I. Introduction
Terminating an employment contract, no matter what the reason or whose decision it is, is a difficult and complex task. Generally, termination of the contract takes one of two forms; a voluntary action by the employee such as a resignation or an involuntary conclusion of employment instigated by the employer. No matter how an employment contract is terminated employers must be aware of their legal obligations towards their employee and behave accordingly in order to prevent possible wrongful dismissal claims and other potential financial liability.
II. Governmental Regulation of the Employment Relationship
In addition to the decisions of the Courts, the workplace is increasingly governed by legislation regulating the relationship between employers and employees. Employers must recognize that they have obligations under legislation that cannot be contracted out of, particularly in the Employment Standards Act and the Human Rights Code.
Legislation regulating the employment relationship includes:
a) the Employment Standards Act;
b) the Workers’ Compensation Act;
c) the Human Rights Code;
d) the Protection of Information and Privacy Act;
e) Occupational Health and Safety legislation ;
f) The Income Tax Act; and
g) The Employment Insurance Act.
While a detailed consideration of these Acts is beyond the scope of this paper, employers should have a basic understanding of the provisions of these Acts, which are as follows:
Employment Standards Act
The Employment Standards Act sets out the minimum requirements regarding basic employment issues such as payment of wages, holiday pay entitlements, work-breaks and severance provisions. It also sets out the basic legal requirements governing maternity leave.
Workers’ Compensation Act
The Workers’ Compensation Act has two distinct areas of jurisdiction. First it provides a system of mandatory injury insurance for all workers in B.C. and provides the statutory basis to levy assessments on employers to fund the compensation system. Second, the Act regulates occupational health and safety in B.C.
Human Rights Code
The Human Rights Code prohibits discrimination in the workplace on the basis of a number of grounds including age, disability, religion, sex, sexual orientation, family status, race etc. The Act, decisions of the Tribunal and of the Courts also requires an employer to accommodate these grounds within the workplace up to the point of “undue hardship”.
Protection of Information and Privacy Act
The Protection of Information and Privacy Act regulates the use of both employee and third party “personal information” within the workplace. It requires the employer to obtain consent and safeguard the gathering, use and disclosure of this information.
Income Tax Act
The Income Tax Act dictates, amongst other things, what constitutes an “employment” relationship and distinguishes that type of relationship from other relationships such as that of an “independent contractor”.
III. Involuntary Dismissal
Under the common law Canadian employers have the right, subject to human rights legislation, to dismiss an employee, without cause, provided reasonable working or paid notice (severance) is provided. However, no notice or severance is required if the employer has cause for dismissing the employee.
What is Cause?
Cause results when an employee’s conduct breaches their obligations to the employer. As the employee is responsible for breaking the employment contract no severance payment is required. However, as a result of the emphasis courts place on the role employment plays in an individual’s sense of identity and self worth, it is becoming increasingly difficult for an employer to dismiss an employee without providing severance.
Some common reasons to allege cause are incompetence, disobedience and theft.
Incompetence
For courts to find cause due to incompetence it is generally required that the employer prove that:
1. The job performance requirements and standards were communicated to the employee.
2. Suitable instruction was given to the employee to allow them to meet this standard
3. The employee was incapable of meeting the standard
4. That there had been a warning to the employee that a failure to meet the standard would result in dismissal.
The courts have been clear that requirement that an employee be warned or notified by the employer that they are not meeting the required standard of their position is fundamental to establishing cause.
The court may not find cause due to incompetence if:
1. The performance of the employee was improving when they were terminated
2. If the employee informed the employer of their capabilities at the time of hiring, the employer cannot increase its standards and fire the employee for not meeting those standards.
3. The employer contributed to the incompetence such as by failing to support or motivate the employee.
4. There were recent positive evaluations prior to the termination as these can indicate the employee’s performance was satisfactory.
5. Providing an enthusiastic reference letter after termination can be seen as inconsistent with an allegation of incompetence.
Disobedience
It is a long established principle that an employer has the right to determine how their business should be run. In doing so they may require employees to comply with procedures they determine necessary so long as they are lawful, safe and within the scope of employment. An employee’s failure or refusal to follow the directions of the employer can result in cause for dismissal if the employer can show that:
1. The employee disobeyed a clear order or a policy or procedure, well known by the employee, that are a matter of some importance.
2. The employee disobeyed an order that was reasonable, lawful and within the scope of the employee’s job duties
3. The employee deliberately and intentionally disobeyed rather than made an honest mistake
4. Unless particularly serious, the disobedient act was be repeated by the employee.
5. As a result of the disobedient act the employment relationship was damaged to the extent that it could not be continued.
6. The employee understood or should have understood that termination was a risk of disregarding the order
7. There is no reasonable explanation for the disobedience.
Examples of when disobedience was found to be cause include:
• The refusal of a dental technician to take out garbage when it was the company’s policy that dental technicians share in that task
• A traveling sales person who failed to carry samples as instructed and failed to follow the prescribed formula for completing an expense account
• A sales and marketing director who refused to come to work on a particular day requested by the employer.
Theft
Theft is the area of cause that is most clear and has the fewest defences available to employees. Even one act of theft can be cause for dismissal. Courts will however fail to find cause if there is a reasonable explanation for the theft. For example, putting personal credit card expenses on the company credit card was not found to be cause since the employee had always acknowledged personal expenses and was prepared to pay for them. Some examples of when cause was found include when an employee:
• Exchanged samples intended for clients for a personal gift.
• Requisitioned a corporate cheque to pay a personal debt.
• Sent stock which was to be sold at his employer’s store to a store owned by his son to be sold there.
While theft is usually a cause for dismissal, it is important to note that this is not always the case. In circumstances where the employee is long serving and has a previously unblemished record, the courts are reluctant to find that theft should warrant dismissal. Similarly, if the employee shows immediate remorse or the theft involves a small amount, termination may not always be warranted. The position the employee holds in the company may also be an important factor to consider. Termination is more frequently upheld where the employee is (and will otherwise continue to be in) a position of financial trust.
Word of Caution Regarding Human Rights
It goes without saying, that if an employer knew or ought to have known that the issue arising with the employee’s performance or behavior is connected to a ground set out in human rights legislation, such as a disability, then the employer is obliged to make enquiries and, potentially accommodations, before termination can occur.
Constructive Dismissal
Constructive dismissal is another from of involuntary termination and it occurs when the employer unilaterally alters a fundamental term of the employment contract such as a decrease in compensation or a reduction of status or responsibility. When an employee has been dismissed in this manner they are found to be dismissed “without cause" and entitled to severance in lieu of reasonable notice.
Constructive dismissal is an extremely risky position for an employee to take because it amounts to a decision to “walk away” from their employment and hope that a court, will agree with their view that the employer’s actions were so egregious as to effectively destroy the fundamental basis of the employee agreement. Some examples of when a court has found that employee has been constructively dismissed are when an:
• Employee held a supervisory position for over 40 years. When the employer was planning a restructure they knew they would no longer need his position so they transferred him to the position of night guard with a significant decrease in pay
• Employee was transferred to a lower position with the same pay. Constructive dismissal found due to humiliation and loss associated with the reduction in responsibility
IV. Dismissal Without Cause - Reasonable Notice and Severance Payments
When an employer terminates an employee without cause they are required to provide the employee with reasonable notice; either in the form of working notice or as a severance payment in lieu of notice. Provisions of the Employment Standards Act set out minimum severance payments that cannot be contracted out of for any employee that is subject to the act.
Reasonable Notice Under the “ESA”
The application of the “ESA” is limited to the employees who are covered under the “ESA”. For example professions such as architects, chiropractors, dentists, engineers, chartered accountants, and lawyers are excluded from the “ESA” so the mandatory minimums would not apply.
The “ESA” sets out the minimum notice requirement that must be given to employees who are dismissed without cause. This obligation can be met by providing the employee with written working notice, payment of the required severance amount or a combination of working notice and severance.
The “ESA” provides employees with a more convenient way of receiving minimal reasonable notice as they do not have to pursue court proceeding in order to have their employer ordered to pay them severance.
In addition to the reasonable notice, employees must also, within 48 hours of terminating an employee, pay to the employee:
• all wages owing to an employee, including banked overtime pay; and
• any vacation pay the employee is entitled to at the time of termination.
Reasonable Notice- Common Law
Under the common law determining the proper reasonable notice an employee is entitled to depends upon a number of factors including:
1. The age of the employee and their opportunity for re-employment;
2. The particular management and/ or professional responsibilities of the employee;
3. Whether the employee was induced to accept employment with promises of tenure;
While court decisions do vary it is often stated that management and professional employees are entitled to one month of severance for each year of employment. Additionally, courts have been reluctant to grant any employee more than 24 months severance. For clerical or lower skilled workers, reasonable notice is often closer to the minimums set out in the “ESA”.
Reasonable Notice- Express Provisions in the Employment Contract
The common law principle that an employee is entitled to reasonable notice of termination is implied term of any employment contract. It can, however, be displaced by including a specific clause in the contract that sets out how the parties will act upon termination of the employment relationship. This allows employers and employees to agree in advance what will be considered reasonable notice. Remember, however, that the contract must still provide for the “ESA” minimums if the employee is subject to the standards in the act.
The court’s preference is to uphold contractual provisions however; they will find a reasonable notice provision to be unenforceable where no consideration was given or if the employee has advanced with the company since agreeing to the reasonable notice provision.
Consideration
“Consideration” is an ancient common law concept fundamental to contract law. The essential requirements of any contract are said to be: an offer, acceptance, and consideration – or the provision of something of value.
If an employee is asked or required to sign a new contract that favours the employer during the course of their employment it will only be enforceable if it provides the employee with new consideration. Consideration is a benefit provided to the employee through the contract, such as a wage increase. Courts have rejected the argument that continued employment can be seen as consideration for the employee to sign the new agreement.
If an employee is asked to sign a new agreement that contains a reasonable notice clause that provides for less notice then they were previously entitled to under contract or common law, or if it includes a provision considerably less favourable to an employee, such as the imposition of a restrictive covenant or lesser compensation, it will not be enforceable unless some benefit, other than continued employment, flows to the employee.
Changed Substratum
Courts have found that the passage of time can result in a contract, that is initially fair, becoming unfair and unenforceable. With respect to reasonable notice this can occur when an employee has been promoted out of the position they were in when they initially signed the contract. To ensure the enforceability of a reasonable notice clause it is recommended that as employees are promoted within the company that updated contracts be signed or at a minimum they should be alerted to the original terms of their contract as they are promoted.
V. Limiting the Availability for Damages due to Manner of Termination
In Wallace v. United Grain Growers, [1997] 3 S.C.R. 701 (“Wallace”) the Supreme Court of Canada held that an employer has a duty of good faith with respect to the termination of employees and if that duty is breached the employer will be liable for increased severance. The duty included that at termination the employer ought to be candid, reasonable, honest and forthright with their employees and should refrain from engaging in conduct that is unfair, or is in bad faith by being for example, untruthful, misleading or unduly insensitive.
Wallace resulted in a lot of awards to employees and in 2008 the SCC pulled back from damages available as a result of the case. In Honda v. Keays, [2008] S.C.J. No. 40 (“Honda”), the Court reformulated how such damages are to be calculated. While an employer still has the duty of good faith recognized in Wallace, Honda places the onus of proving actual damages arising from a breach of this duty on the employee’s shoulders. The court held that an employee must demonstrate not only that the employer behaved as alleged, but that the employee sustained actual damage as a result. The decision also limits the availability of punitive damages to those circumstances where the conduct being penalized is egregious and outrageous.
The result of Honda, appears to be that employers can now act with greater certainty when dismissing an employee as the chance that an employer will face an award of punitive damages as a result of termination has been severely limited, save in the clearest of cases.
VI. Voluntary Termination by the Employee
Under most circumstances it is clear when an employee has terminated the employment contract by resigning. Most often the employer is provided with written or verbal communication that states that the employee wishes to cease their employment after an appropriate notice period. When an employee voluntarily resigns the employer does not have any obligation to provide severance to the employee.
Whether an employee has actually resigned can become unclear in situations where the resignation arises out of a confrontation with his or her employer. Generally a resignation will be accepted by the court in such a circumstance when:
1. The employee either provides a verbal resignation or an act indicating an intention to quit such as asking for a final paycheque that includes vacation pay.
2. The employee acts to carry out the intention
3. The employer accepts the resignation. Anytime before the acceptance of a resignation it can be revoked by the employee.
Resignation or Termination ?
Further difficulties can arise when an employee claims they were dismissed while the employer thought the employee resigned. Determining whether a resignation or termination occurred is a fact driven analysis where the employee must show beyond a balance of probabilities that they were dismissed and did not resign.
Resignation has been found when:
• After a confrontation over the maximum hours that could be worked in a week the employee failed to report to work when expected and then continued to be out of contact for a number of days
• When confronted by an employer who said “if you do this one more time, I’m going to fire you”, the employee responded “if you want me to go, I’ll go”. The employee was told to come to work the following day but did not.
Termination was found when:
• An employee stormed out of a meeting was told that it was a “one-way door”. When he returned to work that afternoon his belongings were in the hall and the locks were being changed. The court found that the employee did not intend to resign and was not given a chance to calm down.
• An employer did not intend to dismiss an employee but said if “she did not think she had to account for her behaviour, she had better leave” and then did not attempt to ask her back when she left.
To avoid any confusion about when an employee has voluntarily terminated the employment contract and to avoid having to pay severance it is advisable that employers require written acknowledgement of resignation.
VII. Medical, Dental and Other Health and Life Insurance Benefits
Generally, courts have held that an employee can recover from the employer the actual costs they incurred for dental and medical costs that would have been covered during their notice period. As such, employers can reduce their risk by maintaining coverage for employees until the conclusion of the notice period.
Employees, however, do have an obligation to reduce their losses by purchasing replacement benefits. If they fail to do so employers can argue that they have failed in their duty to mitigate.
Group life insurance providers are obliged to provide an insured (the employee) with the ability to continue the coverage after termination. Similarly, employers are obliged to advise the employee of this option. While not required, it is good practice for the employer to do the same with any other group insurance plans that can converted for the employee’s use after termination.
VIII. Disability Payments
There is some case law which suggests that an employee may be able to recover from an employer disability benefits during the reasonable notice period that they would have been entitled to if they had not been dismissed. Again, if possible it may be prudent for an employer allow an employee to have continued access to a disability plan where possible in order to avoid potential liability if the employee is disabled during the notice period.
Disability benefits, in certain circumstances, may be deducted by and employer from damages for wrongful dismissal. This is likely limited, however, to situations where the employee did not contribute to the premiums for the long term disability plan.
IX. Other Obligations under the “ESA”
In addition to the requirement to provide reasonable notice, employers have additional obligations under the “ESA” when they are terminating an employee.
Record Keeping
The “ESA” mandates that employers must keep a terminated employee’s employment records for two years from the date of termination. These records are:
(a) the employee's name, date of birth, occupation, telephone number and residential address;
(b) the date employment began;
(c) the employee's wage rate, whether paid hourly, on a salary basis or on a flat rate, piece rate, commission or other incentive basis;
(d) the hours worked by the employee on each day, regardless of whether the employee is paid on an hourly or other basis;
(e) the benefits paid to the employee by the employer;
(f) the employee's gross and net wages for each pay period;
(g) each deduction made from the employee's wages and the reason for it;
(h) the dates of the statutory holidays taken by the employee and the amounts paid by the employer;
(i) the dates of the annual vacation taken by the employee, the amounts paid by the employer and the days and amounts owing;
(j) how much money the employee has taken from the employee's time bank, how much remains, the amounts paid and dates taken.
X. Employers’ Obligations Under PIPA
Retention of Employee Personal Information
The Personal Information Protection Act (“PIPA”) sets our how personal information, which includes employee personal information, can be collected, used and disclosed.
Section 35 of PIPA provides for the retention of personal information, including employee personal information, as follows:
35. (1) Despite subsection (2), if an organization uses an individual's personal information to make a decision that directly affects the individual, the organization must retain that information for at least one year after using it so that the individual has a reasonable opportunity to obtain access to it.
(2) An organization must destroy its documents containing personal information, or remove the means by which the personal information can be associated with particular individuals, as soon as it is reasonable to assume that
(a) the purpose for which that personal information was collected is no longer being served by retention of the personal information, and
(b) retention is no longer necessary for legal or business purposes."
The reference to the retention of employee information for "legal or business purposes" in s. 35(2) incorporates the requirements of retaining certain employee records pursuant to the Employment Standards Act for 2 years after the employee departs from the organization and for 6 years pursuant to the Income Tax Act. Note that it may not be considered a necessary business or legal purpose to maintain all employee information for this long.
References
PIPA also requires employers to obtain an employee’s consent to provide references or other employee personal information to third parties after the employee has left the employ of an organization. As such, when an employee leaves an organization (whether voluntary or involuntary), the employer should obtain the employee’s consent for providing a reference prior to their departure.
In addition to the issue of consent, employers should also consider what type of information they will provide when asked for a reference.
XI. Releases
Employers should carefully consider whether to obtain a comprehensive release from an employee upon termination. In each situation the employer should determine what a release needs to protect them from. Generally, however, the release should prohibit an employee from making any claims against the employer, including under the “ESA” and Human Rights Code, arising out of his or her employment.
To help ensure that a release can be enforced the employee should be given the time and opportunity to understand the release and seek independent legal advice.
XII. Conclusion
The termination of an employee can have serious financial consequences. It is essential, therefore, that employees seek appropriate legal advice both with respect to the manner of the termination and, if applicable, the likely quantum of severance pay