Howard Levitt: The courts are making life hard for employers, and it's getting worse

Recent case could nullify the termination provisions of virtually all Canadian employment contracts

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Employers have a tough time before our courts.

They are limited in how they can use contracts to restrict employees from competing against them after they leave. If they attempt to provide any measure of protection beyond the narrow band that a court thinks should be sufficient, the entire non-competition clause will be struck down and they will receive no protection at all.

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If an employee commits serious misconduct or proves incompetent, employers still often wind up on the hook for wrongful dismissal damages. Only the most egregious forms of misconduct or incompetence create cause for discharge in the eyes of the law. As a result, employers are saddled with weak, inefficient workers or compelled to pay them substantial severance.

The size of those severance awards continues to increase. Six months was once the rough upper limit, then 12, then 24 — now even that amount is being exceeded in a series of recent decisions.

Courts are increasingly awarding damages against employers on top of wrongful dismissal damages for any conduct which the court finds to be inappropriate or heavy-handed. Sometimes such conduct is not even particularly egregious, and the amounts for such punitive, aggravated and bad faith damages are increasing, too.

And, of course, most contracts limiting employees’ rights to bonuses, LTIPs or other entitlements which were to be paid after the employee was dismissed have largely been found to be invalid following the Supreme Court of Canada’s decision in Matthews vs. Ocean Nutrition in which I acted for the successful Matthews.

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It is enough to make employers think that they are better off not having employees at all, and restricting workers to consultants and independent contractors. But there too they are stymied because the courts (and employment standards tribunals and the Canada Revenue Agency) have found that if such workers have a regular relationship with the “employer” and are integrated into the business in the same way as an employee, they will be viewed as employees at law. If that occurs, the employer will be liable for wrongful dismissal damages, overtime pay and could be at risk of having claims made against them by CRA for not withholding income tax. I estimate that over 90 per cent of ostensible “contractors” are employees at law with all the rights resulting from that. And even if the worker is indeed a contractor rather than an employee, but is largely dependent upon one “employer,” then she or he will be entitled to wrongful dismissal damages as if they were employed.

Smart employers realized that the best way to reduce their potential liability is to call a spade a spade, acknowledge their workers are employees but have employment contracts limiting any potential liability to what is required by employment standards legislation.

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But over the last four years, the courts have largely rendered such contracts invalid, mostly by saying that if the contract states that no termination pay/wrongful dismissal damages/severance need be paid if there is “cause for discharge,” then the entire termination provision is invalidated. The reason is that the Employment Standards Act stipulates that employees should receive termination and severance pay, even if there is cause, unless there is “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and had not been condoned,” a tougher test than mere cause.

So, as I stated when the Ontario Court of Appeal came out with these cases, Ontario employers had to entirely revise their contracts since 95 per cent of Canadian employment contracts had provided for no severance in the event of cause. And the courts found that if the with cause provision of the contract was invalid, that invalidated the entire termination provision, cause and without cause alike.

Virtually all employers proceeded to do just that and went on their way assuming they could fire employees who they had sign such new contracts with whatever amounts the contracts prescribed as long as they provided at least as much as the ESA.

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But that has now been ripped asunder again and employers will have to go back to the drawing board and redraft new contracts and get employees to sign them. But new contracts cannot be forced upon employees and are invalid unless the employee gets something new in return for signing it.

As a starting point, one must understand that employment contracts are not commercial contracts and are interpreted differently for the very prescribed purpose of protecting the interests of employees, who are viewed as a vulnerable class by the courts, with less bargaining power and knowledge of their legal rights then contracting employers.

In a case that came out just a week ago, the Ontario Superior Court struck down a contract because it contained a provision in the without cause term that the employer, upon paying the prescribed amount ”at its sole discretion” could terminate the employment “at any time.”

I daresay there are few contracts in this country which do not permit an employer to terminate the employee “at any time” as long as proper prescribed severance is paid. But Justice Pierce found in Dufault vs. the Corporation of the Township of Ignace that that expression invalidated the contract because, under the ESA, employers do not have the right to terminate employment at any time such as on the conclusion of a statutory leave, such as a parental or emergency leave, or in reprisal for exercising a right under the ESA. Since that clause therefore violated the ESA, the entire termination provisions of the employment contract were invalid.

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I would say that almost all contracts which I have seen (and I have seen likely 100,000 or so over time), provide for the right of an employer to terminate at its discretion at any time subject only to paying sufficient severance. As result, the impact of this case will be to nullify the termination provisions of virtually all Canadian employment contracts.

Employers must now have their employees sign new employment contracts to limit their liability back to that which they believed their existing contracts provided. But employees, who have read this column, know that they cannot be forced to sign. But if they do not sign, they are likely to be the first to be let go (although they will be entitled to full wrongful dismissal damages if they are).

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Employers, immediately get all of your employment contracts revised. It will be an interesting battle ahead.

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces and is the author of six books including the Law of Dismissal in Canada.

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