Employment contracts seeing major changes

Court decisions create whole new playing field

The most dramatic and fundamental change to employment law in 2020 is the unenforceability of long-standing employment contracts.

Virtually no employment contracts from early 2020, either limiting dismissal damages or stipulating that employees will forfeit remuneration (such as bonuses, commissions, pension vesting, etc.) that would have accrued during the period of notice following their dismissal are enforceable any longer.

This is a result of a combination of the Matthews v. Ocean Nutrition Canada Ltd. decision by the Supreme Court of Canada, which has had more impact on this field than any case in the last 20 years (and in which I acted for the successful party) and a series of decisions by the Court of Appeal for Ontario.

The Supreme Court, among other things, made clear that if there is a clause in a contract that detracts from employees' rights, it cannot be buried in the contract but must be brought clearly to the employee's attention.

The Supreme Court also discusses, although this point was not ultimately necessary to its decision, the duty of good faith that employers and employees have to each other throughout their employment relationship.

The main legal point of Matthews is that there is a presumption that an employee is entitled to be awarded everything they would have been entitled to if they had actually continued working throughout the period of notice. All forms of remuneration are included: increased vesting, pensions, bonuses, stock options, everything.

David Matthews was awarded $1.1 million for long-term incentive plan benefits that he would have received if the company were ever sold. The company was sold about a year after his dismissal, and his notice period was held to be 15 months, so he would have received the LTIP during that notice. Although the contract in many ways was actively engineered to exclude these LTIP entitlements, the court awarded it anyway.

There is now an extraordinarily high threshold in contractual drafting to overcome that legal presumption. For example, simply stating that the person's entitlements are contingent on their being “actively employed” or even “lawfully employed” at the time that the commission, LTIP, vesting of pension, etc., would have occurred, is insufficient language to deprive the employee of the benefit

It is clear that regardless of the language used, you cannot exclude any benefit that would have accrued during the statutory notice period following termination under the Employment Standards Act (ESA), at least in those provinces where statutes mandate continued benefits for a number of weeks after dismissal.

My office is spending considerable time rewriting contracts that would have been enforceable prior to Matthews, as well as adding the clauses referred to below.

A series of cases in Ontario have also spelled doom

for the vast majority of termination provisions.

The Court of Appeal for Ontario has determined that all ambiguous language must be read in the employee's favour and the presence of ambiguity will nullify a termination provision. Any ambiguity will be fatal. For example, simply stating that the employee will get the greater of their employment standards entitlements or some greater amount, if not worded precisely and correctly, will not hold up because the courts will find the language to be ambiguous.

The same is true of “savings” provisions. A clause stating that “The employee will receive at least the amount provided pursuant to the Employment Standards Act” would generally not be sufficient to “save” the first portion of the contract if that first portion is below the act's minimums.

Most significantly, employment contracts will now be read so that all terms in them must be enforceable for any of its terms to be enforceable. In other words, if a “for-cause” termination provision is unenforceable, the balance of the termination clause will fail.

As well, if that contract could become unenforceable at any time in the future, regardless of the employee's position or length of service, it will be void from the outset. Even if an employee is in a category that is exempt from statutory employment standards or the employer is not large enough to pay statutory severance, employers must ensure that the clause contemplates that these possibilities could arise or the termination provision is void.

One decision of the Ontario Court of Appeal, Waksdale v Swegon North America Inc., specifies that if an employee can be terminated without any notice or pay for “cause” without specifying what “cause” entails, the contract will be unenforceable in those provinces that have a statutory definition more rigorous than mere cause, such as in Ontario's Employment Standards Act. That act requires, for example, “Wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer,” before an employer can avoid paying termination and severance pay.

That definition for cause, and no other, or the analogous provisions in each province and federally, must be inserted in the contract instead of such language as “cause” or the entire termination clause will be a nullity.

With employees returning to work, both employers that have been sued for layoffs and salary/hours reductions and those that remain luckily unscathed, should be rethinking their employment contracts. And not just for the reasons above.

If an employee returns and is offered a dramatically worse employment contract than they had previously, the employee can refuse to sign it, and if they are fired, it is a wrongful dismissal. In every new contract, to be enforceable, an employee must be explicitly provided something new — for example, a bonus, salary increase, etc. — in return for the contractual change. That is called consideration.

Subject to that, smart employers will draft new contracts considering the following:

❚ 1. Prominently insert a section stating that the employer has encouraged the employee to seek independent legal advice prior to signing.

❚ 2. Provide for the right of the employer to place an employee on a temporary layoff without it being a constructive dismissal.

❚ 3. Permit the employer to reduce wages or hours of work, at least upon providing the notice required by the ESA, without it being a constructive dismissal.

❚ 4. Provide the employee the right, if an employee resigns, to waive the resignation notice period, by providing the employee with notice of the lesser of the minimum statutory entitlement for termination or the resignation notice period the employee provided.

❚ 5. Permit the employer to implement discipline short of dismissal without it being a constructive dismissal.

❚ 7. Permit the employer to vary the conditions and duties of work without requiring a change to the contract and without those changes resulting in a constructive dismissal.

Financial Post

Got a question about employment law during COVID-19? Write to me at

levitt@levittllp.com.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers. He practises employment law in eight provinces. He is the author of six books including the Law of

Dismissal in Canada.

GETTY IMAGES / ISTOCKPHOTO The Supreme Court, among other things, has made it clear that if there is a clause in a contract that detracts from employees' rights, it cannot be buried in the contract but must be brought clearly to the employee's attention, writes Howard Levitt.