Fixed-term fault prompts $200K payout

A recent Ontario decision highlights just how severe the financial repercussions can be for breaching an employment agreement.

Fixed-term fault prompts $200K payout
The Ontario Court of Appeal released a decision last week that serves as a stark reminder to employers of just how critical a properly worded employment agreement can be. You can read CCPartners’ recent blogs on the importance of well-drafted employment agreements herehere and here.

In this case, John Howard (“Howard”) was employed at an automotive service centre in a managerial role earning $60,000 yearly plus benefits. His written employment agreement was for a five-year term, commencing in September 2012. Howard’s employer, Benson Group Inc. (“BGI”) included an “early termination” clause at section 8.1 of the agreement, stating:

8.1       Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.

It was BGI’s belief that the early termination clause would allow BGI to terminate Howard’s employment at any time throughout the term of the agreement, as long as Howard was provided separation pay pursuant to the Employment Standards Act, 2000 (“ESA”). Based on that belief, BGI terminated Howard without cause on July 28, 2014 - 23 months into the agreement.

Upon termination, Howard sued for breach of contract, seeking payment of his salary for the unexpired portion of the contract: 37 months’ salary. It was Howard’s position that the early termination clause was void because it was overly vague and that it should be struck from the agreement. Howard argued that if the early termination clause were struck, then BGI would have no contractual right to terminate Howard’s employment, without cause, prior to the expiration of the agreement’s term.

The lower Court agreed that the early termination clause was void due to the fact that it was vaguely worded and struck the clause from Howard’s agreement. However, the lower Court did not award him the remedy that he sought. Instead of 37 months’ salary, Howard was awarded common law damages for wrongful dismissal (likely to have been one to three months’ salary, given Howard’s length of service, age and the nature of his employment). Under the common law, Howard would have had a duty to mitigate his wrongful dismissal damages.

Howard appealed the lower Court’s decision to Ontario’s Court of Appeal.

The main issues on appeal were as follows:
  1. Whether Howard was entitled to damages representing his salary for the remaining 37 unexpired months in the term of the contract, rather than the common law reasonable notice awarded by the lower Court; and
  2. Whether Howard would have a duty to mitigate his damages if awarded the 37 months of salary representing the unexpired term of the contract.
The Court of Appeal held that since the early termination clause was unenforceable and was struck from the agreement, that when removed, the agreement left BGI with no contractual right to terminate Howard’s employment, without cause, prior to the expiration of the agreement’s term.

Accordingly, the Court of Appeal awarded Howard the full 37 months’ salary plus benefits with no obligation on Howard to mitigate his damages. At paragraph 44 of the decision, the Court of Appeal explained why Howard would not have to mitigate his damages: 

[44]   In the absence of an enforceable contractual provision stipulating a fixed term of notice, or any other provision to the contrary, a fixed term employment contract obligates an employer to pay an employee to the end of the term, and that obligation will not be subject to mitigation. Just as parties who contract for a specified period of notice (or pay in lieu) are contracting out of the common law approach,… so, too, are parties who contract for a fixed term without providing in an enforceable manner for any other specified period of notice (or pay in lieu).
Based on Howard’s $60,000 annual salary, BGI will likely have to pay Howard damages in excess of $200,000, mitigation free.

The lawyers at CCPartners are well versed in navigating employee terminations as well as drafting and revising employment agreements including termination provisions that will withstand judicial scrutiny and reduce exposure for employers. Click here for a list of experienced lawyers at CCPartners who can help.

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