, but he continued not to do so.
112      In short, there is overwhelming evidence that there was just cause to terminate the employment of Ryan Bott. The Respondent has met the onus of establishing this. Mr. Bott’s complaint is therefore dismissed.
As this was a situation covered by the Unjust Dismissal section of the CLC, the employer could not simply have terminated  the employee at an earlier time without alleging cause  and paid reasonable notice. In a non-CLC case, it is often cheaper and more efficient to terminate an incompetent employee   and not allege cause than go through the lengthy process of progressive discipline in the hope of saving on the termination costs. The increased of severance is usually offset by the cost and risk of intentionally keeping on an incompetent employee.
As is often the case with CLC adjudications, the employee represented himself. Shaw was represented by Howard Levitt.

 

Excluding STD and LTD during Notice Period Voids Termination Clause:

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:

Termination without Cause
(a) The Company may terminate your employment at its sole discretion, at any time for any reason, without cause, upon providing you the minimum notice, pay in lieu of notice and/or severance pay required by the Ontario Employment Standards Act, 2000, as amended from time to time. You will have no other entitlement to notice of termination, pay in lieu of such notice, and/or severance pay.
(b) In addition to the foregoing and subject to the consent of the Company’s insurers, you will be entitled to continue to receive Company benefits (excluding STD and LTD benefits) during the notice period specified above.
He found that under the ESA , all benefits must be continued during the termination pay period and by excluding STD and LTD , this section violated the ESA and thus under Wood v Fred Deeley, the entire clause was null and void.
As the Plaintiff was a Fashion Studio Manager with  23 years of service , her notice period was 21 months instead of the 31 weeks under the ESA.
This automatic exclusion of LTD and STD during the termination period under the ESA ( which maxes out at 8 weeks ) is a very common clause in termination agreements .
These is the actual words from the decision:
88      The problem, however, for St. Joseph’s Communications is that while some aspects of the termination clause found in the 2012 employment contract were unobjectionable, the treatment of the employee’s benefits during the notice period were contrary to the Act. There was a fatal flaw, an Achilles’ heal so to speak, in the 2012 agreement making its termination clause void and unenforceable.
89      To be more precise, the termination clause in the 2012 employment contract purports to allow St. Joseph Communication upon termination to provide Ms. Cormier with only some of the employee benefits that she received before termination and even then, only subject to the consent of St. Joseph Communication’s insurers. With respect to the employee benefits, the termination clause therefore provides Ms Cormier with a lesser right than the rights set out in the Employment Standards Act, 2000 and therefore, the entire termination clause is void.
90      The case at bar is on all fours with Wood v. Fred Deeley Imports Ltd.. In the Wood case, Ms. Wood’s employment was terminated without cause and her employer relied on a termination clause in her written employment contract to avoid the common law presumption that Ms. Wood was entitled to pay in lieu of reasonable notice. Pursuant to the termination clause, she received thirteen weeks of working notice plus a lump sum equivalent to eight week’s pay. Although some of the payments made to Ms. Wood under the termination clause were superior to what she would receive under the Employment Standards Act, reversing the motion judge, the Court of Appeal ruled that the termination clause was unenforceable because it excluded the employer’s statutory obligation to make benefit contributions during the notice period and the termination provision also did satisfy the employer’s obligation to pay severance pay.
91      The Court of Appeal held that there is a rebuttable common law presumption that if a person who is hired for an indefinite period is dismissed without cause, then he or she is entitled to reasonable notice or a continuation of pay in lieu of reasonable notice. The presumption of reasonable notice can be rebutted by the parties agreeing to a different notice period provided that their agreement is compliant with the minimum employment standards of the Employment Standards Act.50
92      Justice Laskin, who wrote the judgment for the Court, stated out that if the termination clause was not compliant with even one of the employment standards by not substituting a greater benefit for that standard, this would make the termination clause unenforceable and entitle the employee to reasonable notice in accordance with the common law presumption.51 Further, Justice Laskin held that even if the employer ignored the provisions of the termination clause and offered to meet the minimum standards of the Act, the termination clause would be unenforceable. He said that the enforceability of the termination clause depends only on the interpretation of the clause itself and not on what the employer may have done on termination.52
93      As noted above, the termination provision in the 2012 employment contract does not provide benefits better than the minimum standards of the Employment Standards Act, 2000. It follows that the termination clause is unenforceable.

OCA Finally Sets Limits on Reasonable Notice:

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.

OCA Distinguishes Employee Rights v Shareholder Rights :

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.

 

 

 

Do All Arbitration Clauses in Employment Agreements Violate the ESA?

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.