Change to Employment Agreement Extends Limitation Period

The standard limitation period for claims in Ontario is two years. If an individual or business is considering a lawsuit they are always well advised to consult a Lawyer as early as possible to determine when the two year limitation period begins and when it ends.

The recent Ontario Court of Appeal case, Ali v. O-Two Medical Technologies Inc. 2013 ONCA 733, shows the difficulty of determining a limitation period in certain employment disputes. In this case the Plaintiff worked on commission to sell medical devices in Iraq for his employer. Shortly after one such significant sale in December 2006 the employer notified the Plaintiff that it was unilaterally changing his commission structure. The Plaintiff continued working for his employer but informed it that he expected the original and higher commission to be paid. After the sale was completed the employer paid the Plaintiff the reduced commission in November 2007. Unhappy with the lower commission, the Plaintiff eventually started a court action in September 2009, well over two years from the date that he was first informed of the new commission structure.

The employer argued that by the time the Plaintiff commenced his court action over two years had passed since he was informed of the changes to his contract and it was too late to bring the dispute to court. However, in December 2013 the Ontario Court of Appeal ruled that this was not the case and decided that the two year limitation period did not start until the Plaintiff actually received the reduced commission in November 2007. The Plaintiff's court action was allowed to proceed.

Whenever an employer tries to modify an existing contract by reducing an employee’s compensation it creates the possibility of a legal action. The case of Ali v. O-Two Medical Technologies Inc. is an interesting example of when these contractual changes also increase the limitation period in which an employee can commence a claim in court.

‍Based in Kanata, the law firm of Allan Snelling LLP provides employment law advice to both employees and employers throughout Ottawa and the surrounding area.

Frequently Asked Questions

Can an employee be forced to forfeit their unvested shares on a termination without cause?

I was fired without cause. What happened to my company shares or stock options?

Your job was just terminated "without cause" and as if it's not bad enough that you just lost your job, you also find out that your shares in the company are no longer yours. Just like they never existed, any unvested shares are forfeited the day you're terminated. For some, this could mean hundreds of thousands of dollars in expected income gone.

So what does "vesting" mean and why is it important in this context? An unvested share simply means that the shareholder's rights to that share is subject to specific conditions. Companies will typically create vesting schedules for the shares they give their employees. The shares are provided to the employee subject to a share agreement which sets out the vesting schedule. That schedule will tell the employee when his/her shares will vest. Once the shares vests, the employee has an absolute right to these shares. They can be sold or kept at the discretion of the employee.

Vesting schedules are extremely useful and can be justified. The logic behind a vesting schedule holds that employees must earn shares that are available to them. The longevity of their employment should be correlated to their performance. If they perform well, their job will remain secure and their shares will vest with time. The vesting schedule dangles the possibility of added income in front of the employee to motivate good performance.

Employers should have the right to motivate their employees in this manner and an underserving employee should not be rewarded with income that was subject to him or her deserving it. Any employee who has justified a termination for cause, should not benefit from the vesting of unvested shares.

The dispute arises when the employee's performance is not at issue. The employee worked hard for the company and did nothing to jeopardise his or her rights to the unvested shares. We know that the employee can still be terminated without cause since no employer is handcuffed to their employees. The dilemma is whether or not that employee should have some right to his or her unvested shares.

Companies can squash any right the employee might have to unvested shares by contracting accordingly. Provisions in the share agreements or long term incentive plans, if they are sufficiently clear, can restrict the rights of the employee to unvested shares no matter if the employee is terminated for cause or without cause. Think of the following scenario:

Your employment is going extremely well. You've just received a promotion and your performance reviews are great. You're then terminated without cause. You're terminated in August. Before being terminated, you held 500 unvested shares in the company valued at $400.00 a share. Based on your vesting schedule, 50% of those shares were to vest in October that same year.

The shareholder's agreement holds that all unvested shares once terminated, notwithstanding cause, would be forfeited immediately. Remember you did nothing to merit your termination. Notwithstanding, your company has terminated you. Had they kept you for another two months, you would have had access to $100,000 worth of shares on top of your current income.

This does happen and, with the rise in e-commerce and proficiency in which new companies make public offerings, courts are now seeing a rise in cases where these types of employee shareholder agreements are in dispute.

The Ontario Court of Appeal (ONCA) has recently addressed a similar scenario in O'Reilly v. IMAX Corporation, 2019 ONCA 991. O'Reilly brought a wrongful termination claim alleging that he was not provided sufficient notice and that his unvested shares were unlawfully forfeited. On a summary judgement motion, O'Reilly was awarded 24 months' reasonable notice. The main issue before the ONCA was whether or not the motions judge was correct in awarding damages for shares that would have vested during the notice period.

The ONCA looked closely at the relevant provisions within the employer's long-term incentive plan and stock option grants. The following provision was highlighted:

(5) Termination of Employment Generally. In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the Options shall cease to vest, any unvested Options shall immediately be cancelled and revert back to the Company for no consideration and the Participant shall have no further right or interest therein. Any vested Options shall continue to be exercisable for a period of thirty (30) days following the date of such termination; … To the extent that any vested Options are not exercised within such period following termination of employment, such Options shall be cancelled and revert back to the Company for no consideration and the Participant shall have no further right or interest therein.

The Court set out to determine whether the words "terminates for any reason" included termination without cause. The ONCA emphasized the need for clarity in these types of provisions. It agreed with the motion judge "that the reference to terminates for any reason in the plans could not be presumed to refer to termination without cause."

O'Reilly was awarded the entirety of his shares throughout his notice period, valued at what they would have been had he sold them immediately upon vesting. O'Reilly had upwards of 30,000 shares valued between $20-$30 that would have vested during the 24 months' notice. The motion judge's decision on the unvested shares and the ONCA's subsequent dismissal made a difference of upwards of half a million dollars in the overall damages awarded to O'Reilly.

WHAT DOES THIS MEAN FOR EMPLOYEES AND EMPLOYERS?

FOR EMPLOYEES: Do not walk away from your unvested shares without consulting an employment Lawyer. You could be leaving significant entitlements on the table.

FOR EMPLOYERS: Any attempt to limit the common law entitlements of an employee should be clear and unequivocal. Do not assume that general language, meant to encompass all, is sufficient to address one specific scenario. It is best to identify the entitlement within the provision and address it accordingly. Contracts must be drafted with specific consideration to the employer, their employees and the market. Boilerplate contracts leave unintended openings to employees and may significantly hamper the economic status of a company when it attempts to restructure and terminate employees.

Sources:

O'Reilly v. IMAX Corporation, 2019 ONCA 991.

O’Reilly v. Imax Corporation, 2019 ONSC 342.

Veer v. Dover Corporation (Canada), 1999 CanLII 3008 (ON CA)

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Need an Employment Lawyer? Reach out today. You may be eligible for a no-obligation consultation.

I was just let go "without cause", what does this mean?

I was just let go "without cause". What does this mean?

Prior to engaging in any litigious action, clients should have a grasp of not only their rights but those of the employer as well. What may not appear fair, maybe either contractually or legally legitimate. The term "without cause" is seen in most termination letters. There's a very clear reason for this.

The threshold for cause is high and, if the employer is unsuccessful in meeting that threshold, they then risk being subject to damages for wrongful termination inclusive of not only proper notice, but aggravated and punitive damages as well.

A prime example of this risk coming to fruition is seen in Ruston v. Keddco MFG. (2011) Ltd., 2019 ONCA 125. Ruston, former president of Keddco, was fired for cause. Keddco alleged that Ruston committed fraud. When Ruston indicated that he would be retaining legal counsel, Keddco advised him that, if he hired a Lawyer, it would counter-claim against him. They warned that the costs of litigation would be extreme to both parties.

Ruston ignored the threat and filed a claim against Keddco. Keddco followed-up on their promise and brought a counterclaim for $1.7 million. The lower court found that the allegations of fraud could not be proven. It was held that Ruston was wrongfully dismissed. He was awarded 19 months termination pay, in addition to $100,000 in punitive damages and $25,000 in moral damages. The costs award was $546,684. The total award, including payment in lieu of notice, was just below $1 million. The Ontario Court of Appeal dismissed the employer's appeal and withheld the lower courts ruling on these matters. Keddco's total losses would have far exceeded $1 million with their legal costs included.

Had Keddco simply terminated the employment without cause and relied on a properly drafted termination provision, Ruston's damages could have topped out at the Employment Standards Act entitlements. Without a contract, common law notice would have been subject to the soft cap of 24 months and early settlement would have been possible. Without the allegation of fraud and the subsequent counterclaim, Keddco's worst-case scenario would have likely been much better than the current end result.

This is an example of why employers are often advised to dismiss without cause, asserting the employer's right to do so and relying on properly drafted contract provisions to navigate the employees' entitlements upon termination.

So what does this mean for employees? Firstly, do not assume that your performance can no longer be factored into an award for termination pay. The employer can always argue "near cause" which has reduced awards in past decisions. Understand, however, that the most prevalent dispute in a without cause dismissal is the employee's entitlement, by contract and by law.

Employees who are terminated without cause, need to acknowledge that the employer has the right to do so. Nonetheless, they must do so while preserving your entitlements. Those entitlements should not be assessed by yourself or your employer. All aspects governing the employment relationship should be forwarded to a competent employment Lawyer. The employment Lawyer will indicate your entitlements and provide an honest opinion on the viability of disputing the package that was offered.

What does this mean for Employees and Employers?

Employees: Once terminated without cause, do not sign a full and final release without having a Lawyer review the employment relationship and confirm your actual entitlements.

Employers: Asserting cause is a risky position to take. Cost-benefit might weigh in favour of dismissing the employee "without cause." The allegation of cause cannot be retracted. Counsel should be sought prior to alleging cause.

Sources:

Ruston v. Keddco MFG. (2011) Ltd., 2019 ONCA 125 (CanLII)

Ruston v. Keddco Mfg. (2011) Ltd., 2018 ONSC 2919 (CanLII)

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Are temporary layoffs permitted?

Work at my business has slowed down quite a bit this year. I currently have 11 employees but there is not enough work to go around. I should be getting a set of new contracts that will keep everyone busy this spring, but I’d like to make some temporary layoffs in the meantime to avoid having to let anyone go for good. I’ve discussed this with business colleagues who told me that temporary layoffs are not permitted for non-unionized employees. What are my options?‍

The law applicable to temporary layoffs in Ontario can be confusing. The Employment Standards Act does allow temporary layoffs of up to 13 weeks in a 20 week period. In certain seasonal industries, such as construction, temporary layoffs over the winter months are fairly common. However, in other workplaces courts in Ontario have treated temporary layoffs as constructive dismissals and have ordered employers to provide termination and severance pay.

In recent years, some Ontario court decisions have allowed temporary layoffs provided employers comply with both the Employment Standards Act and the terms of the employee’s contract. Depending on the nature of the work, such layoffs may even be permitted when an employee is working with an unwritten contract. A temporary layoff is also more likely to be permitted if an employee remains entitled to benefits and can access Employment Insurance during their time off. During any such layoff it is important to inform the employee that the layoff is temporary and to provide them with a return to work date. Finally, a temporary layoff should not be used as a form of discipline to punish an employee for misconduct – that will most certainly result in a claim for constructive dismissal.