Avoiding Wrongful Dismissal Litigation: One Employment Contract at a Time
Many wrongful dismissal cases are determined by the sensibilities of the judge who is appointed to the case. Some are employee friendly. Others are employer friendly.
Consider the opening sentence of a wrongful dismissal case that was decided earlier this month: “Employment law is governed by the notion that the employer should not be able to use its larger power to unfairly gain an advantage over the employee.” I didn’t need to read any further to know who won this case…
The Case of An Employer Trying to Avoid Termination Pay By Requiring An Employee to Enter into a Series of One-Year Fixed Term Contracts
I strongly oppose the use of fixed term contracts. A contract of indefinite employment with a well-drafted termination clause can usually achieve the same end. It also avoids you the time, cost, disruption and uncertainty associated with litigation.
Here’s what can happen if an organization uses a fixed-term contract:
In Michela v. St. Thomas of Villanova Catholic School, three teachers signed a series of one-year contracts; two of them signed 12 one-year contracts, and the other signed 8 one-year contracts. They were all notified that the last contract would not be renewed when it expired on August 31, 2013. These types of contracts are common in private schools.
The teachers claimed the last contract was not a fixed term contract and were therefore entitled to “reasonable” notice of termination. The school claimed the teachers had signed a one-year fixed term contract that ended on August 31, 2013 and were not entitled to any further notice of termination. The judge looked at the entire agreement and the surrounding circumstances and concluded the last contract was not a one year fixed-term contract. She stated:
“The term (of the 2012-2013 contract) is for one year, but the contract contemplates that it may operate for either a longer or shorter period… (A term in the 2000-2001, 2001-2002, 2002-2003, 2003-2004, 2004-2005 contracts) required the teacher to decline a renewal in writing 30 days before the end of the current contract…. For the first three school years referred to, these contracts also included a term that says that the Agreement would automatically expire on September 1st of the applicable year (i.e. 2000-2001 2001-2002 and 2002-2003) …For the fourth and fifth years, the clause was amended by adding additional direction: The teacher will be notified in writing by April 15th [of the applicable year] if the School does not intend to offer the teacher a full time position for the [subsequent] school year (i.e. 2003-2004 and 2004-2005)”.
“…For the first three years, which is it? Does the contract expire or, absent a notice declining renewal, was the contract renewed? For the fourth and fifth years, the position depends on a double default. Absent a notice that the School did not intend to offer the teacher a position for the upcoming year or a notice from the teacher declining a renewal, the teacher would continue for another year. Either way, there is ambiguity.
Lessons to be Learned
1. Judges are unpredictable. We generally have excellent judges in Ontario who do their best to apply the law fairly. Each judge however has a unique personal, educational and professional background. I believe this background influences how they mete out justice. Two judges hearing the same facts could come to different conclusions. This is one of the reasons why lawyers try to settle cases early in the litigation process; to avoid this litigation risk.
2. Fixed-term contracts can be very costly. In this case, each of the three employees was awarded six months compensation in lieu of notice, and the employer was ordered to pay $ 42 000 in legal costs. The employer was also, of course, required to pay it’s own legal costs. In this case, the school could ill afford these costs. In this regard, the school terminated the three employees (and 2 others) because it believed it was likely facing a $300,000 shortfall in revenue for the 2013-2014 school year.
3. Employment contracts save termination costs. Under a series of one year fixed-term contracts, a teacher with 25 years service earning $ 100 000 a year could be entitled to receive as much as 24 months notice of termination (or up to $ 200 000 pay in lieu of the notice) whereas a school who uses a well-drafted employment contract can reduce this notice period to 8 weeks (or about $ 15 000 in lieu of notice).
For the past 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers and employees on all aspects of the employment relationship including employment contracts. If you have any questions, you can contact him at 416 317-9894 or at [email protected]
There are many ways to attack the termination clause in an employment contract.
I am now surprised if employee counsel does not claim that their client’s termination clause is not legally enforceable - usually because the termination clause does not allegedly comply with the Employment Standards Act.
This blog considers a case, McKercher v Stantec Architecture Ltd., 2019 SKQB 100, where an employee successfully attacked the termination clause in his contract because he did not explicitly agree to it after being promoted.
The Facts
In 2006, Mr. McKercher commenced employment as a staff architect. The termination clause in his employment contract stated:
Termination other than for cause will be with notice or pay in lieu of notice, based on your length of service. If the Employer terminates your employment for other than just cause you will receive the greater of:
- a) Two weeks notice or pay in lieu of notice during the first two years of employment increasing by one week for each additional completed year of employment to a maximum of three months notice or pay in lieu of notice.
or
- b) The minimum notice of termination (or pay in lieu of notice) required by applicable statutes.
Eleven years later, when Mr. McKercher was employed as a Business Centre Sector Leader, his employment was terminated. The employer paid him the three months termination pay he was owed under his employment contract.
Another way to attack a termination clause: What is the changed substratum doctrine?
An Ontario judge in a 2012 case, MacGregor v National Home Services, 2012 ONSC 2042 (CanLII), described this legal doctrine as follows: "The changed substratum doctrine … provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed."
The rationale for this doctrine has been described by one judge, Schmidt v AMEC Earth & Environmental Ltd., 2004 BSCS 2012 (CanLII), as follows: "In my view, it was incumbent on the defendants to advise Mr. Schmidt that they intended to continue to rely upon the termination provision set out in the Agreement when substantial changes in his employment occurred. This would have allowed him to consider the matter and to negotiate for other terms. If the defendants wished to continue to rely on the termination provisions there ought to have been a ratification of the provisions as the nature of Mr. Schmidt’s employment changed."
Decision
The judge hearing this case relied on the following factors when deciding not to enforce the termination clause in the employment contract: ”...there is no evidence that (the employer) made it clear to the (employee) that the notice of termination provisions were intended to apply to the positions to which he was promoted. The employment agreement contains no express wording to this effect, nor does it contain any wording to support the inference of such an intent. Further, and in keeping with the analysis in Schmidt, the Court received no evidence that, as it promoted the plaintiff, SAL reasserted its understanding and expectation that the notice of termination limit would remain in effect.”
Lesson to be learned:
An employer should make it clear that the termination clause in an employment contract applies when an employee is promoted. This expression of this intent should be in writing and should be clear and unambiguous. I recommend that an organization’s employment be reviewed by an employment lawyer every year or two. If your employment contract does not address this issue then think about doing so the next time it is reviewed.
For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]
The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.
Recent Posts
Duty of Good Faith: Do Employers Have a Duty to Disclose Material Facts to Employees Who are Making Employment Related Decisions?
The Facts Mr. Jonasson, a 55 year old engineer with 22 years’ service with Nexen Energy was thinking about either retiring or taking a leave of absence. He decided to request a six month leave of absence. The employer agreed to his leave request if he entered into the...
read moreEmployment Contracts: Unenforceable Termination Clause Costs Employer over $ 400 000
A recent case underscores the importance of including a properly drafted termination clause in your organization’s employment contract. The Facts In March 2010, CIGI hired Mark Menard, a chartered accountant, as Senior Director of Finance. He was responsible for the...
read moreDirectors Sent to Jail for Failure to Pay Employee Wages
If you are a director or a party to a unanimous shareholder agreement did you know that you are personally liable for unpaid wages and you could go to jail for up to one year for failing to pay them? So if you are a small business owner, have signed a unanimous...
read more