Supreme Court of Canada Update
2020 was a busy year for the Supreme Court of Canada with four important decisions that impact employment law. In January 2021, a further related decision was published. In this post we summarize the five decisions which touch on the following issues:
- The enforceability of “just cause” provisions in employment contracts;
- Bonus entitlements during the reasonable notice period;
- Discrimination on the basis of sex and pension entitlements; and
- The duty of honesty and good faith owed by contracting parties.
Waksdale v. Swegon North America Inc. and “Just Cause” Termination Provisions
Last summer, we wrote about the Ontario Court of Appeal rendering this important decision regarding the enforceability of termination clauses. On January 14, 2020, the Supreme Court of Canada denied the application for leave to appeal which means that the Court of Appeal’s decision remains the binding authority in Ontario. The Waksdale decision will be very influential as it calls into question the enforceability of “just cause” clauses which are commonplace in written employment contracts, variable compensation plans such as bonus and commission plans, and equity plans including stock option plans.
In Waksdale the Court of Appeal held that:
- An employment agreement must be read in whole, not piecemeal. This means that where one termination clause in a termination provision in an employment agreement is unlawful and unenforceable (in this case the ‘for cause’ clause), the entire termination provision is rendered unenforceable, even if:
- the other clauses comply with the ESA and would be enforceable as standalone clauses; and
- a lawful clause is what is being relied upon by the employer.
- Severability clauses cannot be relied upon in employment agreements to remove the unenforceable clauses and save the lawful clauses in a termination provision.
Under the ESA Regulations, the standard for a termination where the employer may dismiss without notice or severance is where the employee is “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Plaintiff counsel have argued, and the courts have now agreed, that the common law “cause” or “just cause” standard is less stringent than the ESA “wilful misconduct” standard. It is now accepted that there can be misconduct that is serious enough to be “just cause”, but not serious enough to be “wilful misconduct”. As such, a clause that disentitles an employee to notice of termination based on the lower standard of just cause is not compliant with the ESA because it is possible that the employee is entitled to notice under the ESA.
The impact of the Waksdale case for provincially regulated employers in Ontario is that a just cause termination clause that says employees can be terminated without notice or compensation, and makes no exception for the wilful misconduct standard under the ESA, could render the entire termination clause unenforceable – even if the employer is not asserting cause.
Matthews v. Ocean Nutrition Canada Ltd. and Bonus Entitlements During the Common Law Notice Period and the Duty of Honesty and Good Faith
The Supreme Court published its decision in Matthews v. Ocean Nutrition Canada Ltd. on October 9, 2020. The case is important for a couple of reasons. First, it confirms the two-part test to determine whether an employee’s bonus entitlement continues during the common law notice period (spoiler alert- it almost always does, unless there is very clear language in the plan text or employment contract that says otherwise). Second, it considers the question of dishonesty by an employer and the impact on termination entitlements. This second issue was not fully explored by the Court but other decisions (C.M. Callow and Wastech which are summarized below) signal that a dishonest employer can expect to pay additional damages.
Mr. Matthews was a chemist. He worked for Ocean Nutrition for fourteen years in different senior executive positions. He participated in a Long-Term Incentive Program (LTIP) that included a significant payment in the event of a “Realization Event” such as the sale of the company. In order to qualify for the payment, employees were required to be “a full-time employee of ONC”. The bonus plan went on to say: “For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.”
In 2007, Ocean Nutrition hired a new Chief Operating Officer, Mr. Emond. Mr. Emond did not like Mr. Matthews and gradually reduced his responsibilities. In 2010, a new President was appointed. In that year, Mr. Matthews was put “under review”. There were a number of factual findings in the case that Mr. Emond was dishonest with Mr. Matthews about his reduction in status and future with the Company.
Mr. Emond advised the Board of Directors of the company that Mr. Matthews had no future with the company. Around the same, time Mr. Matthews started to suspect that the company might be sold in the near future. Mr. Matthews advised Mr. Emond that he wanted to stay in his role as he anticipated the company would soon be sold (and trigger the payment under the LTIP). Mr. Emond falsely told him he did not know what the company’s plans were for him. A few months later, Mr. Matthews asked the president of the company if his employment was to be terminated and was told that the company had no such plans. Eventually, Mr. Matthews had enough and quit and commenced a position with another company. He claimed that he was constructively dismissed.
Just over a year later, Ocean Nutrition was sold for over half a billion dollars. The company refused to pay Mr. Matthews the payment under the LTIP for the “Realization Event” because his employment ended before the sale occurred. The amount of the payment was about $1 million.
The Issues before the Supreme Court
By the time the case got to the Supreme Court of Canada, everyone agreed that Mr. Matthews was forced to quit. Everyone agreed that he should have received 15 months’ notice. They disagreed on whether he should get the bonus payment as part of his reasonable notice. They also disagreed on whether Ocean Nutrition lied to him, and whether this meant he should get the bonus.
Bonus payments during the notice period
Regarding the bonus payment, the Supreme Court referenced with approval several decisions of the Ontario Court of Appeal: Paquette v. TeraGo Networks Inc., Lin v. Ontario Teachers’ Pension Plan Board, and Taggart v. Canada Life Assurance Co. The Supreme Court endorsed a two-part test for entitlement during the notice period:
- Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
With respect to the first part of the test, the Court found that the “Realization Event” occurred during Mr. Matthews’ reasonable notice period:
…The purpose of damages in lieu of reasonable notice is to put the employee in the position they would have been in had they continued to work through to the end of the notice period. It is uncontested that the Realization Event occurred during the notice period. But for Mr. Matthews’ dismissal, he would have received an LTIP payment during that period.
With respect to the second part of the test, the Court found that the bonus plan did not contain absolutely clear and unambiguous language disentitling Mr. Matthews to the bonus that would otherwise be payable during the reasonable notice period:
… language requiring an employee to be “full-time” or “active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period.
The above conclusion is not surprising to Ontario employers where the Court of Appeal has consistently found that “active employment” clauses (also known as “bum in seat” clauses) do not disentitle employees from bonuses that would otherwise be paid during the notice period.
Having concluded that Mr. Matthews was entitled to the payment under the LTIP plan, the Court did not need to fully consider the second argument of Mr. Matthews, that he was entitled to the bonus as remedy for the bad faith conduct of Ocean Nutrition. It should be noted that Mr. Matthew’s commenced his action against Ocean Nutrition before the Supreme Court of Canada released a key decision regarding the duty of good faith and honest performance owed by contracting parties in Bhasin v. Hrynew. As a result, he did not claim certain damages that he may have been entitled to. However, the Supreme Court of Canada did make a number of obiter comments on the issue of good faith and honesty by contracting parties that will no doubt be repeated in future cases. The key points are as follows:
- It was open to the trial judge to tie the dishonesty that occurred over the four-year period before Mr. Matthews quit to the “manner of dismissal”. “Manner of dismissal” was originally conceptualized at the moment of dismissal but, should be applied to constructive dismissals where a period dishonesty or other similar conduct by the employer eventually pushes the employee out the door.
- The contractual breach of good faith rests on a wholly distinct basis from that related to the failure to provide reasonable notice. In other words, the employee can seek damages for the breach of good faith and honesty to provide compensation beyond entitlements to notice or bonuses.
Finally, it should also be noted that the Court declined to consider whether the law regarding good faith in employment contracts should be expanded to provide a cause of action where an employee is subjected to bad faith conduct but chooses not to leave their job.
Fraser v. Canada (Attorney General) and Discrimination on the Basis of Sex and Pension Plans
Viewing the Fraser case narrowly, it is a case about a federal government employer and whether it is discriminatory under the Charter of Rights and Freedoms to deny a “buy back” option for women who work reduced hours due to their child care obligations where such a buy back is permitted for other reasons. Viewing it widely, the case broadens the circumstances that are recognized as “adverse affect discrimination” and could have implications for cases decided under provincial human rights legislation.
The case involved three retired female RCMP members who had taken maternity leave in the 1990s and then returned to full-time duties. In 1997, the RCMP introduced a job-sharing program, which allowed two or more RCMP members to split the duties and responsibilities of one full-time position for a limited or fixed period of time, at reduced pay. The job-sharing program introduced greater flexibility for RCMP members, as it provided an alternative to taking leave without pay. It also helped the RCMP to retain trained members, and to address staffing shortages. Each of the claimants elected to participate in the job-sharing program. In general, job-sharing participants were mostly women with young children. The job-share participants continued to be considered full-time employees.
The women sought to purchase their “missed” service under the RCMP pension plan’s buy-back provisions in order to bring their pensions to the same level as if they continued to work full-time hours. The pension plan allowed other full-time members who had been suspended from work or had unpaid leaves for other reasons to buy-back all or a portion of those periods. The RCMP took the position that work under the job-sharing program was equivalent to part-time work, for which no buy back was available under the RCMP pension plan.
Issue before the Supreme Court and Outcome
The women argued that the failure to extend the buy back to job-share employees had an adverse affect on women contrary to section 15(1) of the Charter. The RCMP pension plan is a creation of legislation and for that reason is subject to the Charter. The job-sharing program involved a temporary reduction in working hours for full-time staff members and was not equivalent to part-time work. Because job-share participants were predominately women, not permitting the buy back had a disproportionate impact on women. Though these consequences were not explicitly based on sex, the Supreme Court found adverse impact discrimination, which can arise where a seemingly neutral law has a disproportionate impact on members of a group protected under the Charter.
Implications for Employers
As noted above, the RCMP pension plan is subject to Charter scrutiny where private pension plans are not. However, provincial human right statutes also prohibit adverse effect discrimination. As such, the Supreme Court’s jurisprudence is influential in disputes involving private employers.
One of the key considerations in adverse effect discrimination cases is the “comparator group” – who do you compare a protected group to in order to determine if there is a disparate impact on that group? In the RCMP case, it was a key factual finding that the job-share employees retained full-time employee status and were therefore compared to other full-time employees. If the job-share employees were compared to part-time employees, there was no disparate impact because part-time employees had no ability to buy service under the plan.
It is a recognized human rights principle that paying employees less when they work less or offering different forms of compensation based on full-time or part-time status is not discriminatory because the distinction is based on hours worked, not personal characteristics of employees. The Fraser case does not directly suggest that these principles need to be revisited. However, it does open the door to further arguments and claims where there is evidence that a disproportionate number of part-time employees were women who cannot work full-time due to their childcare responsibilities. We can anticipate that more adverse affect discrimination arguments will be made following the Fraser case in order to address these social inequities.
C.M. Callow Inc. v. Zollinger and Dishonesty by Silence
C.M. Callow is not an employment case. However, it picks up on the theme of good faith and dishonesty that was considered in obiter in the Matthews case.
C.M. Callow provided outdoor maintenance services for a property manager, Baycrest, that managed a number or condominium buildings. The parties entered into a two-year contract for winter maintenance. The contract terms included a clause that permitted Baycrest to terminate the contract on ten days’ notice. In March 2013, during the first year of the winter contract, Baycrest decided that it would terminate the winter contract early. It did not advise C.M. Callow of its decision at the time. In a conversation between a representative of C.M. Callow and a representative of Baycrest, Baycrest created a false impression that the winter contract would not be terminated early and in fact would likely be renewed. In order to encourage Baycrest to renew the winter contract, C.M. Callow provided extra work over and above their summer contract on a gratuitous basis. Although there were opportunities to do so, Baycrest never corrected C.M. Callow’s impression that the second year of the winter contract would proceed. Baycrest notified C.M. Callow of its decision to end the winter contract early in September 2013. At that point in time, it was too late for C.M. Callow to find a new contract to replace the Baycrest work.
Issues before the Supreme Court
The Court framed the question before it as “what constitutes a breach of the duty of honest performance where it manifests itself in connection with the exercise of a seemingly unfettered, unilateral termination clause”. To put it another way the Court asked “whether Baycrest failed to satisfy its duty not to lie or knowingly deceive Callow about matters directly linked to the performance of the winter maintenance agreement, specifically by exercising the termination clause as it did.” The next question to be determined is the compensation due to C.M. Callow if a breach is found.
What is the obligation of honesty performance?
Although the contract between the parties did include an unfettered right to terminate the winter maintenance contract, based on the 2014 Bhasin case, Baycrest could not lie or otherwise knowingly mislead C.M. Callow about “matters directly linked to the performance of the contract.” The exercise of the early termination clause was something that directly related to the performance of the contract. As stated by the Court:
…Baycrest may not have had a free‑standing obligation to disclose its intention to terminate the contract before the mandated 10 days’ notice, but it nonetheless had an obligation to refrain from misleading Callow in the exercise of that clause. In circumstances where a party lies to or knowingly misleads another, a lack of a positive obligation of disclosure does not preclude an obligation to correct the false impression created through its own actions (para 38).
Later in the judgment, the Court expressed the obligation on contractual parties related to contract termination clause as follows:
No contractual right, including a termination right, can be exercised dishonestly and, as such, contrary to the requirements of good faith (para 48).
What are the Damages for breach of the duty of honesty and good faith?
There was some debate in the case regarding the appropriate measure of damages. Baycrest argued that the contract provided for 10 days notice of termination and therefore, the remedy should be limited to that notice. In other words, there was no remedy for the breach. The Supreme Court disagreed and concluded that the damages should be measured against a defendant’s “least onerous” means of performance and in this case, that meant correcting the misrepresentations by Baycrest. The Court went on to find that if C.M. Callow was aware of the early termination when the decision was made by Baycrest, it would have taken proactive steps to bid on other winter maintenance contracts. Indeed, C.M. Callow introduced evidence of other contracts it did not pursue believing that it already had a secure contract for the upcoming winter. Having lost that opportunity, the Court confirmed that C.M. Callow was entitled to the profit it lost under the winter maintenance agreement for the 2013/2014 winter. In addition, the Court confirmed an award of damages for the cost of leasing a machine that C.M. Callow incurred when it leased the machine for the purposes of the winter maintenance contract.
How does this case apply to employers?
It is not immediately obvious how the C.M. Callow case will impact employment contracts as the right to terminate with notice is fundamental to the employment relationship. Usually, reasonable notice damages will fully compensate an employee for their losses if a contract is terminated. However, where an employee is hired based on a fixed term or where a contract contains a renewal clause, employers should be very careful not to mislead employees about the longevity of the contract or the possibility of renewal.
The other area where the C.M. Callow case may gather some momentum in the employment context is in conjunction with the obiter comments in the Matthews case regarding breaches of the duty of dishonesty being separate from the obligation to provide notice and give rise to additional types of damages. It is already common practice these days for plaintiff’s counsel to include claims for general damages tied to allegations of breaches of the duty of good faith. We can expect that trend to continue into the future.
Wastech Services Ltd. v. Greater Victoria Sewerage and Drainage District and the Exercise of Discretion in Contracts
In a companion case to the C.M. Callow decision referred to above, the Supreme Court considered the general duty of honesty and good faith in the exercise of discretion in the administration of contracts. The Wastech case is also not an employment case. However, it builds upon the concept of good faith in contracts as introduced in Bhasin which has relevance to employment contracts.
Wastech and Metro had a long-term contract. The contract was for the removal and transportation of waste by Wastech to different sites. Wastech was paid a different rate depending on which site was chosen. Wastech was paid more if the site was farther away. However, the contract aimed to pay Wastech a “target operating ratio” of .89, meaning costs were 89% of revenue, and it did not guarantee a specific operating ratio in any given year. The contract also gave Metro discretion to send the waste to the site of its choice.
In 2011, Metro decided to send more waste to a closer location. This meant that Wastech did not reach the target operating ratio. Wastech sued for breach of contract alleging that Metro exercised its discretion in a way that prevented Wastech from having any chance of meeting the target operating ratio.
Issues before the Supreme Court
Wastech argued before the Court that Metro breached a duty of good faith when it exercised its discretion to allocate waste amongst the various disposal facilities. It asserted that Metro failed to have appropriate regard for Wastech’s “legitimate contractual interests” when it chose a disposal location that would not be profitable for Wastech under the terms of the contract.
What are the limits on discretion under the good faith requirement?
The Supreme Court of Canada did not find a breach of contract by Metro. It found that the duty of good faith only imposed on a contracting party an obligation to “exercise their discretion in a manner consistent with the purposes for which it was granted in the contract, or, in the terminology of the organizing principle in Bhasin, to exercise their discretion reasonably.” That does not mean that a contracting party cannot exercise their discretion in a manner that has a negative outcome for the other party. Rather, the question to ask is: “was the exercise of contractual discretion unconnected to the purpose for which the contract granted discretion?”
In answering this question in the Wastech case, the Court found that the purposes of giving Metro discretion to determine waste allocation in its “absolute discretion” were clearly to allow it the flexibility necessary to maximize efficiency and minimize costs of the operation. Further, the fact that this discretion exists alongside a detailed framework to adjust payments towards the goal of a negotiated level of profitability, contradicts the idea that the parties intended this discretion be exercised so as to provide Wastech with a certain level of profit.
The Court summarized the limits to the duty of good faith with reference to the Bhasin decision as follows:
… That does not require a party to subordinate its interests to those of the other party (para. 86).
Like the distinct duty of honest performance, the duty to exercise contractual discretionary powers in good faith is not a fiduciary duty. In exercising a contractual discretionary power,
… a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest (para. 70).
Doing so is not necessarily exercising discretion wrongfully or in “bad faith”.
How does this case apply to employers?
It is not unusual for employment contracts to include clauses that permit employers to do certain things at their “sole discretion”. For example, bonus and commission plans often include clauses permitting employers to amend the plans or eliminate them altogether at their sole discretion. Grants under stock option agreements are often “solely at the discretion of the Board of Directors”. Similarly, employers often retain the discretion over a number of terms and conditions of employment such as work location, benefit plans, job duties, reporting relationships, the introduction of policies, to name a few. In exercising this discretion, employer should be mindful that the decisions need to be consistent with the purposes for which the discretion was intended.
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