Court Allows Forfeiture of Executive Compensation

In a recent case, Levinsky v. The Toronto-Dominion Bank 2013 ONSC 5657, an Ontario court confirmed that it is possible to draft contracts that allow employers to “claw back” compensation owed or paid to employees if an employee resigns from their employment. The court also provided guidance on how to prevent such clauses from being rendered void for unduly restraining trade.

Mr. Levinsky was a highly paid vice-president of TD Bank who resigned to start his own hedge fund in 2010. The Long Term Compensation Plan (LTCP) established by TD Bank provided Mr. Levinsky with Restricted Share Units (RSUs) in addition to his base compensation. These RSUs however only became payable once they had matured over a period of three years. The LTCP also provided that if an employee resigned before the end of these three years they would forfeit any of the RSU compensation that had not already been paid.

When Mr. Levinsky resigned his employment he argued that the contractual clause allowing TD Bank to withhold compensation was void as it “restrained trade” by preventing him from leaving TD Bank to set up his own business.

Determining whether the terms of an employment contract unduly restrict trade is a common issue in employment law disputes. Restraint of trade arguments are most commonly advanced against non-competition clauses that may prevent a departing employee from competing against the employer they have departed. In the Levinsky case the court determined that the clause forfeiting Mr. Levinsky of his RSU compensation did not restrain trade, it was merely an element of the agreement between Mr. Levinsky and TD Bank.

In its decision the court emphasized the fact that although the compensation forfeited by Mr. Levinsky was significant it was only a portion of the total compensation he received for his service. To determine whether a particular contractual clause constitutes a restraint of trade the court held that each clause had to be analyzed on the basis of whether the forfeiture of compensation resulted just from an employee’s resignation, or whether it also somehow prevented departing employees from certain courses of business conduct following their departure. In Mr. Levinsky's case the court found the clause in question did not restrict Mr. Levinsky's activities following his resignation.

Frequently Asked Questions

What is "just cause" in employment law?

Last month local newspapers reported the case of a McDonald’s employee in Kanata who was dismissed after receiving poor performance reviews. The employee received more than $100,000.00 in court. Why?

‍The short answer is that the judge in this case found that although the employee’s performance was not perfect the employer did not have “just cause” to terminate her employment contract. If a business chooses to dismiss an employee the employer has to first decide if they have just cause to end the contract or not. Just cause exists when an employee has committed a serious breach of contract such as theft or continually missing work without reason. If the employer does not have just cause then in most cases they have to provide compensation which can equal up to a month of salary for every year of the employee’s service.

Many employers have staff who they believe are poor performers. Performance reviews are often done to encourage better performance but may also be an attempt to build a case for a just cause dismissal. After several poor performance reviews an employer may choose to dismiss an employee for just cause. However, a decision to terminate an employee for just cause can be challenged in court where employers often find it difficult to prove that the alleged breach of contract was serious enough to warrant a just cause dismissal. Poor performance reviews may show that an employee was less than perfect but this alone is usually not enough to disentitle them to some compensation when they are dismissed. Because compensation is typically based on the number of years the employee has worked, the amount owing to dismissed employee can be significant which is what occurred in the case of the former McDonald’s employee.

Fired without Cause - Should you take the offer?

I was fired without cause. My employer has given me an offer. Should I take it?

Answer: Employers aren’t handcuffed to their employees. If they act in accordance with their statutory and common law obligations, employers are free to part ways with employees without cause. Typically, the employer is obliged to provide statutory or common law reasonable notice or payment in lieu of notice. Costs, benefits, risks and reward of bringing legal action, should all be considered, prior to starting a claim.

Needlessly pursuing litigation could potentially prejudice the employee. You could delay the settlement and run the risk of losing a fair offer. You may find another job in the weeks following termination. If this happens, then the employer’s settlement may be subject to mitigation which means that they are credited the wages you obtain from that new job. You may also pay more in legal fees then the additional notice you should have received.

There are cases where employees are grossly underpaid when it comes to severance, so I do advocate that everyone who faces termination seek counsel to go over any severance offer. Do not sign it blindly. Speak to a Lawyer and make sure the offer is fair. Employers will often expect and, if prudent, will insist that their past employees reach out to counsel when deciding to sign a severance offer. You should do so as soon as possible after receiving the offer.

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Are paid and unpaid internships illegal in Ontario?

I own a small events and promotions business. Every so often I get emails from students asking if they could volunteer to learn about the business. I’ve never hired a student because they’re inexperienced but I’m considering hiring one as an intern this summer. I don’t have the budget for a full time employee but I would be willing to pay them a modest stipend. I’ve heard both paid and unpaid internships are illegal in Ontario. Is this true?

In Ontario, the rules around internships are strict and in recent years some employers have been required to change their internship programs as a result. If someone is receiving on the job training from a business they are considered to be an employee of the business under Ontario law. As an employee they are entitled to a minimum wage under the Employment Standards Act so paying them a stipend that does not meet the minimum wage is against the law.

There are two exceptions to this general rule which recognize the educational value of internships. The first is internship programs approved by a college or university which are permitted.

The second exception is internships that meet criteria set by the Ministry of Labour. These requirements include that the intern is receiving valuable training, is not taking someone else’s job, and has not been promised a job after their training. The most important feature is the educational component: the primary purpose of internships is to teach valuable skills, not to provide cheap labour to businesses.

The safest way to ensure compliance with the law is to have an internship approved as part of a college or university program. Alternatively, you should design the internship ahead of time to focus it around training and skills development.