Wednesday, May 11, 2016

Small Claims Court Can Order Production of Documents

In the recent case of Burke v. Lauzon Sound and Automation Inc., the plaintiff sought an order for production of documents from the defendant.

The defendant, by contrast, took the position that the Small Claims Court has no power to order production of documents, outside of a settlement conference.  There were a couple of earlier Small Claims Court decisions reaching that conclusion, including a decision by Deputy Judge Winny finding that motions for production of documents would "import a discovery process that is neither contemplated by nor intended under the Small Claims Court Rules."

However, Deputy Judge Lepsoe in Burke declined to follow those cases.

On a careful summary of the applicable Rules, and specifically the broad 'catch-all' language giving the Small Claims Court powers analogous to the Superior Court as to matters not specifically touched upon in the Small Claims Court, the Deputy Judge concluded that he did have power to order production, and proceeded to do so.

Commentary

This issue does arise from time to time.

Unlike the Superior Court, which as part of its ordinary process requires production of all documents that are arguably "relevant" to the matters in issue, the Small Claims Court only requires that parties disclose the documents upon which they intend to "rely".  If I have a document that will help you, there's nothing automatic in the Small Claims Court rules that requires me to produce it to you.

When I was an articling student (quite some time ago - before either of the cases relied upon by the defendant were decided), I was carrying a wrongful dismissal file at Small Claims Court, where the employer alleged cause, based on pretty technical allegations of breach of policy.  I put together a lengthy demand for productions - on the whole, it looked pretty excessive for the Small Claims Court, but the reality is that all the documents I was insisting upon were justifiable as being important to the matters in issue - because of the nature of the allegations the employer was making, it was hard to see how we could get a fair trial without having the opportunity to explore these records.

Opposing counsel argued that there was no mechanism for discovery of documents, but I reviewed the Small Claims Court Rules at the time and came to the same conclusions as Deputy Judge Lepsoe:  It didn't make sense that the Small Claims Court didn't have any jurisdiction to order production of documents, but it probably would make sense that the scope of such production should be limited to bear in mind the mandate of the Small Claims Court itself.  (Eventually, the matter settled, and we never needed to argue the issue of the proper scope of discovery.)

Particularly with the Small Claims Court jurisdiction at $25,000 these days, procedural protections become more important:  Maybe we don't want to order voluminous productions in a case that's only worth a couple thousand dollars, but when we're arguing over $25,000, some requirement for productions is certainly appropriate.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Friday, April 22, 2016

Court of Appeal Extends Goss Doctrine to Fixed Term Contracts

Here's a head-scratcher for you.

Remember Bowes v. Goss Power Products Ltd.?  I posted about it a few times - it was an odd one, because Bowes was making an argument that seemed to me to be unlikely to succeed, even though I felt that, on first principles, it probably should.

Bowes dealt with an issue where a contract provided a fixed amount of notice or pay in lieu thereof: Bowes was fired without notice, got a new job quickly, and then nonetheless pursued his full pay in lieu of notice from the old employer.  The 'old' case law suggested that he had mitigated his losses, and was entitled to essentially nothing.

However, I argued in my blog entries, and the Court of Appeal eventually concluded, that the language entitling him to pay in lieu of notice gave him a monetary entitlement not subject to the duty to mitigate.  So he won.

However, in my commentary on the Court of Appeal's decision, I asked whether or not it went "too far", because the Court's commentary suggested that simply the act of fixing termination entitlements, at all, without an express obligation to mitigate included in the contract, relieves the employee of the obligation to mitigate.

There's a new decision from the Ontario Court of Appeal which clarifies that not only is this the case, but it applies to the termination of fixed term contracts as well.

Howard v. Benson Group Inc.:  Background and Procedural History

Mr. Benson worked as a manager at an automotive service centre in Bowmanville.  He was hired in September 2012 on a five-year fixed term contract, and dismissed 23 months later.

The contract also included an 'early termination clause':  "Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario."

The effect and enforceability of this kind of language is often arguable.  The employer's intention would be to limit the employee's entitlements on termation - in this case to two weeks' pay in lieu of notice - but enforceable language to do so can be challenging.

This is certainly not the best termination language I've seen, but I could probably find good authorities on both sides of this argument.  On motion for summary judgment, this language was found to be ambiguous and therefore unenforceable.  I could go into detail on this, but Sean Bawden posted a good commentary at the time, and ultimately this finding was not appealed, so the Court of Appeal didn't assess whether or not the issue was rightly decided.

That being the case, we are left with a five-year fixed-term contract with no enforceable termination language, and a termination less than two years in.  This is naturally a dangerous situation for an employer - consider, for example, the similar Loyst case, where a fixed term contract led to liability on the basis of 30 months.

However, the motions judge found that damages should be assessed on the basis of common law 'reasonable notice', subject to the duty to mitigate.

The plaintiff appealed on both points, arguing that he should be entitled to the full balance of the outstanding remuneration on the fixed term contract, and that there should be no requirement to mitigate.

The Court of Appeal Decision

Earlier this month, the Court of Appeal released its decision on these issues:  The plaintiff was successful on both.

Common Law Damages versus Wages for the Unexpired Term

A fixed term contract is created only by clear and unambiguous language...and where that is the case, the contract expires at the end of its term without the need for notice by the employer.  Thus, language that expressly creates a fixed term contract actually has the effect of displacing the implied term requiring reasonable notice of termination.

It is possible for parties to a fixed term contract to contemplate early termination, but with the unappealed removal of the early termination clause, there was no basis to do so - and accordingly there was nothing in the contract that expressly or impliedly conferred a right on the employer to terminate the employment contract prior to the expiration of its term.

As a result, the Court of Appeal concluded that damages must be assessed on the basis of the remainder of the five-year term.

Duty to Mitigate

The Court of Appeal spent some time analyzing the Bowes decision, and its rationales, summarizing the policy concerns at issue as being, firstly, a concern about fairness in allowing the employer to "opt for certainty" in terms of its termination liabilities, and then nonetheless reduce that amount by requiring the employee to mitigate its losses where mitigation is not addressed in the employment agreement; and, secondly, "it would be inconsistent for parties to contract for certainty, and yet leave mitigation as a live issue with its uncertainties and risk of future litigation."

The Court acknowledged that the contract in Bowes was different in two respects:  "(1) it was not a fixed term contract; and (2), more significantly, it contained an express clause stipulating a fixed quantum of damages for early termination of the contract".

However, the Court was nonetheless persuaded that the importance of 'certainty' translates well from the Bowes contract to the Howard contract, and therefore that the same legal considerations should be applied.

Accordingly, the Court of Appeal concluded that Mr. Howard is entitled to remuneration for the entire remainder of the term, without deduction for any mitigation earnings.

Impact

In my view, the actual direct practical impact of this decision is small.  I have long been of the view that fixed term contracts, in most circumstances, are a terrible idea for employers, and that most employer objectives are better served by an indefinite term contract with a good termination clause.

This case drives in the point, but from the perspective of employer risk is not really new:  I pointed to Loyst as authority for the proposition that a five-year fixed-term contract could leave an employer on the hook for years of lost wages.  The difference in Howard is that some of the partial defences that the employer might have faintly hoped to rely upon are totally extinguished.

It will be interesting to see if the courts apply the same reasoning to constructive dismissal cases dealing with fixed term contracts:  That's an area where mitigation proves to be a much more difficult concept for plaintiffs.

Concerns with the Decision

Make no mistake:  At present, the decision in Howard is law in Ontario, binding on lower courts.  It's possible that it could be appealed, or that the Court of Appeal could rethink it in the future, but until or unless this happens, expect Howard to be followed in similar cases.

And as a lawyer who does a significant amount of plaintiff-side work, I'll acknowledge that the 'certainty' argument resonates.  Of course, all the contracts we've been seeing since Bowes, trying to build in mitigation clauses...well, they're tricky, and complicated, and weird, and difficult for an employee to understand, and that's going to develop into a whole new area of contract interpretation in employment law, with new dimensions of uncertainty.

But if I boil this down to a "first principles" perspective - the same one that I used when analyzing Bowes before the Court of Appeal decided it - I find the decision troubling, a case of the pendulum swinging way too far in one direction.

Indeed, I would argue that it's impossible to reconcile Howard with the first principles of contract damages.

Contracts 101:  The Compensation and Mitigation Principles

In Canada, "breach of contract" is not a swear term.  It's not considered to be morally outrageous, that somebody might not do what they've promised.  The law will generally permit people to breach contracts, but then expect and require them to pay 'damages' to the other parties to the contract.

And the quantum of those damages is governed by two of the oldest principles in the common law - compensation and mitigation.

The compensation principle states that the non-breaching party is entitled to be put into the position he would have occupied had the contract been honoured, to the extent that this can be done by the payment of money.  The mitigation principle states, however, that avoidable loss or avoided loss is not compensable.

But the mitigation principle gets applied only to income that you were able to earn as a result of the breach.  In wrongful dismissal contexts, this is usually straightforward:  I fire you without notice, in breach of an implied term of your contract, and you now have time during the notice period to use to earn more money...so when you get a new job, that's mitigation.

Where Mr. Bowes' case differed was that he wasn't contractually entitled to notice of termination.  He was contractually entitled to notice or pay in lieu, which means that the termination without notice, in and of itself, didn't actually breach his contract.  Rather, Goss Power breached Bowes' contract only when they - having terminated him without notice - failed to provide the pay in lieu.  His ability to take another job, therefore, can't be said to flow from the breach.

That can't be said of Mr. Howard.  Mr. Howard was entitled to work the full five years, for his full remuneration package.  Benson Group breached his contract by terminating his employment during the term, which directly freed him up to seek new employment.

Unlike Bowes' contract, with actual contractual language that entitled him to a contractual sum on termination without notice, there is absolutely nothing comparable in Howard's contract.  His entitlement to a payout arises only as a function of the compensation principle - which, with very few exceptions (see, for example, Waterman v. IBM), must be subject to the mitigation principle.

Within the employment context, there's no cogent way around this analytical problem, and especially not in a 'fixed term contract' case:  It requires one to regard the compensation and mitigation principles as being, themselves, implied terms of the contract - which is a difficult proposition to justify, because then you could never really talk about 'breach of contract' coherently (because by providing compensation, you'd actually be complying with your full contractual obligations).  The further difficulty is that the compensation and mitigation principles actually transcend contract law, and exist in an essentially identical way in tort law.

Furthermore, the rationale for setting aside the obligation to mitigate, in fixed term contract cases, is based on propositions which is ubiquitous within contract law:  The mitigation principle, by definition, results in uncertainty, because its very function is to modify liabilities flowing from breach, based on events after the breach which are not necessarily within the control of the parties.  Likewise, the very act of entering into a contract is an attempt to achieve certainty.  Nobody ever deliberately contracts for uncertainty.  To say that parties who "contract for certainty" should never apply the mitigation principle...would basically eliminate the mitigation principle as a proposition of law altogether.

For illustration purposes, consider a fixed term tenancy:  If I enter into a one year tenancy, and then terminate the tenancy after two months, it is trite law that the landlord has an obligation to take reasonable steps to re-rent the place, and then account for new rental income.  If he re-rents it for the same amount two months after I leave, my liability is two months.  Yet you would say that we "contracted for certainty" in exactly the same way that Howard and Benson Group did, so why should I benefit from the mitigation principle?

As I said, Howard is now the law in Ontario.  And frankly I'm not all that worried about how that plays out, in practice.  But on a theoretical level, I believe that it take the Bowes proposition further than it can rationally bear.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Monday, March 7, 2016

Costs and Pre-Litigation Offers to Settle

There have recently been a couple of interesting decisions in the case of Borrelli v. Dynamic Tire Corp.:  One deals with tax deductions from a judgment, which is interesting and useful, but in this entry I want to talk about the costs appeal recently decided by the Divisional Court.

Background

Mr. Borrelli was dismissed without cause.  It appears that he was initially offered 16 months' pay in lieu of notice, with a 50% clawback in the event of successful mitigation.  In the course of negotiations, the employer did offer more (it isn't clear exactly how much), but Borrelli didn't accept, instead choosing to litigate.

Early in the litigation, the employer made a formal offer to settle which would have been the equivalent of 12 months' pay in lieu.  (One assumes that the logic was that this was going to be a lump sum, without a mitigation clawback - so without the potential to benefit from a mitigation clawback, they discounted the scale of their settlement position.)  Ultimately, on a summary judgment motion, the judge awarded 16 months' pay in lieu of notice, and denied the plaintiff's claims for bad faith damages, etc.

The Costs Decision

After the summary judgment motion, both sides sought costs.  The plaintiff wanted substantial indemnity costs of about $29,000, or partial indemnity costs of about $20,000; the defendant wanted substantial indemnity costs of about $36,000 or partial indemnity costs of about $28,000.

Justice Mullins was critical of the plaintiff's failure and refusal to accept the pre-litigation offers, calling the defendant's positions "reasonable, exemplary even", and referring to the plaintiff's action as "ill-conceived".  She considered the pre-litigation offers to be 'relevant' to costs.  Still, the Plaintiff was awarded modest costs, of $6000, representing costs of the motion and not of the action more generally.

The Appeal

The employer appealed to the Divisional Court.  (This is an unusual process, requiring 'leave', which was obtained.)  It would appear that they regarded themselves as having been the 'successful party', having held the plaintiff to basically the same amount they put on the table at the very beginning.

The Divisional Court dismissed the appeal, making four observations:


  1. The Defendant didn't beat its own "Rule 49" offers in the course of litigation.  Had they, then they presumptively would have been entitled to costs...but because their in-litigation offers were a little on the cheaper side than their pre-litigation offers, the Rule wasn't triggered.
  2. Awarding costs of the motion made sense:  By the time the motion was commenced, the plaintiff's alternative - of accepting the Rule 49 offer on the table - would have gotten the plaintiff a lesser remedy than when he ultimately received.  Accordingly, it's fair to say that the plaintiff won the motion.
  3. The plaintiff acted unreasonably by not accepting the pre-litigation offers.  "This is a factor that, in my view, reasonably results in a significant reduction in the amount of costs that should be awarded to the plaintiff."
  4. Ultimately, awarding the plaintiff only $6000, when he was seeking over $20,000 on a partial indemnity basis, reflects an appropriate balancing.


Lessons Learned

The importance of a Rule 49 Offer can't be overstated.  Fundamentally, these are what define the parties' positions when it comes to the costs award - they're what defines who 'won' and who 'lost'.

By scaling back to a 12 month offer in the Rule 49 Offer, having had 16 months on the table before, this was going to be a tough one to settle once litigation started.  Having taken that position through litigation, it's completely right to deny them costs.

On the flip side, this is an unusual case where pre-litigation offers became important.  It's quite rare for an employer to beat its pre-litigation offers in this context.  This unambiguous statement from both the motions judge and from the Divisional Court expressing the importance of the pre-litigation offers will stand as a caution to plaintiffs:  If your employer is making reasonable offers, don't get greedy.  (To be absolutely clear, I am not saying to just accept an offer if it looks okay.  Quite the contrary, if anything, this makes it more important to get legal advice on an offer, to know whether or not the offers are, in fact, reasonable.)

However, I'm not entirely convinced that this proposition has a particularly widespread application.

Limits:  The LTD Problem, and Other Uncertainties

It isn't clear to me if this employee had a benefits package including, say, long term disability.

However, many insurers simply will not continue LTD benefits through a non-working notice period, and those that will charge a very hefty premium for it.  As a result, most of the negotiated settlements I've seen have an exclusion for LTD.  An employer's offer, no matter how generous it is in other respects, will basically never include LTD.

In the right fact pattern (or, perhaps more accurately, the worst possible fact pattern), the discontinuation of LTD can result in a claim that is well in excess of any other 'reasonable notice' types of claims.  (See my discussion from Brito v. Canac Kitchens for details.)

Which makes every early-stage settlement a bit of a gamble on the employee's part:  I'm betting that I'm going to stay healthy.  If I accept a 'generous' offer from my employer, that's almost certainly going to require me to sign a release of any LTD claims that might arise, and if something happens to me during the notional notice period, that means that I've lost very substantial entitlements by signing the release.

Maybe the package is reasonable in other regards, but I'm worried about losing LTD benefits.  Is that unreasonable?  It'd be a stretch for a costs doctrine to send a message that employees should sign away their LTD rights willy-nilly.

Mitigation Clawbacks

Even in this case, the mitigation clawback itself raises its own uncertainties.  The 'standard' form of these clauses is roughly this:  You'll be paid a salary continuance, and as soon as you get a new job, you need to let us know, and we'll stop your salary continuance and instead pay a lump sum equal to half the outstanding continuance payments.

In other words, if I have a 16 month salary continuance, and get a new job after 6 months, then my employer will just pay me an additional five months - giving me a total pay in lieu of notice equivalent to 11 months - and we're done.  But this doesn't mean that I've gotten a five-month windfall.  It's possible that my new job doesn't pay me as much, firstly.  (I usually include language, on the employee side, to prevent the clause from being triggered by nominalistic income, but they never require the new job to be at 100% of prior income levels.)

And more importantly, what happens if I lose that job during a 3 month probationary period?  So I got the new job after six months, worked at it for two months, earning 80% what I was making before, and was dismissed because of poor fit.  End result?  Within my 16 month notice period, I got six months of salary continuance, a five month lump sum, and the equivalent of 1.6 months' wages in mitigation earnings: the 'generous' employer offer, which looked like it gave me 16 months of income security and the potential for a sizeable windfall, actually left me short by 4.4 months' wages.

These are the kinds of uncertainties that can create challenges for early-stage settlement.  And while most employees would probably rather have a deal in place now and see what comes, it's not totally unreasonable for an employee to prefer to take a 'wait and see' approach to see what his claims are actually worth.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Saturday, March 5, 2016

The Rule Against Assignment of Employment Contracts

There's an old doctrine in the common law that an employment contract cannot be assigned without consent - i.e. an employer can't tell you, "From now on, you work for that guy."

It is actually quite a complicated doctrine, particularly in the modern world of complex corporate structures.  The legal personality of the employer is often a flexible concept, and moreover isn't generally significant to the employee:  The identity of the person to whom my boss reports is of little or no importance to me.  As long as the employer respects the core terms of the employment contract (for instance, relating to compensation, working conditions, and duties), the employee doesn't care what name is on his pay cheques.

The underlying policy rationale is that workers should not be treated as chattel, to be bought, sold, or traded between employers.

Further, the courts have regularly held that the purpose of the rule is to protect employees from unilateral changes to their employment contracts.

The trouble is that it doesn't provide much meaningful protection in that way, and in fact has the potential to yield counter-productive results.  Moreover, its purpose has been largely subsumed by other doctrines.

Asset Purchase versus Share Purchase

There are a couple of different types of ways that businesses get bought.  One is by way of 'asset purchase', involving a different business purchasing all the assets (equipment, inventory, receivables, intellectual property, good will, etc.) of an existing business.

The other is by way of 'share purchase', involving the new business buying the corporate shares from the existing shareholders.

In a share purchase, the original employer is left intact.  It remains a party to all the contracts, including employment contracts, it previously entered into.  The 'buyer' is just a shareholder; the 'employer' remains the same corporate entity.  In an asset purchase, on the other hand, existing contracts must be assigned, or new contracts entered into, because the buyer is the new employer, and isn't a party to any of those existing contracts.  (So if I sell the assets of my business, the buyer will need to either get an assignment of my commercial lease, or alternatively will need to enter into a new lease.)

Thus, in a share purchase, while ownership of the employer has shifted, the identity of the employer - that is, the corporation - has not changed.  Thus, the employees remain with the existing employer, subject to the same terms and conditions as before.  From a legal perspective, there has been no change in their employment contract.

By contrast, in an asset purchase, if the purchaser wants to retain the existing employees, the purchaser must offer them new contracts of employment.  NB:  This needs to be done with competent legal advice.  By operation of the Employment Standards Act, 2000, the employees will typically be deemed to have their service with the previous employer factor into certain entitlements.  Likewise, the buyer will typically be regarded as a 'successor employer' at common law, with all the results that entails.

But this doesn't always happen.  In many asset transactions, the employees are left out of the loop.  They don't necessarily know what's going on, and don't really care - they come to work day after day, do the same job, the front-line employees report to the same managers, etc.  They may be aware that there's some high-level restructuring going on, but as long as they don't get told "Don't come into work tomorrow", they'll continue to come into work, and expect to get paid, and as long as that happens, they're satisfied.

At law, the implication of the rule against assignments of employment contracts is that the old employment contract will be terminated, and an unwritten employment contract will have formed between the employee and the new employer.

And, again, 19 times out of 20, the employee won't care.  It's a fairly rare case to begin with where a buyer who doesn't use employment contracts will buy a business from an employer who has integrated written employment contracts with express terms beyond the most fundamental (like compensation, nature of the work, etc.), and most of the time, other express terms in a written contract are to the disadvantage of the employee.  So an incidental voiding of existing written terms doesn't hurt the employee.

But, perhaps more importantly, the employee will not even know.  The only visible change to the employee in such a case will often be that there's a different name on the pay cheque, and that doesn't necessarily mean anything:  Even without an asset transaction, and quite often following a share transaction, there are frequently high-level corporate restructures which result in a different corporate entity processing the payroll.  The 'common employer' doctrine being what it is, that doesn't actually signify any change in the employee's status.  (The case law on point suggests that the rule against assignment doesn't apply to transitions between 'common employers':  See, for example, Yellow Pages Group v. Anderson.)

There are, however, rare cases where a written employment contract contains unusual perks to the employee's advantage - for instance, a golden parachute clause which grants the employee more significant termination entitlements than usual.  In such cases, a 'deemed termination' of the original contract, where the employee is not even aware of the facts giving rise to this deemed termination, ostensibly for the purpose of 'protecting an employee against changes in his employment contract'...makes no sense at all.

The Purpose is Largely Obsolete

In recent decades, we have developed a very elaborate doctrine to protect employees from substantial and unilateral changes in the terms and conditions of employment:  Constructive dismissal.

If my employer 'sells' me to another employer, who insists on changing the terms of my employment relationship in fundamental ways, then - without resorting to my old employer's inability to sell me, without treating my old employer as having terminated my contract, I can claim to have been constructively dismissed simply by virtue of the changes themselves.  This is true whether the transition was an asset transaction, a share transaction, or the exact same management making structural changes to the workplace.

The mitigation doctrine also factors importantly into the common law analysis of the rule against assignment as it presently stands:  Suppose in an asset transaction, my old employer terminates my employment, and the purchaser offers me a new position.  Could I turn down the new offer, and sue my old employer for wrongful dismissal?  Maybe, but in practice, 'mitigation' will often be a significant obstacle to such an approach.  If the new position is on similar terms and conditions to my previous employment, then in most circumstances a Court would regard my refusal of the new offer as a 'failure to mitigate'.

Thus, in most such transactions, caution is (or should be) used by the employers to ensure that the new offer of employment is closely aligned with the existing terms and conditions of employment, to put the employees into a position where they basically have to take the new position.

In light of the constructive dismissal doctrine, we don't need the rule against assignments to protect employees against changes in their employment relationship.  In light of the mitigation doctrine, it doesn't effectively protect against the 'trading' of employees anyways.

Case in Point:  Dundee Securities Ltd.

In December, the Rule arose in the context of a procedural decision in the case of Dundee Securities Ltd. v. Atul (Al) Verma, following a motion by Verma to require the plaintiff to answer certain questions.

Mr. Verma was hired as an investment advisor by Macquarie Canada Services Ltd.  Under the terms of the contract, Macquarie provided Verma with the sum of $505,000, apparently repayable upon resignation - Verma says that this was a signing bonus, structured as a 'forgivable loan' for tax purposes, not to be repaid if Verma was terminated without cause.

Three months later, Macquarie was acquired by Richardson GMP.

Shortly thereafter, Richardson GMP entered into an arrangement with Dundee to assign certain agreements (including Verma's) to Dundee...and the way they structured it was a little complicated:  Richardson GMP incorporated a numbered holding company, and then transferred the shares to Dundee. which then amalgamated with the numbered company.  (Immediately thereafter, Verma left, claiming that his contract was effectively terminated by the change.  Dundee is suing on the 'loan'; Verma is counterclaiming in constructive dismissal, among other things.)

Remember what I said earlier about the Rule against assignment not applying to common employers?  This whole structure looks like an end run around the Rule.  Technically, it's actually kind of clean:  The numbered holding company was a wholly owned subsidiary of Richardson GMP when it became the nominal employer - thus, it was a permissible assignment under the common employer doctrine.  Then because the transition to Dundee was accomplished by way of a share transfer, the Rule is still not triggered.

In the real world of employment law, that kind of technicality tends not to carry the day, and there would be compelling policy reasons to treat a share transfer of a wholly-owned subsidiary as an asset purchase, for the purposes of the Rule.

On the other hand, it's a very technical rule to begin with.  Which is, in large measure, my point:  It's absurd to treat Verma's employment status as substantively different because the corporate lawyers wagged their fingers in a particular way as opposed to another means of attaining the same goal.

Likewise, one can certainly imagine scenarios where an individual in Verma's shoes might reasonably feel that they've been wronged by having their employment relationship shifted in such a way.  And other scenarios where that feeling would be unreasonable.  And the reasonableness of Verma's perception has nothing to do with the corporate prestidigitation that occurred behind the scenes.

In other words, whether or not Verma should be regarded as having resigned or as having been terminated should be a contextual question of fact within the constructive dismissal framework - was it reasonable for him to regard the transition to Dundee as a fundamental change to the terms and conditions of employment?

The Future of the Rule

There's little question that the Rule is, in broad terms, still good law, even though it comes up very seldom.

As is much of employment law, the Rule is asymmetrical in its purpose:  It seeks to protect employees.  As a result, one can expect that it will probably be applied in the rare case where a successor employer tries to rely on a termination clause in the original employment contract, etc., but that it will probably not be applied where an employee is seeking to enforce a term of the original employment contract against a successor employer following an asset sale.

And there are certainly important questions that arise following a transition of an employer, in terms of the substantive rights and remedies of employees.  But I think we seriously need to question whether "Was it an asset transaction or a share transaction?" should really be one of them.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Friday, January 29, 2016

Police Suspension With Pay: A Middle Ground

There is significant controversy right now about Ontario's Police Services Act, regarding the suspension of officers, with pay, when they are subject to disciplinary proceedings or criminal charges.

Because of the time involved in these proceedings, it's a reality which can legitimately be infuriating - in hindsight:  These processes can take multiple years, and then at the end, if it is determined that the police officer did indeed engage in serious misconduct, we scratch our heads and ask "So why did we pay him to stay home for the last x years?"

I would urge moderation.  At the outset of any process, we don't necessarily know how it will resolve.  And suspensions without pay can also render significant injustice.

The Private Sector Analogy

The closest private sector analogy to this issue would be discharge grievances in unionized environments.

If I'm a unionized employer, and I believe that an employee is guilty of significant misconduct, I might go ahead and discharge him.  His union may grieve, and eventually send the matter to arbitration.

In the mean time, the individual is out of the workplace, and not being paid.

At the end of the arbitration, the arbitrator is called upon to determine if the discharge was an appropriate action.  If the employer fails to prove the misconduct, then the employee will usually be reinstated with full back pay.

When the employee has been off work for two years, that's a large amount of money.  But on the flip side, that's two years without a steady income to provide for one's family - that's a lot of hardship for the employee and his family, on unproven allegations.

There's a secondary question, too.  Even if the employer proves misconduct, then the question becomes whether or not it was serious enough to justify discharge.  In many cases, an arbitrator will substitute a different penalty - for instance, reinstating the employee, but substituting an unpaid suspension for a period of time - often significantly less than the amount of time the employee was actually off, meaning that the employee is still entitled to significant back pay.

This model has its advantages, certainly, but it isn't perfect, and sometimes puts employees to very substantial hardship because of false or trivial allegations of misconduct.

Putting the Punishment Before the Process

We need to bear in mind that not every case is clear cut.  In some cases, it isn't clear that there was misconduct.  In others, it isn't clear that the misconduct will warrant the discharge of the officer.  Recall the discharged police officer who last year made the news because he sent a mocking letter thanking the police chief for his three year paid vacation?

His misconduct was at the margins:  He sent 'confidential' information about a person in custody to a mutual friend, for seemingly good intentions.  It was information that had the potential to interfere with an ongoing investigation, but ultimately there was no impact from the disclosure, and the officer took full responsibility for the action from the outset.  This was certainly a close case, and in the private sector I suspect that the conclusion would have been that a discharge was not warranted.

So consider where we stood at the outset of that 3 year process?  We know it's going to be a long time; we don't know how it will turn out; it's entirely plausible that he will receive a slap on the wrist or a short suspension, and be put back on the job.  Is it fair to impose 3 years of financial hardship on him before that process has run its course?

No.  That seems straightforward.  Punishing somebody in such a way, before it is found that they deserve it, is deeply unfair.

The Middle Ground

Either extreme, in my view, is likely to render injustice on a frequent basis.  On the one hand, suspensions with pay allow officers guilty of severe misconduct to continue drawing a salary so long as they can drag out the legal processes.  On the other hand, suspensions without pay have the potential to put innocent officers into dire financial situations.

My suggestion would be that the Police Services Act create an expeditious process for interim remedies:  If the Police Services Board is confident that the officer will be found guilty of conduct deserving of discharge, then it can go to an adjudicator for an order authorizing a suspension without pay until the disciplinary/criminal proceedings are complete.

The specific onus could be the subject of discussion:  I would propose a threshold of a 'strong prima facie case' for discharge - i.e. that the evidence is very strong that the misconduct occurred, and that the misconduct clearly calls for discharge.

This way, in the clearest cases, wrongdoers can be denied of this lengthy paid vacation...but in the less clear cases, we continue to give the accused the benefit of the doubt.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Tuesday, January 26, 2016

The "Suitability" Test: Wrongful Dismissal from Probationary Employment

Many employers insist on a period of 'probation' in their employment contracts.

Sometimes it's clear on the face of the contract what that means - usually, that the employee can be dismissed without notice and without cause during the probation period.  Sometimes, it's less clear, with a verbal or written reference to a 'probation' period of a particular length of time.

The case law, in the non-union context, has tended toward a fact-based interpretation of the word 'probation'.  In a 2001 case, Easton, Justice Lederman concluded that the 'probationary' language in the contract suggested only that a raise at the end of the probationary period was contingent on satisfactory performance - and did not manifest in a right to terminate summarily without cause.  Thus, employment lawyers such as myself have encouraged employers to include very clear contractual language about what probation means.

Even probationary language, however, doesn't give the employer to dismiss, carte blanche, without any reason.  The courts have also consistently held that probationary employees are entitled to good faith evaluation of their work - that the employer cannot use a probationary clause to terminate for reasons unrelated to performance or fit in the workplace.  In practice, it turns into something of a "just cause lite" analysis.

Yesterday, the Divisional Court released its decision in Nagribianko v. Select Wine Merchants Ltd., a case where an employee was dismissed without notice toward the end of a six month probation period.

The Trial Decision

Nagribianko sued in Small Claims Court.  The Deputy Judge accepted that the meaning of the word 'probation' was not defined within the employment contract.  (It was defined in the employee handbook, but the evidence was that the handbook was not provided at the time the contract was signed, and thus not effectively incorporated into the contract.)

Accordingly, the Deputy Judge awarded four months' pay in lieu of notice.

The Appeal

The employer argued, and the Divisional Court accepted, that the word 'probation' has an established meaning in law, and that probationary employment can be terminated in accordance with the "suitability test" - a good faith analysis of whether or not the employee is suitable to the workplace.  This meaning existed without requiring a reference to the employee handbook.

As the employer had engaged in such a good faith analysis, the Divisional Court allowed the appeal and dismissed the action.

Commentary

The "suitability test", per se, arises from the unionized labour law context:  In cases of discharged probationary employees in union contexts, that is a very frequently applied test.

And there's no question that, where an employment contract purports to give the employer a right to dismiss probationary employees without notice, the courts will apply a similar test.

But there's a danger in directly importing labour (unionized) principles into employment (non-unionized) contexts:  In the union context, these matters are governed by collective agreements, with specific and detailed language, often derived from certain boilerplates.  And collective agreements will include language, even on a near-universal basis, which are not always present (or sometimes very seldom present) in a non-union employment contract.

So caution must be exercised when importing such labour principles, deriving from a collective agreement, into employment contexts, where the contract may well set out markedly different terms.  Thus, a term may have been consistently defined in a way in the labour law regime, but that does not result in a conclusion that the term has a settled definition at law in a broader way.

In particular, the question here is one that basically never arises in the labour context:  Does the contract effectively give the employer a right to terminate summarily without just cause?  If it does, then something akin to the suitability test would certainly be applicable.  But the Deputy Judge concluded that the language - which is different from that found in collective agreements - did not create such a right.

And there's a more fundamental problem with the Divisional Court's analysis, in the context of the facts described in the case:  A six-month probationary period, allowing termination without notice on the basis of the "suitability test", cannot withstand scrutiny under the Employment Standards Act.

ESA Entitlements

Under the ESA, most employees are entitled to at least one week notice of termination or termination pay, if they've worked for the employer for a period from 3 months to 12 months.  There are a number of exemptions, including for an employee who "has been guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer."

It's a high test - generally even harder to satisfy than the common law test for 'just cause'.

Thus, dismissing an employee with nearly six months of service, on the basis of the suitability test could absolutely not disentitle an employee to statutory notice or termination pay, and any probationary language that purports to do so, expressly or impliedly, would be void.

It would be impracticable, and inconsistent with well-established legal principles, to interpret vague probationary language as automatically excluding common law 'reasonable notice' but not statutory notice or termination pay.  Thus, a good employment contract with a longer-than-3-month probation period will typically have ESA saving language, specifying that the meaning of the probation language is to allow termination on provision of ESA minimums only.  (In fact, the employee handbook in this case had such language, but the Divisional Court did not disturb the finding that this was not integrated into the contract.)  Whereas a non-extendable probation period of less than 3 months might not have the same issue, defining itself as permitting termination without any notice whatsoever.

Impact

The clear articulation of the suitability test is useful, in general terms.  This is consistent with the long history of judicial findings that a probationary termination isn't completely beyond judicial scrutiny.

But the ESA issue does not appear to have been considered by the Divisional Court.  In order for this result to be consistent with the ESA, one would have to read the mere word 'probation' as integrating a right to terminate, subject to the suitability test, upon the minimum notice set forth in the Employment Standards Act.  I do not take the Divisional Court as actually proposing this, nor would it be likely to stand as a proposition of law if it did.

One Last Headscratcher

This is something that's slightly perplexed me about the 'probation' doctrine for a long time:  Since probation can't reduce an employee's entitlements to less than the minimum entitlement under the ESA, and a probation clause can't be triggered for straight economic reasons or otherwise arbitrarily...what's the point of probationary language?

An employer who dismisses a 'probationary' employee is going to be called upon to prove that it gave the employee a meaningful opportunity to establish suitability, and considered the employee's suitability in good faith.

By contrast, an employer who relies on an ESA-minimum termination clause (when enforceable) is not called upon to justify the termination in any manner whatsoever (except to the extent, perhaps, of excluding illegal reasons for termination).  If that's within the first three months, the employee is entitled to nothing.  If it's after the first three months, entitlements remain quite nominal.

The only advantage I can see to the probation language is that it's less likely to be disregarded by the courts.  But, even then, many of the problems that exist with termination clauses also arise for probationary language.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

Thursday, January 21, 2016

Antunes v. Limen Structures Ltd.: Court of Appeal Lifts Stay

You may recall the exciting case of Antunes v. Limen Structures Ltd. from a few months back, where a five-month employee received 8 months pay in lieu of notice (over $105,000), plus an additional half million dollars in damages, and costs and interest totalling over $40,000.

Limen filed a notice of appeal in respect of the additional half million, but did not initially appeal the other aspects of the judgment.  Filing the notice of appeal has the impact of generating an automatic 'stay' of the judgment, preventing the plaintiff from trying to enforce the judgment until the appeal has run its course.  This applies, by default, to the whole judgment - even the $145,000 of the judgment debt not being appealed.

Antunes brought a motion to lift the stay, in relation to all but the half million dollar award, to allow him to collect the uncontested part of the judgment.  Limen's response was to file a supplementary notice of appeal, appealing the rest, too.

The stay is rather concerning to Antunes, because Limen claims to be insolvent - and as time passes, recovery of the debt will likely become increasingly difficult.  Antunes continued the motion, arguing that the Court of Appeal should exercise its discretion to lift the stay, because the supplementary notice of appeal was a tenuous appeal solely for the purpose of delaying payment.

The Court recognized Limen's claim to be unability to pay the judgment, but appeared to doubt the bona fides of that claim:
The appellant has managed its affairs in such a way as to minimize its exposure to Mr. Antunes.  I accept that businesses can find themselves in financial difficulty for many reasons having nothing to do with the wrongful dismissal claim of a former employee.  But I take into account the "scorched earth" trial and appeal tactics taken by the appellant.
Limen contended that, if it paid the judgment and then won on the appeal, Antunes likely wouldn't be able to repay the employer.  Antunes' response was that he would be satisfied to have the funds held by his lawyer in trust pending disposition of the appeal - a fair resolution to concerns of uncertainty.

The Court lifted the stay, and didn't order any such trust:  The appeal itself (as it related to the wrongful dismissal) was weak on its face, and Antunes' financial hardship made it desirable for the Court to exercise its discretion.

*****

This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.