A Word of Caution for Employers: When Terminating Employees Say What you Mean and Mean What you Say

November 2, 2020

What do employment contracts and termination letters have in common? They both have the potential to end, or at least limit, an employer’s liability in the event of a termination. However, to be effective, they must be properly drafted. A termination letter that fails to assert just cause for termination, and specify the reasons for cause, will be ineffective, even if cause for termination exists. Likewise, a without cause termination provision in an employment contract will be invalid and unenforceable if it is not properly worded and attempts to contract out of the statutory minimums established by the Employment Standards Act.

The recent decision of the New Brunswick Court of Appeal in Abrams v. RTO Asset Management, 2020 NBCA 57 (“Abrams”) addressed both of these issues and serves as a cautionary tale for employers.

Background

James Abrams was employed by RTO Asset Management (“RTO”), and its predecessors, for approximately 29 years. The terms and conditions of Mr. Abrams’ employment were set out in a detailed Employment Contract which included, among other things, a provision relating to termination without cause which stated as follows:

The Company may terminate your employment at any time without cause by providing you with written notice or pay in lieu of notice equivalent to your statutory entitlement under the province of New Brunswick employment standards legislation. If the Company terminates your employment pursuant to this paragraph, the Company shall not be obliged to make further payments to you and you will not be entitled to any additional payments under the common law as a result of the termination.  In addition, the payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice or other severance pay pursuant to the province of New Brunswick employment standards legislation.

The provision limited Mr. Abrams’ notice entitlement to the minimum notice prescribed under the Employment Standards Act and alleviated RTO from having to make any further payments to Mr. Abrams.

Mr. Abrams’ employment was terminated in 2017 forhaving engaged in a sexual and romantic relationship with a subordinate employee. Mr. Abrams had hired the subordinate employee, disclosed confidential information to her, and later promoted her, all the while keeping their relationship concealed from RTO. When confronted with the allegations about his relationship with the subordinate, Mr. Abrams was initially dishonest but eventually confessed to the relationship and the related misconduct. At the termination meeting, RTO explained to Mr. Abrams the reasons for his termination. RTO provided Mr. Abrams a termination letter which specified that RTO felt it had cause for termination but that it was proceeding to terminate his employment on a without cause basis, without prejudice to its ability to later assert just cause for termination. Mr. Abrams was provided with four (4) weeks’ pay in lieu of notice, in accordance with the Employment Standards Act and the terms of his Employment Contract. Additionally, Mr. Abrams was offered a further three months’ salary conditional on him signing a release.

Mr. Abrams rejected the offer and brought a wrongful dismissal action, claiming entitlement to common law reasonable notice. A motion for summary judgment was filed by Mr. Abrams in relation to his claim for damages for wrongful dismissal.

Summary Judgment Decision

The motion judge found that RTO had just cause for termination and that there was no issue requiring a trial. RTO was granted summary judgment in its favour and the Plaintiff’s claim was dismissed. Mr. Abrams appealed this decision.

Court of Appeal Decision

Termination Without Cause

Notwithstanding the fact that there was a termination letter provided to Mr. Abrams that stated RTO was of the position that it had cause to terminate his employment, the Court of Appeal held that RTO had terminated Mr. Abrams on a without cause basis. It relied on the following evidence to make this finding:

  • at his termination meeting, Mr. Abrams was informed he was being dismissed without cause;
  • his Record of Employment indicated he had been terminated without cause;
  • he was provided four weeks’ pay in lieu of notice in accordance with the termination provision in his employment contract; and
  • he was provided a letter which indicated a termination without cause.

Enforceability of Without Cause Termination Provision

Upon finding that the termination had been effected without cause, the Court of Appeal then considered the enforceability of the without cause termination provision. The Court held that the provision was void as it purported to contract out of certain benefits under the Employment Standards Act, namely vacation pay and accrued wages. It relied on the language in the without cause termination provision which stipulated that RTO “shall not be obliged to make any further payments” to make this finding, and explained that if a termination clause purports to contract out of a benefit under the Employment Standards Act, the entire clause is void, not just the offending part.

Common Law Reasonable Notice

Having found that Mr. Abrams was terminated without cause, and that the without cause termination provision in his Employment Contract was unenforceable, the Court of Appeal then assessed the reasonable notice period Mr. Abrams was entitled to under the common law. The Court awarded a notice period of 24 months. The amount of the damages was in excess of $300,000.

Key Take-aways for Employers:

This decision serves as a cautionary tale to employers, and reiterates the importance of carefully worded termination letters and employment contracts. If an employer believes they have cause for termination, they should clearly and unequivocally assert that they have cause for termination and not take any actions which would undermine that decision or suggest that the termination is without cause. More specifically, an employer should refrain from making gratuitous payments to employees who have been terminated for cause or issuing a Record of Employment that states the termination is without cause. While an employer may contemplate doing these things to show some compassion to an employee who has just lost their job, doing so brings with it a risk that their ability to later rely on cause for termination will be removed. The case also reinforces the care that must be taken in drafting without cause termination provisions in employment contracts. It further illustrates the great lengths a court will go to in order to find that such provisions are unenforceable. This decision only adds to the growing number of decisions employers must consider when drafting employment contracts which attempt to limit the amount of notice an employee is entitled to upon a termination without cause.

Stay tuned – leave to appeal this decision to the Supreme Court of Canada has been filed so there may be more to come with respect to these issues.

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