Monday, June 27, 2016

What's the Minimum Reasonable Notice Period?

Throughout English-speaking Canada, if you don't have a valid express contractual clause setting out your entitlements on termination in non-union environments, the usual result is that you're entitled to "reasonable notice".

Much of the job of an employment lawyer is figuring out what's "reasonable" in a given scenario, based on factors like length of service, age, character of employment, and availability of replacement employment.

In Ontario, at least, it's pretty well-established that there's a soft ceiling of 24 months.  There are exceptional cases, but you rarely see more than 24 months.

But what's the minimum?

There's no question that assessing the notice periods for short service employees can be a relatively difficult task, so the entitlements of 'new employees' are hotly debated.  There's long been an attitude among employers that 'reasonable notice' should never really be much more than about a month per year of service.  In the 1990s, respected employment lawyer and mediator Barry Fisher used a comprehensive database he developed to prove that this "rule of thumb" didn't really track the outcome of cases, especially for particularly short-service and particularly long-service employees.  In 1999, in the case of Minott v. O'Shanter, the Ontario Court of Appeal expressly rejected the "rule of thumb", finding that it placed an undue emphasis on length of service, to the detriment of the other factors.

Accordingly, while it's always surprising to people outside of employment law, it's not at all uncommon to see employees with less than a year of service getting notice periods of 3 months or more, or to see employees with just three years of service getting upwards of 6 months.  For managers in particular, it's not at all unusual to see someone with 3 or 4 years of service obtaining a reasonable notice period approaching one year.

A few years back, I watched a presentation by Justice Sproat, a well-respected employment law judge, where he asserted that any 'real job' can be expected to take no less than 3 months to replace.  I've had similar conversations with experienced employment law mediators, including one recent mediation for a very short-service employee where the mediator suggested that anything outside the 3-6 month range was very improbable.  This is in line with much of the case law.  It's fairly rare to see notice periods assessed at much less than 3 months, and this tends to be the understanding in the employment law bar in general.

Yet there's very little case law actually talking about general propositions for short-service employees.  Is there a floor, or even a soft floor, for reasonable notice periods?  A number that you won't get below, barring exceptional circumstances?  It would actually be very helpful to have such a figure.  As employee counsel arguing my client's position, or employer counsel advising my client, to have a judicial decision setting a rough minimum for notice periods.  (It's not unusual to see an employer offering 6-8 weeks of notice, or sometimes even less, which is usually a pretty aggressive posture.)

However, in recent years, there have been some cases out of the west coast talking a bit about low-end notice periods - a couple of decisions from the British Columbia Court of Appeal Hall and Saalfeld, culminating in a recent decision from the Yukon Court of Appeal, in the case of Cabott v. Urban Systems, where the Court referred to a range of "two to three months" as being "a useful starting place" for a short-term employee.  The Court concluded that, because of Cabott's level of responsibility, the range should be bumped up to four months (but not to six months, as found by the trial judge).

On the facts, the Court's treatment of Ms. Cabott is, perhaps, rather questionable:  The Court refers to the the Hall and Saalfeld decisions as being essentially a baseline, and places Cabott's circumstances slightly above them.
On the other hand, there is some force to the submission that Ms. Cabott’s position in Whitehorse, described by the judge as senior and supervisory management, involved somewhat greater responsibility than the positions discussed in Saalfeld and Hall. Accepting the description of the range of notice for specialized employees in short term positions as two to three months as observed in Saalfeld and Hall, the character of this employment would justify an award modestly beyond that range.
While it's certainly true that Cabott, at age 53, was older than Hall (42) and Saalfeld (35), and likewise true that the trial judge considered her role to be "senior and supervisory", unlike Hall and Saalfeld, there remains one minor hitch with the Court's reasoning here:  The British Columbia Court of Appeal had upheld a five month notice period for Saalfeld.  They had felt it was at the high end, but not so outrageous as to warrant appellate intervention.  The trial judge awarded Cabott, with a more senior role, a significantly higher age, and even a longer period of service, a modest one month improvement over what the BCCA had upheld for Saalfeld.

There's a bit of revisionism here:  The BCCA was clearly of the view that 2-3 months would have been more appropriate for Saalfeld, but 5 wasn't totally outrageous.  Yet, in the Cabott decision, one would think that going much beyond the three months for a short service employee requires executive-level and/or retirement age employee.

What's more, I might resist the idea that Cabott's age and character of employment should move the notice period so very little.  It seems to put far too high a degree of importance on 'length of service'.

Indeed, the very language of a 'starting position' for short-service employees, to be bumped up depending on other factors, looks a little too similar to the "rule of thumb" language the Ontario Court of Appeal rightly rejected in Minott.

If we read the "starting place" language as creating a floor, assuming all Bardal factors to be toward the low end, then that would make sense.

Yet the Yukon Court of Appeal's reasoning appears instead not to do this, ultimately asserting 2-3 months not so much as a floor, but rather as a soft ceiling based on one of the Bardal factors.  This reasoning is reminiscent of the Ontario Court of Appeal's reasoning in Cronk in 1995 - a decision which was dismantled piece by piece, starting with Minott in 1999.

Notwithstanding a questionable application, however, I expect that, across the country, Cabott will be routinely cited for this simple proposition:  "For a short term employee the useful starting place in discussing range is the two to three months spoken of in Saalfeld and Hall."

And I suspect that this will make many wrongful dismissal cases far easier to settle.

*****

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, June 17, 2016

Superior Court Declines to Follow Trites v. Renin Corp

Three years ago, the Superior Court of Justice released its decision in the case of Trites v. Renin Corp, where an employee claimed to have been dismissed or constructively dismissed by the imposition of a temporary layoff.

In a statement which made the entire employment law bar do a collective double-take, Justice Moore held that:
there is no room remaining at law for a common law finding of constructive dismissal in circumstances where a temporary layoff has been rolled out in accordance with the terms of the ESA.
I have come to refer to this proposition as the "Trites proposition".  I argued at the time that the Trites proposition is wrong, and will not largely be followed, because it's obiter (in that Justice Moore concluded in any event that the temporary layoff had not been rolled out in accordance with the ESA), inconsistent with established and binding jurisprudence, and fundamentally rooted in a misinterpretation of the Employment Standards Act.  The widely-accepted status quo, before Trites, was that a temporary layoff would constitute a constructive dismissal unless the employer could demonstrate an express or implied term in the employment contract authorizing such a layoff.

I've had to argue about Trites in court since then:  I argued a motion for summary judgment on such a case last year.  I think the judge, who generally sits in the family court, was happy to be able to conclude that there was a constructive dismissal without needing to resolve the Trites question, in an unreported decision this past January.

But I'm not the only one who's been arguing about it.  In 2014, Deputy Judge Hagan declined to follow it in the case of Wiens v. Davert Tools (my commentary here).  As a Small Claims Court decision, it has little precedent value, but nonetheless it was striking that the Small Claims Court declined to follow an ostensibly binding precedent:  To do so, Deputy Judge Hagan concluded (as I had previously argued) that the Trites proposition is obiter, and therefore not binding, and inconsistent with the rulings of higher courts.

Until recently, however, Trites hadn't been expressly considered by any other Superior Court judges.  Which brings us to the recent case of Michalski v. CIMA Canada, in which Justice James expressly rejected the Trites proposition.

Justice James reviewed the Stolze and Chen cases (see my first linked entry above), as well as McLean v. The Raywal Limited Partnership, as well as the text "Employment Law in Canada", and concluded that these were out of step with Trites.
To the extent that the decision of Moore J. in Trites stands for the proposition that the common law conditions precedent to a lawful layoff have been completely displaced by the ESA, I respectfully disagree.
Commentary

While this can't be said to finally resolve the question for once and for all, I would suggest that the results in Michalski and Wiens bring into focus my earlier caution that employers should not place reliance upon the Trites decision.

When I was arguing Trites in court last year, it was a tricky argument.  A contention that a recent decision of the Superior Court was wrongly decided on the law is not a submission to make lightly.  I needed to make the argument, with significant and detailed appeal to the authorities with which Trites was inconsistent, and an indepth examination of the intellectual framework of the Employment Standards Act.  Even then, I was happy to be able to add to my factum the corroborating viewpoint of Deputy Judge Hagan, as an example of an independent judicial officer come to the same conclusions about Trites that I was making on behalf of my client.

Now, that will be even easier.  With a Superior Court decision that expressly rejects Trites, providing authorities for the position, I expect that it will be much easier to deliver future arguments that Trites was bad law, to the point that I expect most employer counsel will advise their clients that the Trites argument is a long shot - making many such files much easier to settle.

So the lesson to employers is simple:  If you want the right to temporarily lay off your employees, put it in the written contract.

Other Issues Surrounding Temporary Layoffs

There's another tidbit of useful commentary in the Michalski decision, as well.  Quite often, employers facing a temporary layoff constructive dismissal allegation are taken by surprise, as some employers (including large national employers) have been routinely using layoffs to control costs for a lengthy period of time:  "I've been doing this for decades, and this employee knew it!"

Quite often, in these cases, I see employers attempting to rely on the long-standing practice as supporting a contention that the ability to lay off becomes an implied term of the employment contract.  (There are contexts in which this is the case.  The onsite construction industry comes to mind.)  In dealing with such an argument, Justice James noted:  "Standing alone, it is difficult to see how the layoff of one worker can result in a unilateral amendment of the employment contracts of other workers."  Only in cases where the right to layoff is "notorious, even obvious, from the facts of a particular situation" will it be found to be an implied term.

Of course, this doesn't head on address the other variation of that argument we sometimes see, of acquiescence to temporary layoffs: there are scenarios where an employer may have temporarily laid off an employee in the past, and the employee did not raise an objection at that time, and then takes a constructive dismissal position in response to a subsequent temporary layoff.  (Personally, I regard this as a difficult argument, most of the time, requiring a fairly particular factual matrix, for a number of reasons.)

There's also another variation in cases where an employee takes a constructive dismissal position after a lengthy layoff, or even after being recalled.  Andrew Monkhouse recently litigated such a case, Kurt v. Idera, at the Divisional Court, and it was sent back down to the motions court.  The employee in that case responded to a recall notice, over six months after the layoff, with a letter indicating that he took the position he had been constructively dismissed.

I find this variation to be challenging, as well:  On the more fundamental principles of constructive dismissal law, the employee has the option (or sometimes the obligation) of 'trying out' the changed terms and conditions of employment for a reasonable period of time.  If your employer changes your employment conditions, and you try it out for just long enough to conclude, "You know, this really doesn't work for me", then you're not blocked from taking a constructive dismissal position.  On the other hand, if you continue with the changed employment conditions for a much longer period of time, you'll be said to have accepted the change.  This is the root of the acquiescence argument here.

Yet it's difficult to apply this concept to temporary layoffs at all, and moreso to a single continuous temporary layoff:  The image of acquiescence is that the employee is going into work and doing his job under the modified conditions.  Even with multiple temporary layoffs, that's a tough pitch, because when the employee does report back to work, it's presumably under the same terms and conditions as before.  But with a single lengthy temporary layoff, and particularly for one of an indeterminate length, it seems inherently difficult to suggest that the employee has to make that assessment before knowing just how long the temporary layoff will be.  Maybe I'm prepared to acquiesce to a one week layoff, but not to a 12-week layoff.  Seems reasonable that I might hit a point where I say, "Hey, this isn't right" and want to seek recourse for an ongoing breach of contract.  Yet the longer the temporary layoff has gone on, the less likely it is to be a constructive dismissal?  Seems a little off.

*****

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, May 27, 2016

Employer's Failure to Pay Settlement Funds Does Not Repudiate Settlement

The vast majority of employment law settlements get paid out without much difficulty.  Most of the time, the employer has the funds to pay the settlement, and would rather get it done and over with.  In many of my settlements with '30 day payment' clauses, the cheque still comes in within a week, just to get the file closed.

But every so often, you run into a file where a struggling employer can't make the payment.  And that puts a plaintiff in a position of asking "What do I do now?"

Such was the case for Mr. Ball, following his dismissal from employment:  He was dismissed from employment on June 13, 2013, and quickly entered into a settlement (as of June 21, 2013) contemplating payment of three months' wages over six months, by way of 12 bi-weekly payments.  There were other aspects of the settlement, too, including the forgiveness of a large loan.  The settlement was ultimately very different from the termination entitlements set out in Ball's contract, which entitled him to 12 months' notice or pay in lieu.

After the first six payments, the employer stopped.  There was some email correspondence through 2014, with the employer basically saying "We don't have the money right now, but we're working on it."

In late 2014 and early 2015, Mr. Ball's counsel wrote to the employer, but received no response, so they commenced litigation in April 2015.  The employer didn't defend, so the plaintiff sought default judgment on the basis of the terms of his employment agreement - as opposed to merely enforcing the settlement terms.

The story is similar for Mr. Clark, who worked for the same employer, except that his settlement did not include forgiveness of a large loan - it was strictly a 'salary continuance' plus benefits type arrangement.

In two recent decisions (here and here), Justice Rasaiah awarded judgment to both plaintiffs based only on the settlement terms.  Ball was not entitled to treat the settlement agreement as never having been reached: No material misrepresentations induced him to enter into the agreement, there was no 'fundamental breach', and the employer had not *actually* repudiated the agreement., because they always expressed an intention to honour the agreement.

In the alternative, Justice Rasaiah indicated that even had the agreement been repudiated, she still wouldn't have awarded additional damages, because there wasn't evidence of damages.  (This, based on the limited description of the employment agreements, appears to be a very problematic conclusion, failing to consider the consequences of Bowes v. Goss Power and Howard v. Benson Group.)

Commentary

In the course of litigation, a breached settlement has consequences which are fairly clearly set out in the Rules:  The non-breaching party can bring a motion to enforce the settlement, or alternatively the non-breaching party can continue the litigation as if no settlement had been reached.

Outside of litigation, it gets a little bit more complicated, but the practice is similar:  When a settlement is fundamentally breached, the non-party has two options:
It could have elected to affirm the settlement and hold the appellants to the performance of their contractual obligations. Or, it could have elected to accept the breach as a repudiation of the contract and proceed with the action.
Here's how it works:  When a party, by words or conduct, fundamentally breaches a contract and/or evinces an intention not to be bound by the terms of an agreement, the other party can elect to 'accept' the repudiation, releasing both sides from performance of the agreement, or alternatively the other party can seek to enforce the terms of the agreement.

Normally, your damages following repudiation of a contract are to put you in the position you would have occupied had the contract been complied with.  However, in the context of settlements, there's an additional hitch:  Because an accepted repudiation releases both parties from performance of obligations under the contract, the non-breaching party is no longer precluded *by* the settlement from pursuing the entitlements that the settlement was intended to resolve.

So, in practice, it is a very similar 'election' process to the in-litigation settlement breach options.  As a non-breaching plaintiff, I can seek to enforce the settlement, or I can irrevocably say, "Fine, you don't want to honour the settlement, I'm seeking my full entitlements."

And, what's more, from a policy perspective, this makes sense:  I entered into a settlement with the intention of achieving a final resolution to the original dispute.  If I compromised my original position at all in reaching that settlement (which is the case in pretty much every settlement), and I were held to that compromise even though the other side didn't honour the settlement, then I'm put in the position of still having to litigate to enforce my compromised position - exactly the thing I was trying to avoid having to do by compromising in the first place.

Suffice it to say that I have my concerns about the outcome here.

In both cases, the judge focused significantly on the requirement that fundamental breach deprive the non-breaching party of "substantially the whole benefit of the contract".  In Mr. Ball's case, this allowed her to look at the very substantial benefits he received in the form of a forgiven loan, as well as having received more than half of the financial settlement, and conclude that he received "substantially what he bargained for".

In Mr. Clark's case, the judge found that simply providing approximately 60% of the amount of the settlement amount constituted "substantial performance of the obligations in the settlement agreement".  (This "substantial performance" language is interesting.  The phrase is not typically used in this context, but has a very particular meaning in construction lien law:  A contract is deemed to be substantially performed when the improvement being made or a substantial part thereof is ready for use, and any outstanding work is only worth a certain percentage of the contract price - the formula caps at 3%.)

Normally, when we're arguing about 'fundamental breach', it's because of an arguably technical breach, or because one party, in the course of completing its obligations, got a detail wrong.  It's pretty unusual that an ongoing non-payment of financial obligations under a contract was the subject of such a debate.

But perhaps that's because of the other side of the repudiation test:  Because, typically, when you aren't paying your bills, that's said to evince an intention not to be bound by the terms of the contract.

Justice Rasaiah got around that issue by pointing out that the employer never said they weren't going to pay...it was just taking a while.

She considered it a total non-starter that their breach required them to engage a lawyer and pursue legal action.  This, according to Justice Rasaiah, is not a factor when assessing whether or not the parties got what they bargained for.

A lot of settlements don't have a fixed timetable for payment.  In that case, you might argue about at what point a 'breach' has even occurred, much less a fundamental breach.  But in these two cases, where they stalled for several months, and then totally ignored a lawyer's letters with the outstanding settlement amounts more than a year in arrears, with no payment forthcoming approaching three years after the settlement was reached, it's really difficult for me to see how such conduct does not evince an intention not to be bound.

My concern about this is that it undermines an already-dubious element of dispute resolution:  The Payment Plan.  When you have a party who is in a difficult financial position, and you agree to settle the claim based on paying a reduced sum over an extended period of time - because you'd rather get paid something than nothing - then Justice Rasaiah's reasoning really leaves zero incentive for the payor not to breach the payment plan after a little while:  As long as you still got *something* that isn't insignificant out of the payment plan, and the payor keeps feeding you "The cheque's in the mail" types of responses, all you can do is try to enforce the settlement as you made it in the first place, and the defendant can say "Tell you what, I'll give you half of that, and save you the trouble of having to litigate."  (Believe it or not, I've seen this happen.)

In particular, there are many such cases where there is really not much controversy about how much the plaintiff is owed.  I might have a more-or-less airtight case for x, but enter into a settlement for 2/3 of x, paid over several months, for the sole reason that it's better than having to pursue formal legal action and obtain and enforce a judgment.  Yes, in that case, by being required to take it to court, I have been denied substantially the entire benefit of the agreement that I was to obtain by entering into it, and I think that Justice Rasaiah is likely giving the 'legal fees' issue too short of shrift by dismissing it in such a manner:  I've contracted for finality, for the bird in hand, and I don't have the bird in hand.

*****

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.

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.

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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.

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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.

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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.