Litigation Risk Associated with Employee Terminations

Nov 17, 2016

Employment Contracts Eliminate Litigation Risk

An employee and employer can agree on how much notice of termination the employer must provide the employee before the employment relationship commences. This agreement can be included in a termination clause in an employment contract.

Litigation Risk Arises When Employees Are Entitled to Reasonable Notice of Termination

Readers of this blog know that I strongly recommend that every new hire sign an employment contract with a legally enforceable termination clause. Absent such an agreement an employee is generally entitled to reasonable notice of termination.

An employee and employer can and often do disagree on what constitutes “reasonable” notice of termination. A recent case illustrates the vagaries of wrongful dismissal litigation.

A case Study: Michelle Summerfield vs. Staples Canada Inc.

The Facts

Staples Canada Inc. terminated Ms. Staples employment without cause after almost 5 years’ service. At the time of her termination she was 39 years old, her total remuneration was about $ 84 000, and she worked in a sales capacity.

The Litigation

Ms. Staples commenced a wrongful dismissal action. The only issue in dispute was the length of the reasonable notice period so the parties agreed to have this issue resolved by way of a summary judgment motion.

The Legal Test

The parties agreed that when determining the length of the reasonable notice period the judge should apply the Bardal factors; that is; the character of her employment (i.e. a sales position); the length of service (i.e. almost 5 years); the employee’s age (i.e. 39 years old) and the availability of similar employment given her experience, education and qualifications.

The Litigation Risk

The employer submitted cases where judges found a 3 to 5-month notice period is allegedly similar circumstances. The employee submitted cases where judges found a 6 to 9-month notice period was appropriate. The range of reasonable notice (i.e. 3 months to 9 months) represented the litigation risk in this case.

My Thoughts On This Case

I know nothing about this case except what I have read in the decision. My guess is that the employer made a without prejudice offer of 3 to 4 months pay. The judge referred to such an offer but stated the terms of the offer were not disclosed to the court.

The judge awarded Ms. Summerfield 6 months pay in lieu of notice less the 5 weeks’ termination pay she received or $ 34171.92 which I think is on the high end of the reasonable notice in this case. In this case, I think the employee rolled the dice and won.

I suspect that the legal fees incurred by both parties FAR exceeded the difference between the employer’s without prejudice settlement offer and the 6-month damage award.

Lesson To Be Learned

If the employee had signed an employment contract with a legally enforceable termination clause then the employer could have saved over $ 34 000 AND the legal fees associated with this wrongful dismissal action. In this latter regard, the employer will be required to pay its own legal costs and probably most of the employee’s legal costs.

For over 25 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]

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:

  1. 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

  1. 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.

 

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