The Ontario Court of Appeal has emphatically confirmed that an employment contract signed without new consideration is invalid.  In doing so, the Court has produced another addition to a growing line of strongly worded decisions that emphasizes the need to protect vulnerable employees.

In Hobbs v. TDI Canada Ltd., released on December 1, 2004, the Court limited the application of Techform v. Wolda (2001), 56 O.R. (3d) 1 (C.A.) and reaffirmed its decision in Francis v. CIBC (1994), 21 O.R. (3d) 75, which held that an employment contract that is presented to an employee and signed after the employee begins new employment is unenforceable unless some new consideration is provided.

The successful appellant in the most recent decision, Alan Hobbs, was a salesperson, selling transit advertising.  When his old company lost its major source of revenue, the successful bidder – the respondents – offered him a position to work with his old clients.  Hobbs had oral discussions with the respondents – who agreed to pay Hobbs certain negotiated commission rates.  Shortly afterwards, the respondents provided an offer letter that offered a draw of $60,000 against commission, with details on the rates to follow.  On the basis of that letter, Hobbs quit his old job and agreed to join TDI.

A few days after he started working for TDI, Hobbs was presented with a new document, an employment contract, which he was told was “non-negotiable.”  The document set out a range of terms relating to calculation of commissions including terms that limited TDI’s obligation to pay commissions in the event that Hobbs resigned or was dismissed.  Having already left his old employer and having started work for his new employer, Hobbs signed the new document.

After a number of months, Hobbs began asking TDI when he would be paid commissions owing.  He was only being paid a draw and a monthly car allowance and was growing impatient waiting for a reconciliation.  Hobbs quit his employment with TDI and asked for a reconciliation of commissions against draw.

Relying on the new document, the “employment contract,” TDI maintained that Hobbs was only entitled to be paid commissions if his full annual draw was exceeded – even though he had only worked for 5 months.  TDI refused to pay Hobbs commissions on his actual billings weighed against the draw that was actually paid to him.  Hobbs sued for commissions owing on the $3.1 million worth of sales that he had sold for TDI, which all agreed was subject to commission of 6%.

At trial, Justice Peter Jarvis of the Ontario Superior Court dismissed the action. ([2003] O.J. No. 2646])  Justice Jarvis held that the new document that Hobbs signed after starting work with TDI was a “second installment” of the contract.  He held that since Hobbs had read and signed the contract, he was bound by it even though it was only provided to him after he started work and even though it contained “onerous” terms.

In his reasons, Justice Jarvis also held that the Court was bound by Techform v. Wolda and that forbearance from dismissal is adequate consideration in this type of situation.  The Court also relied on a 1935 Supreme Court of Canada decision, Maguire v. Northland Drug Co. [1935] S.C.R. 312, which arrived at the same conclusion.

In overturning the trial Court decision, the Ontario Court of Appeal rejected the two installment analysis.  It held that Hobbs had not been shown the “second installment” and had no way of anticipating its onerous terms.  The second document was only provided to Hobbs after he started working and therefore required some new consideration if it were to be enforceable.

The Court of Appeal then considered whether Hobbs was provided with any such new consideration.  In distinguishing Techform v. Wolda, the Court noted that there was no evidence in Hobbs’ case that the respondent TDI wanted or intended to terminate Hobbs’ employment prior to having him sign the second document.  Although TDI may have told him that he had to sign the document to keep his job, there was no explicit or tacit promise of forbearance from dismissal.  The Court therefore ruled that there was no consideration and the agreement was unenforceable.  The Court held that Hobbs was entitled to $52,779, the amount billed and collected up to the effective date of his resignation.

Finally, the Court of Appeal reiterated the proper procedure for having employees sign standard form employment contracts – which had been set out by Madam Justice Weiler in Francis v. CIBC:

Employers should state “in the original offer of employment that the offer is conditional upon the prospective employee agreeing to accept the terms of the employer’s standard form of agreement, a copy of which could be enclosed with the offering letter.”

In light of the Court’s most recent decision, anything short of this procedure will jeopardize the enforceability of any newly imposed employment contract in the absence of fresh consideration.

This questions was answered recently by the Ontario Court of Appeal in the case of Bowes v. Goss Power Products Ltd., a decision issues on June 21, 2012.

Peter Bowes had a written employment agreement with his employer.  The contract stated that he would receive six months’ notice or pay in lieu of notice if his employment was terminated without cause “prior to the completion of forty-eight (48) months from commencement.”  The contract said nothing about mitigation or about timing of the payment.

Mr. Bowes was dismissed without cause and he was able to find new employment after only two weeks.  His employer paid him out three weeks’ notice as required under the Ontario Employment Standards Act, but then refused to pay out the rest of the amount specified in the employment agreement.  Mr. Bowes was forced to file a lawsuit.  He was unsuccessful initially and then appealed his case to the Ontario Court of Appeal.

The Court of Appeal reviewed the case law dealing with mitigation of damages in these circumstances.  It emphasized that an employer and employee can fix an enforceable notice period which provides some certainty to both parties.  It may well be a lower amount than the employee would have otherwise been entitled to receive under common law.  However, by doing so, the employer gives up the right to the benefit of mitigation if the employee successfully mitigates damages.

In particular, the Court of Appeal stated the following, quite emphatically:

1.  “A fixed term of notice or payment in lieu is not equivalent to common law damages for reasonable notice.” and

2.  Payment in lieu of a fixed term of notice, being liquidated damages or a contractual amount is not subject to a duty to mitigate;

The Court of Appeal stated that it is unfair of an employer to draft an employment agreement with a set severance term, that is less than the employee might have had under the common law, and then try to get out of it at the point of dismissal by informing the employee “that future earnings will be deducted from the fixed amount.”

The Court decision, written by Chief Justice Winkler, on behalf of a unanimous Court of Appeal, concludes:

“Where an agreement provides for a stipulated sum upon termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.”

In the present case, Mr. Bowes was awarded the full six months’ pay, as specified in employment contract, despite the fact that he found other work quickly.

This is a very important decision for Ontario employees as it clarifies an area in which there had been mixed case law.  The Ontario Court of Appeal has stated very clearly that employers must pay out fixed contractual severance amounts, even if the dismissed employee finds new employment quickly – unless the employment agreement very clearly states otherwise.

Employers can still use contracts that include mitigation provisions but these provisions must be included in the original employment agreement and must meet all of the other normal conditions of enforceability.

The recent Ontario Court of Appeal decision in Richards v. Media Experts  is an example of the extent to which a proceeding can become costly and prolonged as a result of a decision to include a personal defendant.

The plaintiff sued the corporate defendant for wrongful dismissal.  She also named her former boss, the executive chairman of the company in a suit for intentional and negligent infliction of nervous shock.

The Ontario Court of Appeal upheld a motions Court decision to dismiss the claim against the personal defendant for two reasons:

1.  The employee had signed an employment contract with a limitation clause, which barred these types of claims from being brought against the company and its officers and directors.  Perhaps surprisingly the Court of Appeal agreed with this argument;

2.  More importantly, the Court of Appeal held that the material facts, as included in the Statement of Claim, showed that the personal defendant was acting on behalf of the company when he fired the employee.  In other words, the allegations of misconduct or improper treatment did not demonstrate that the executive chairman was acting outside of the scope of his employment.  There was an allegation that he was off on a “frolic of his own” but this was not sufficient to show that he was personally responsible.

In dismissing the case against the personal defendant, the Court of Appeal ordered the plaintiff to pay $15,000 in legal costs.

This decision is a reminder that plaintiffs should be very careful in deciding whether or not to sue personal defendants.  The claim must show that the individuals were acting outside of the scope of their employment.  Some examples could include fraud, harassment, conspiracy or other outrageous conduct.  But normally, just because a boss makes a decision to let someone go, that will not be the basis for personal liability on the part of the boss.

The decision also reinforces the importance of employment contracts.  Employment contracts can specify termination arrangements that will be made at the conclusion of employment and can broadly exclude other types of claims.  This case suggests that courts will be quite deferential in upholding these clauses if they are crafted properly.

The dismissed employee, Derek Martin,  was a twenty year employee with a minority share in his employer’s business. When the assets of  the business, Concreate USL were sold, Martin received significant compensation.  However, he was required to sign a far-reaching non-competition and non-solicitation agreement.  After later being dismissed, Martin asked the Ontario Superior Court to rule that the restrictive covenants were unreasonable and therefore unenforceable.  The Ontario Superior Court held that the restrictions were reasonable and enforceable in the circumstances.

On appeal, one of the key issues was whether the duration of the agreements was uncertain.  Martin would be bound to certain restrictive covenants as long has he continued to hold shares in the company.  He could not dispose of these shares without the consent of third parties, including lenders and bonding companies with whom he had no connection.  It was therefore, arguably, unclear how long these agreements might remain in place.

A second issue on appeal related to the overly broad scope of the prohibited activities.  If the restrictions were enforceable, Martin would be prohibited from dealing with numerous potential customers, dealers and agents with whom he had not even had contact while working for Concreate.

Martin was successful with both of these arguments.  The Court of Appeal held that the scope of the restrictions went “far beyond what was properly required to adequately protect the goodwill of the purchased business…”  The unanimous decision of the Court references and relies on its prior decision from 2011 in Mason v. Chem-Trend Limited Partnership, in which it had held that it would not enforce an overly broad non-solicitation restriction.

The Court of Appeal noted that Martin had received independent legal advice about the restrictive covenant and he had signed a clause indicating that he agreed it was reasonable.  However, the Court held that it must still scrutinize these types of agreements to determine whether they are in the public interest, even where the situation involves more of a business transaction than an employment contract.

In light of these decisions, employers seeking to impose and enforce restrictive covenants must be extremely careful.  They must ensure that they are only restricting the employee from activities that would affect proprietary interests that they are entitled to protect and nothing more.  As the Ontario Court of Appeal has indicated, employers who overreach will be left with little or no protection from post-employment activities, other than their continued ability to enforce restrictions on the use of their confidential information.

Employees are often tempted to leave with an exclamation mark.  This can be motivated by a desire to get even or get revenge for unfair treatment.  It may be a letter circulated to the entire company and its customers, a harsh letter sent to the boss or a posting on social media.  I have seen many situations where these actions come back to haunt the employees.  While this is not to say that these actions are never a good idea, they are often more trouble than they are worth.  This post looks at some of the issues you should consider when quitting a job – from an employment law perspective.

First, a recent example of an “I quit” video by Marina Shifrin:

As you may know by now, this video, at the item of writing of this blog, has had more than 8 million hits on YouTube.  From a Canadian employment law perspective, the video is really not that bad.  Ms Shifrin mentions that she was employed at a great place.  She avoids slandering her past employer.  And ultimately, she probably helps get them lots of publicity.  She may well have generated job offers for herself in the process – and probably a variety of personal offers as well.  Sure there are some vindictive employers out there who might try to bring some kind of lawsuit in a response to a video like this, but that would probably not be the best corporate marketing strategy.

Here, the company recognized that the video might be more helpful than harmful.  So, it produced its own response, which it is also using to recruit new employees, sending the message that it is a fun place to work.  The company’s responding video does not slander the departing employee – and in fact wishes her well:

As much fun as these videos might be, not everyone is about to make an “I quit!” video or other production.  Most people would probably get themselves into quite a bit of trouble trying to do it properly and safely.

Whether you are thinking of making a video or not, here are some legal issues to consider when quitting a job in Canada:

1.  Unpaid Bonuses:  If you are with a company that has a bonus plan in place, you may not be eligible for the bonus (even an accrued portion of it) unless you are working at the time the bonuses are paid.  Some employees have received a great new employment offer  and cannot wait around with the old company to collect the bonus.  If this is the case, you may want to ask the new employer for a signing bonus to compensate for the amounts you are losing.  You might also want to check your employment contract and see whether you will be disqualified from the bonus if you leave before bonus time.

2.  Restrictive Covenants:  If you have an employment contract in place (which can even be an offer letter, from when you started or some later point in time), you may want to get that reviewed carefully by an employment lawyer before agreeing to go and work for a competitor. There may be steps you can take to minimize the potential difficulties.  The covenants may not even be enforceable.  If they are, or even if they might be, you may be able to get an indemnity for any legal fees and costs from the new employer.  But you should deal with this issue properly before accepting the new position.

3.  E.I. Eligibility:  If you are quitting and you do not have a job lined up, you may not be eligible for Employment Insurance benefits unless you can prove that you were forced to quit (or left with no choice).  Make sure you have a plan lined up for how you intend to support yourself.

4.  Constructive Dismissal:  If you believe that you have been forced to quit, either as a result of a reduction in pay, a demotion or a poisoned work environment, this is probably something that you should mention in a resignation letter.  It can harm a constructive dismissal case where an employee sends a glowing resignation letter about how wonderful everyone has been in the workplace and then tries to allege “poisoned work environment.”  If you are considering a constructive dismissal claim, you should probably get legal advice before you quit.

5.  References:  Employees quitting a job are often concerned about potential references.  If you have been severely mistreated and have a legitimate constructive dismissal claim, it may be more important to take actions that support the claim than to worry about the reference from this particular employer.  In fact, negotiating a mutually agreeable reference may ultimately be part of the claim.  But in most other cases, leaving employment in a classy way will help ensure a decent reference from your former employer.  You may even be able to get some helpful, written reference letters on your way out the door or some assurances that people will respond favourably when called.

6.  Company Property:  In most cases, employees are required to return all company property including computers, cell phones, vehicles and documentation in hard and soft copy form.  There have been cases where employees have downloaded company documentation and information to local drives or even personal devices before leaving their employment.  This can provide the basis for a lawsuit to be brought by the company you.  Not a good idea!

7. New Employment Contract:  If you are going to be accepting employment with a new employer, it goes without saying that you should ensure that you have received and accepted a signed offer of employment before submitting a resignation letter.  You should consider having this new employment offer reviewed by a qualified employment lawyer.  There may be clauses in the agreement that affect your future severance or your future ability to work elsewhere. There may be other clauses that have a major impact on your legal rights.  Don’t assume that you are simply being given a “standard offer” and that is is “non-negotiable.”  This is rarely true.

8.  It’s a Small World:  In most industries, the world is a lot smaller than we might think.  Word gets around about actions that people take, especially if the actions are inappropriate.  In the vast majority of cases, it is best to leave in style, with a classy, professional note to the employer.  Who knows, you may find yourself working with, or even for, some of these people a lot sooner than you might have expected.

The plaintiff worked as a customer support agent from October 2005 to March 6, 2008, a total of about 2 1/2 years.  Six months after the plaintiff began his employment, he signed an employment agreement.  The agreement included a clause which provided for fifteen days’ notice in the event of dismissal.

The plantiff was dismissed and was provided with two weeks’ severance.  He did not accept this amount and sued for $70,000 in wrongful dismissal damages.

At trial, the plaintiff noted that he had not obtained legal advice at the time he signed the contract.  However, he apparently agreed at trial that the agreement was “valid and in force.”  (This is really a legal conclusion rather than a factual matter).   Instead of arguing that he was owed more notice – and that the employment agreement was not valid, the plaintiff alleged the defendant had dismissed him for improper reasons, relating to his record of offences.

The trial judge concluded that since the plaintiff was dismissed on a “without cause” basis, he was only entitled to the minimum amount provided for in the employment agreement.  The reason for his dismissal was held to be irrelevant.  The lawsuit was dismissed and the plaintiff was ordered to pay the defendant’s costs in the sum of $5,012.

The plaintiff appealed to the Court of Appeal and represented himself once again.  The Court of Appeal upheld the employment contract and dismissed the case, ordering the plaintiff to pay another $3,500.

The striking aspect of this case is the arguments that do not appear to have been put before the trial judge or the Court of Appeal or considered by one of the two levels of court.

Firstly, the employment agreement  that the defendant relied upon was provided to the plaintiff six months after he commenced employment.  There is no suggestion in the trial decision that any new consideration was provided to the plaintiff.  Based on a number of cases that have previously been decided by the Ontario Court of Appeal, the employment agreement should have been thrown out for lack of consideration (See for example Hobbs v. TDI Canada Ltd.) Interestingly, one of the Court of Appeal judges who sat on the panel that decided Hobbs v. TDI Canada Ltd., Justice MacPherson, was on the panel in this case of Musoni v. Logitek Technology Ltd.  Yet there is no mention of any consideration argument.

Secondly, even if the employment agreement had been provided to the plaintiff in exchange for some new consideration, it contained a clause that provided for only 15 days notice.  If the plaintiff had been working for the defendant for three years, this 15 days would have been less than the minimum notice required under the Ontario Employment Standards Act, 2000 (21 days rather than 15).  At four years, it would have been significantly less, no matter what type of calculation is used.  These types of clauses that will eventually amount to less than the minimum amount required by statutory provision have been held to be void by Canadian courts.  (See, for example Shore v. Ladner Downs, a decision of the B.C. Court of Appeal).

It seems likely that if this case had been argued properly, the plaintiff should have been entitled to between 3 and 6 months’ notice, based on his annual income of $47,000.  Instead, he wound up with 15 days’ notice and a bill for the defendant’s costs of more than $8,500.  The case is an illustration of a situation in which the courts will not come up with the proper arguments for the unrepresented plaintiff.  So the plaintiff is ultimately left with a brutal result and only himself to sue for professional negligence – for not having raised some key legal arguments that any competent employment lawyer would have put forward.

A final note: Given that the case was probably only worth three or four months’ compensation, the proper place for this case would have been Ontario Small Claims Court, which has a monetary limit of $25,000, rather than the Ontario Superior Court.  Ouch!

In other posts, I have looked at the types of clauses that can be used in employment contracts and what they really mean.  You can find the most recent discussion here.

But I wanted to consider some more practical points.  Some might seem obvious.  But people holding a new job offer in hand don’t always think of everything that should be considered.  While you may be anxious to sign the employment contract and start the new job, especially if you have been out of work for some period of time, you really do need to look at the contact closely.  Not all of the terms are written in stone.

What items can be negotiated?

1. Salary.  Well, of course this is not really a legal point.  But most people realize that salary is negotiable.  So I often have employees tell me that they negotiated up the salary level of a new position – but ignored everything else in the contract.  Don’t assume that the salary is fixed.  There may well be room to improve it.  Most of the time, it can’t hurt to try.

2. Vacation and Bonus.  In a sense, these benefits go hand in hand with salary.  They are tangible items that an employer might agree to increase.  Often, both items are subject to a grid or a plan.  But I regularly see employers making agreements to increase vacation time at the request of a new hire – especially from two to three weeks or from three to four.

3. Severance.  This is crucial.  Even though it might seem like the last thing on the mind of someone who is about to be hired, it can be incredibly significant.  Some employers will use clauses that drastically limit the amount of potential severance to be paid on a dismissal.  Any clauses that say “employment standards legislation” or something similar should be questioned and considered.  They might even be deal breaking clauses.  As a result, employers will often negotiate these clauses.  If they will not, you should get proper legal advice so that you understand the implications of signing away such important and monetarily valuable rights.

4. Non-Competition Agreements: People generally realize that these clauses are significant, even if they have not had legal advice.  But I often hear employees telling me that a friend or family member told them not to worry because these clauses are rarely enforced and may not even be enforceable.  While that advice might be true sometimes, it is not always the case.  Signing a non-competition agreement – or even a “non-solicitation” agreement can greatly impact your future opportunities after leaving this new employer.  These clauses are also often negotiable, particularly the proposed time period of the restrictions.

5. Probation and Benefits Clauses.  Believe it or not, these too are negotiable items.  If an employee is being recruited from another position, the potential employer may agree to waive a probationary period and/or start benefits right away.  Sometimes a signing bonus can even be negotiated.

These are just a few of the points to consider.  Competent legal counsel can often point out a number of different clauses in a proposed employment contract that are problematic or that should be considered very carefully.  It may well be much cheaper, in the long run, to go through an employment contract review process at the outset than a legal battle at the end of a relationship.  It is usually far worse to find out, after being dismissed, that a signed employment agreement has now left you with below-market severance, enforceable post-employment restriction and no real legal alternatives.

If the employer is reasonable and is genuinely interested in treating its employees fairly, it should be prepared to negotiate reasonable provisions in all of these areas and maybe some others as well.