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07 April 2021
This article covers three recent cases that employers should keep in mind.
On 14 January 2021 the Supreme Court denied an application for leave to appeal the Ontario Court of Appeal's decision in Waksdale.(1) Much to the chagrin of many Ontario employers, the Supreme Court's refusal to allow leave means that the Ontario Court of Appeal's short and pithy decision in Waksdale is the current law of Ontario. In Waksdale, the Ontario Court of Appeal found that if any aspect of a termination clause violates the Employment Standards Act (ESA) 2000, regardless of whether the impugned provision is found under a separate heading or in a different sub-clause, the entire clause will be voided, even where the employer is not seeking to rely on the impugned provision.
Moving forward, it is crucial for employers to ensure that their employment contracts comply with the ESA's minimum requirements. Improperly drafted employment contracts can result in terminated employees receiving common law entitlements on termination, which are typically significantly higher than employees' termination entitlements under the ESA. The Ontario Court of Appeal's decision in Waksdale is a clear indicator that the Ontario courts will closely scrutinise employment contracts for any potential violation of the ESA.(2)
On 18 December 2020 the Supreme Court released its decision in Callow which interpreted and expanded the duty of good faith in the performance of contracts.(3) While Callow involved a dispute between a condominium corporation and a maintenance company, the Supreme Court's decision applies to all types of contract and therefore includes employment contracts.
In Callow, a condominium corporation agreed to a two-year winter maintenance contract with a maintenance company. The parties also had a separate summer maintenance contract. Under the terms of the winter maintenance contract, the condominium corporation could terminate the contract by providing the maintenance company with 10 days' written notice or if the company provided unsatisfactory service.
The condominium corporation decided to terminate the winter maintenance contract but did not inform the maintenance company about its decision for several months. During that period, and while the condominium corporation was aware of its decision to terminate the winter maintenance contract, the maintenance company performed more work than was required under the summer maintenance contract with a view to enticing the condominium corporation to renew the winter contract. In addition, the board members and owners of the condominium corporation gave false hopes to the maintenance company that the winter contract would be extended or renewed. Later, the condominium contract gave the maintenance company notice that it was terminating the winter agreement.
The maintenance company filed a lawsuit against the condominium corporation alleging that it had acted in bad faith. While the lower courts' decisions on the application of the duty of good faith in the performance of contracts were divided, the Supreme Court found in favour of the maintenance company. The Supreme Court found that the duty of honest performance in contracts, which is itself a part of the overarching duty of good faith and applies to all types of contract, requires that parties to a contract do not lie or knowingly deceive each other about issues directly connected with the contract at issue. The Supreme Court was careful to state that the duty of honest performance does not create a positive obligation of disclosure, but that it may require a party to correct a false impression that the party itself created. In this case, the major factor to the condominium corporation's breach of the duty of good faith in the performance of the contract was that it had knowingly given false hope to the maintenance company that the winter contract would be renewed.
Callow provides interesting guidance to employers when considering the duty of good faith and the honest performance with respect to employment contracts. In Callow, the Supreme Court made it clear that parties cannot deliberately deceive each other. Even where a contract does not stipulate any type of disclosure of information, employers must be cautious when making promises to their employees or otherwise giving them reason to believe that their employment is secured.
While Callow serves as a reminder that parties to an employment contract cannot deliberately deceive each other, the Supreme Court recently held in Matthews v Ocean Nutrition Canada Ltd(4) that "a contractual breach of good faith rests on a wholly distinct basis from that relating to the failure to provide reasonable notice".(5) The application of Callow in the employment context will be worth monitoring in the future.
On 17 December 2020 the Ontario Court of Appeal upheld a lower court's decision to award an employee more than C$1.2 million in damages after their employer unilaterally imposed a number of changes to the former employee's terms and conditions of employment.(6)
In McGuity, the employee had sold his family's funeral home to the employer and entered into a 10-year transitional services consulting agreement. Under the agreement, the employee was entitled to an annual salary of C$100,000, commission payments and various other perquisites and fringe benefits. The agreement contained no early termination provision. This was a key feature of the case – Ontario law is clear that employees on fixed-term contracts that contain no early termination clause will normally be entitled to compensation through to the full term of the contract in the event of an early termination.
Shortly after the parties began to work together, their working relationship ran into difficulties. The employee's work was being closely monitored by a subordinate at the funeral home, his perks and benefits were abruptly removed by the employer and the employer stopped paying the employee's commission payments. The relationship deteriorated to the extent that the employee commenced a medical leave of absence only 11 months after the employment relationship had started. Shortly after commencing his medical leave, the employee discovered that the employer had changed the funeral home's locks without providing him with new keys. He also learned that his workstation had been moved to a desk in the basement of the funeral home. The employee never returned to work following his medical leave of absence and two years later commenced the lawsuit against the employer.
At trial, the judge found that the employee had been constructively dismissed. The trial judge found that the employer's actions would have led a reasonable person to conclude that the employer no longer intended to be bound by the terms of the agreement. On appeal, the employer argued that the employee had condoned the changes to the terms of the agreement as a result of the length of his medical leave of absence.
The Court of Appeal rejected this argument, finding that employees may take a reasonable amount of time to decide whether to accept the changes to the employment relationship or allege constructive dismissal. Further, the Court of Appeal found that the fact that the employee had been unable to work as a result of the medical leave of absence could not be reconciled with the employer's argument that the employee had condoned the changes to the employment relationship.
The Court of Appeal confirmed that the employer had constructively dismissed the employee by unilaterally changing the terms of his employment. The Court of Appeal also confirmed that the employee was entitled to damages equivalent to the compensation that he would have received had he worked the remaining nine years of the fixed-term contract.
These cases provide important considerations for all employers to keep in mind:
For further information on this topic please contact Lisa Cabel, Richelle Pollard, Kaley Dodds or Derek Klatt at KPMG Law by telephone (+1 416 777 8000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The KPMG Law website can be accessed at www.kpmg.com.
(2) For further information please see "Waksdale vs. Swegon North America Inc.".
(5) For further information please see "Matthews v. Ocean Nutrition Canada Ltd.".
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