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Posts tagged: employment contract

Is an Employer Required to Provide a Bonus to an Employee Who is Not Employed on the Date the Bonus is Paid?

By , July 31, 2018 1:05 pm

What is an employer’s responsibility to pay bonuses to an employee who resigns after the year in which he or she earns a bonus, but before payment has occurred?

The Ontario Court of Appeal (“OCA”) tackled this question once again in Bois v MD Services, 2017 ONCA 857.

Facts

The appellant, Mark Bois, worked for the employer for approximately 14 years. Mr. Bois was awarded bonuses under his employer’s Variable Incentive Plan (“VIP”), where a bonus was payable in equal installments over the 3 years following the calendar year for which the bonus was awarded.

Mr. Bois resigned in 2011, before the payout dates for the third installment of his 2009 bonus and two installments of his 2010 bonus. Mr. Bois started an action seeking these instalments, which amounted to nearly $115,000.

The employer’s VIP contained provisions regarding entitlement to payments. Further, a letter from the employer, signed and agreed to by Mr. Bois, stated:

In any given year, you must be a permanent employee of the CMAH Group of Companies on December 31 of the year for which the incentive is paid and continue to be so employed on the payment date(s) to receive a payment. Any employee who is no longer employed with the organization or has given notice of termination prior to the payout date will not be eligible to receive a payment.

The issue in this appeal was whether the requirement to “continue to be so employed”, as per the employer’s VIP, conflicted with the Employment Standards Act, 2000 (“ESA”).

Mr. Bois argued that the effect of s. 11(5) of the ESA was to accelerate his employer’s obligation to pay out future installments, regardless of the language in the VIP. Further, he argued that that the VIP disentitling him to future instalments was a violation of ss. 13(1) of the ESA.

Analysis

The Court held that the requirement of continued employment in the employer’s VIP did not conflict with the ESA and Mr. Bois’s appeal was dismissed.

The OCA agreed with the lower court’s interpretation that the VIP requires an employee to continue to be employed with the employer on the date of the bonus installment payout to receive the installment. Since Mr. Bois resigned before the incentive pay date, he became ineligible to receive the bonus payment.

The Test and Previous Cases Finding for the Employee

In a Paquette v. TeraGo Networks Inc., 2016 ONCA, which we wrote about here, the OCA found that the relevant provision in employee’s contract did not limit the employee’s claim to the bonus. The contract simply stated, that the employee must be “actively employed by TeraGo on the date of the bonus payout”. The Court looked at more than if the term “actively employed” was ambiguous. Rather, the wording of the bonus plan was viewed broadly in determining that the employee’s award was not to be limited.

The court outlined a test to determine whether a terminated employee is entitled to damages on account of a lost bonus. The court will ask:

  1. does the employee have a common law right to damages for breach of contract that would include compensation for a lost bonus?
  2. is there language in the bonus plan that unambiguously alters the common law entitlement?

In another case where the court found for the employee, the employee was entitled to the bonus for the time he worked, as well as what he would have earned during the 18-month notice period. Read more about this case here

A third decision that found for the employee is Lin v OTPPB 2015 ONSC, which we wrote about here. The court held that the employer’s annual incentive plan was integral to the Mr. Lin’s compensation. The court reiterated that there are different types of bonuses and in this situation, the bonus was significant and non-discretionary. Even though Mr. Lin was not working with the employer at the time the bonus compensation was paid, he was entitled to bonus income that he would have earned during the reasonable notice period.

What Do These Inconsistent Decisions Mean?

The Bois case seems to be in line with the principle of freedom of contract. the Court stated that it is open to the parties to agree how and when any bonus was declared, earned, accrued and would be payable. As shown above, however, not all judges consistently apply this principle in the employment law context.

This begs the question, when will contractual language purporting to limit an employee’s right to bonus pay be enforced?

Previous cases illustrate a variety of factors to consider. Not only should employers use clear language and unambiguous provisions, employers should also consider the type of bonus it is. Considering the increasing complexity in this area, employers should consult a legal professional to determine the sufficiency of their contractual provisions on bonus awards.

We note that the OCA sided with the employer in the Bois case where the employee resigned whereas the OCA sided with the employee in the Paquette and Lin cases where the employee was terminated. The court in Bois stated that Mr. Bois had notice of the active employment eligibility requirement and knew (or ought to have known) that when he resigned, he would forfeit his bonus award.

If you are looking for experienced employment lawyers to review or draft your bonus entitlements provisions, contact us at [email protected] or 647-204-8107 and one of our lawyers would be happy to assist you.

For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416-317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

The Benefits of Failsafe Provisions

By , July 17, 2018 8:53 pm

The Ontario Court of Appeal recently released a decision on the enforceability of termination clauses in employment agreements that contain failsafe provisions.

Background

A “failsafe provision” is a portion of a termination clause that provides that, regardless of what the termination clause provides, an employee who is terminated on a without cause basis will always receive at least the minimum notice of termination, benefit continuation and severance pay the employee is entitled to receive under employment standards legislation.

Amberber v IBM Canada Ltd.

Mr. Amberber’s employment contract contained a termination clause that entitled him to notice of termination equal to the greater of (a) one month’s salary, or (b) one week of your current annual base salary, for each completed six months worked since his start date, up to a maximum of 12 months’ salary. This amount expressly included all payments to which the employee might be entitled under employment standards legislation and at common law. This part of the clause, which the motion judge termed as the “options provision,” was followed by a failsafe provision.

After he was terminated, Mr. Amberber sued IBM Canada Ltd. (“IBM”) for wrongful dismissal and claimed he was entitled to pay in lieu of notice at common law. At the motion, Mr. Amberber advanced three arguments. The motion judge only gave effect to one of the arguments: the termination clause failed to rebut the presumption of common law reasonable notice of termination.

The motion judge found that although the termination clause was one paragraph, it broke down into two parts. The inclusive payment provision immediately followed the options provision, so the motion judge interpreted that the provision applied to the first part. Because the inclusive payment provision was not repeated at the end of the clause, it was not clear that the inclusive payment provision was meant to apply to the failsafe provision. The motion judge found that the inclusive payment provision could just as easily have been included at the end of the paragraph and could have just as easily been specified to apply to both scenarios.

On appeal, the motion judge’s decision was overturned. The Ontario Court of Appeal found that the motion judge made a fundamental error when she subdivided the termination clause into what she regarded as its constituent parts and interpreted them individually. Rather, the clause must be interpreted as a whole, and when read as a whole, there could be no doubt as to the clause’s meaning. To hold that the inclusive payment provision applies to only one part of the clause but not the other, gave the clause a strained and unreasonable interpretation. The Ontario Court of Appeal reminded judges that the court should not strain to create an ambiguity where none exists.

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

The Cost of Terminating Employees When a Business is Sold

By , April 17, 2018 8:29 am

When a business is sold the cost of terminating unwanted employees can significantly impact the sale price. The purchaser does not want to pay the cost of terminating long service employees, and the seller doesn’t want to incur termination costs which reduces the net sale price.

General Rules on Termination Pay Obligation when a Business is Sold

  1. Under the Employment Standards Act (the “ESA”)

A section in the ESA states that when a business is sold an employee’s service with the seller is deemed to be service with the buyer when the buyer subsequently terminates the employee. So if an employee worked five years with the seller and is terminated six months later by the buyer then the buyer owes the employee five weeks notice of termination; not one week notice.

  1. At Common law

Unless the buyer stipulates otherwise, an employee’s service with the seller is taken into account by the courts when determining common law reasonable notice of termination when the buyer subsequently terminates the employee.

How the Seller of a Business Can Reduce Termination Costs

If you are thinking of selling your business over the next 2 to 3 years then a great way to reduce termination costs is to make sure that all of your employees have signed an employment contract with an enforceable termination clause. This clause can significantly reduce your termination pay obligations for employees you are required to terminate as a condition of the sale.

Existing employees can sign an employment contract but managing this process can be very tricky. We help sellers navigate this legal and HR minefield.

How a Purchaser of a Business Can Reduce Termination Costs

If you are buying a business then a great way to limit liability for termination pay for the employees you inherit from the seller is to require them to sign an employment contract with an enforceable termination clause.

We help buyers prepare employment contracts for the seller’s employees that address employee benefits, vacation, termination pay and other terms of employment that are of interest to the seller’s employees. This is especially important for key employees who are critical to the continued success of the business.

Lessons to Be Learned:

1. The cost of terminating long-term employees can be significant. In fact, in some cases I have seen termination costs eat up most of the sale proceeds.

2. To avoid this situation, termination costs can be reduced by including a termination clause in an employment contract. These contracts can significantly benefit the seller.

3. Often one of the key challenges for the seller is convincing the buyer to take on all employees on substantially the same terms and conditions of employment. We help our clients with this issue.

4. On the other hand, one of the key success factors in a sale of a business for the buyer is retaining certain key employees. Negotiating a “fair” employment contract with these employees can be difficult because these employees have so much bargaining power. We help our clients with this negotiation.

5. Sellers and buyers can benefit from speaking with an employment lawyer well in advance of the sale of a business.

For over 30 years Doug MacLeod has been advising employers on all aspects of the employment relationship. You can contact Doug directly at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

Case Study: Why You Need to Periodically Review Your Employment Contract

By , October 11, 2017 9:08 am

A well-drafted employment contract is the best employment law investment an employer can make. It protects an employer from significant liability and will usually save thousands of dollars in termination costs.

An employment contract should be reviewed periodically because judges are refusing to enforce termination clauses if they are not drafted properly.

In a recent case, Covenoho v. Pendylum Ltd.,2017 ONCA 284, Ontario’s highest court concluded a termination clause was not legally enforceable because it might breach the Employment Standards Act (“ESA”) in the future.

The Facts

Joss Covenoho signed a one year fixed-term contract with Pendylum Inc. The employer terminated her agreement without advance notice when she had been employed for less that 3 months. The termination clause stated in part that the contract could be terminated before the end of the fixed-term “if the Pendylum Client to which you have been contracted terminate[s] its contract with Pendylum for your services”.

Decision by Motion Judge

The motion judge concluded that since the employee had been employed for less than three months, she was not entitled to any notice of termination. Under the ESA an employer is not required to provide any notice of employment to an employee during the first three months of employment.

Decision by Court of Appeal

The Court of Appeal reversed the motion judge’s decision and found that the termination provisions were void. It ruled that “the terms must be construed as if (the employee) had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void”. In this case, if Ms. Covenoho had been terminated after three months of work, then the termination clause would have violated the ESA because she could have been terminated without any notice of termination (or any payment in lieu of notice) contrary to the ESA.  The court also ruled the employee was entitled to receive the salary that she would have earned for the balance of the fixed-term contract.

Lessons for employers:

1)   Employers should periodically review their termination clauses to ensure they are properly drafted and do not provide shorter notice than required by the ESA.

2)  As we have written about before, it is generally a bad idea to enter into a fixed term contract. If a fixed term contract must be used, it must include an enforceable early termination clause.

On October 16 and October 20 MacLeod Law Firm is holding seminars in Toronto and Barrie that will cover three topics. One topic is why employment contracts need to be reviewed periodically. Cases like this one is one reason but there are other reasons. Information on the seminar can be found here.

For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

Negligent misrepresentation during recruitment process costs employer $83,000

By , October 10, 2017 4:53 pm

Providing misleading information to an employee during the recruitment process about the eligibility for an employee benefits program cost an employer $83,000

Feldstein v 364 Northern Development Corporation

Mr. Feldstein applied for a software engineer position with 364 Northern Development Corporation (“the Company”). Before accepting the position, Mr. Feldstein asked the Company’s Chief Information Officer (“CIO”) about the eligibility requirements for the Company’s long-term disability (“LTD”) plan. As Mr. Feldstein suffered from cystic fibrosis, this information was very important to him, as he believed that he would require substantial LTD benefits in the future.

The CIO provided Mr. Feldstein with a brochure which summarised the Company’s LTD benefits, which contained a “proof of good health” clause. When Mr. Feldstein asked what this clause meant, the CIO explained that he would qualify for LTD benefits after working for the Company for three months. Based on this information, Mr. Feldstein accepted the position and signed an employment contract.

The employment contract in question contained the following “entire agreement” clause:

“This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, representations, understandings and agreements whether verbal or written between the parties with respect to the subject-matter hereof.”

The purpose of an entire agreement clause is to prevent parties who have entered into a final contract from invoking prior discussions or understandings to give a different meaning to its provisions.

However, the contract did not contain any details of the benefits plan. Instead, the clause in the contract stated:

“The Employee shall be entitled to participate in all rights and benefits under any life insurance, disability, medical, dental, health and accident plans maintained by the company for its employees generally. In addition, the Employee shall be entitled to participate in all rights and benefits under other employee plan or plans as may be implemented by the Company during the term of this Agreement.

Shortly after accepting the position, Mr. Feldstein applied for LTD benefits as his health deteriorated significantly. He expected to receive full coverage of up to $5000 per month. Instead, Mr. Feldstein was only eligible for $1000 per month because he had not completed a medical questionnaire which was required to establish “proof of good health.” Mr. feldstein sued the Company for negligent misrepresentation.

Decision

The trial judge made the following findings:

  • the CIO’s explanation of “proof of good health” was inaccurate and misleading;
  • the Company was negligent in making this representation as the CIO had not taken any steps to verify the accuracy of the information he provided and the Company failed to provide Mr. Feldstein with the required medical questionnaire
  • it was reasonable for Mr. Feldstein to rely on the information the CIO provided; and
  • Mr. Feldstein would not have accepted an employment offer that did not provide adequate LTD coverage and acceptable eligibility requirements due to his health concerns.

The Company attempted to argue that the entire agreement clause in the employment contract meant that Mr. Feldstein could not sue for negligent misrepresentation. The court rejected this argument, as the CIO’s statement relating to the meaning of “proof of good health” was not an express term of the contract. As it was a matter outside of the contract, the clause could not exclude liability for pre-contractual misrepresentation.

Mr. Feldstein was awarded $83,336.80 as compensation for lost LTD benefits and $10,000 for aggravated damages. On appeal, the award for loss of benefits was upheld, but the aggravated damages were overturned.

Lessons to be learned

  1. Anyone interviewing a job applicant should provide accurate information concerning employee benefits; otherwise, the organisation may be required to self-insure for the value of benefits that are subsequently denied by the group insurer.
  2. Including an entire agreement clause in a contract like the one cited above does not always protect an employer from negligent misrepresentations made during the hiring process.
  3. It is important to periodically review employment contracts including entire agreement clauses and clauses dealing with group benefits to ensure they still protect employer interests in light of recent developments in the law.

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

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