Update on Constructive Dismissal

In March 2014 the Ontario Court of Appeal released a brief decision on an employee's obligations when they have been constructively dismissed by their employer.

In the case of Farwell v. Citair, Inc. (General Coach Canada), 2014 ONCA 177 it was established that an employee was constructively dismissed when his position was modified during a restructuring. The employee considered the change of position imposed on him, moving him from operations manager to purchasing manger, to be a fundamental breach of his contract and claimed 24 months of severance. At the Court of Appeal the employer argued that while they may have constructively dismissed the employee he should have remained at work during the 24 months for which he claimed severance. Previous court decisions have held that in certain situations an employee may be responsible to mitigate their damages in this way by continuing to work for an employer unless they are asked to leave or the workplace has become toxic. However, in the Citair case the Court of Appeal held that the employer could not expect that the employee remain at work during the 24 months for which he claimed severance without specifically offering this work opportunity to the employee - which it had not done.

The decision clarifies both the steps an employer must take if it wishes employees to remain at work following a constructive dismissal and the obligations of employees in the same situation. This fairly clear direction from the Court of Appeal should result in more certainty for both employers and employees when constructive dismissal has been alleged.

Frequently Asked Questions

Workplace Travel: Must I go if I'm worried about my safety?

My employer has again asked that I work in a foreign country. I am concerned that this posting is unsafe. Last time I worked abroad multiple bombings took place and several governments closed their embassies. I also had my personal belongings stolen while I was in what was supposed to be a secure area. Do I have to go work in this country? If I do is my employer required to provide travel insurance in case something goes wrong?

‍The first thing to look at is your employment contract. Most employment contracts contain both written terms, and unwritten terms that are implied into the contract by law. The written portion of an employment contract usually mentions the benefits and insurance coverage that an employer is required to provide and it may also mention work locations and travel.

Unless travel insurance is covered in the original contract, or has since been agreed to by the employer, an employer generally cannot be forced to provide travel insurance. Also, most travel insurance policies will not cover all of the risks you’ve outlined. However, the failure to mention travel or relocation in a contract may prevent an employer from requiring that an employee work in a foreign country. Whether an employer can make such a request, without it being specifically mentioned in the contract, depends primarily on the nature of the work and if foreign travel to that country was expected or foreseeable when the employee was hired or promoted into their current position.

If an employee has a legitimate fear for their safety they may be able to argue that a travel request from their employer is not consistent with their contract. The context of the employment and the country involved are important considerations. For example it could be implied into many contracts that travel to the United States is acceptable, whereas travel to parts of Afghanistan is not. It is always best to review your contract, check your facts, and consult with a Lawyer before making any demands of your employer.

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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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.