Employment Contracts: Unenforceable Termination Clause Costs Employer over $ 400 000

May 22, 2019

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 company’s finances and reported to the President and the Finance Committee of the Board.

The termination clause in his employment contract stated, in part:

During the Term, the Employee’s employment may be terminated: a)      By the Employer,… ii)      Without cause, upon providing the Employee with the minimum notice for the time employed as determined under the Employment Standards Act, 2000 (Ontario), as amended or replaced from time to time, And the Employee specifically acknowledges and agrees to the above and hereby waives any claim to further notice or payment or compensation.

Six years later Mr. Menard employment was terminated without just cause when he was in his mid-50s. Thereafter the parties entered into pre-litigation settlement discussions. After CIGI had offered Mr. Menard seven months termination pay he sent an email asking for more and basically threatened to expose alleged wrongdoing. In particular, he wrote, in part:

If I am forced to move forward with a civil suit for wrongful dismissal there could be information within the legal documentation that will be subject to the public domain, much of which could be very embarrassing and damaging to CIGI, both now and for the foreseeable future.  … this information would undoubtedly be of importance to various news organizations throughout Canada and the World, and could spread like wildfire within the realm of social media. CIGI’s current funding for both the Endowment and the ILRP may be jeopardized, as well as the prospect of any other funding, and perhaps repayment of past KIP funding.

This threat did not go over well. Thereafter CIGI retained an external firm to conduct a forensic investigation which concluded that Mr. Menard had downloaded large amounts of copyrighted materials onto CIGI computers. As a result of these findings, CIGI withdrew its settlement offer and claimed it had “after acquired” cause which meant it believed it had evidence to support a just cause termination. So Mr. Menard was forced to commence a wrongful dismissal action to obtain any termination pay.  He looked for alternative employment and told prospective employers he had been terminated for just cause.

Legal Issues

  1. Did CIGI have just cause to terminate Mr. Menard’s employment? 
  2. If not, was the termination clause in Mr. Menard’s employment contract enforceable? 
  3. If not, how much notice of termination should he have received? 
  4. Was Mr. Menard entitled to any punitive damages which are are only awarded in exceptional cases for “malicious, oppressive and high-handed” misconduct that “offends the court’s sense of decency”

Decision

Just cause – The trial judge concluded the misconduct did not amount to just cause. The misconduct evidence was weak and I think most judges would have reached the same result.

Enforceability of termination clause – It is often difficult to predict with any certainty whether a judge will enforce a termination clause but I think most employment lawyers and judges would agree this clause should not have been enforced.

Notice period – The CIGI lawyer argued the common law notice period was in the 7 to 11 month range however the judge concluded Mr. Menard should have received 12 months notice. The judge indicated he extended the notice period because Mr. Menard told prospective employers he was terminated with just cause.

Punitive damages – Given Mr, Menard’s ill advised email the judge had no difficulty rejecting his claim for punitive damages. “In looking at the whole picture, one must also consider the unfortunate email that Mr. Menard sent CIGI after his termination, in which he effectively sought to blackmail them into a higher severance package.”

Lessons to Be Learned:

  1. A properly drafted termination clause will significantly reduce an employee’s termination costs. In this case, if the termination clause had been drafted property Mr. Menard would have been entitled to 6 weeks notice of termination and if CIGI’s payroll was over $ 2.5 M then he would also have been entitled to another 6 weeks severance pay. His salary was $ 175 000 so in the worst case scenario for the employer he would have received about $ 40 000 instead of the $ 175 00 termination pay the judge ordered CIGI to pay him.
  2. An employer should not allege just cause unless it has evidence of serious misconduct. It annoys judges and it unnecessarily extends the trial and usually significantly increases legal costs. In this case, the judge said he awarded a longer notice period because of the unproven just cause allegation.
  3. Wrongful dismissal actions are obscenely expensive and rarely make any economic sense for employers especially when legal costs are considered. In this case, CIGI was ordered to pay $ 175 000 of Mr. Menard’s legal costs in addition to the $ 175 000 wrongful dismissal damages. I wouldn’t be surprised if CIGI’s legal fees were at least $ 175 000. So CIGI likely paid over $ 500 000 for a termination that could have cost $ 40 000 with a properly drafted termination clause. In addition, significant valuable management time was unnecessarily devoted to this case with no return on this investment.

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.

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