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In a recent decision, an Ontario court considered both the meaning of “just cause” in employment cases as well as the impact of the parties’ sophistication on the enforceability of the employment agreement’s termination provisions.

Employee Sells Business to Employer

The employee has a medical degree and worked for many years in the healthcare industry before founding a medical practice in 2016 that operated through a numbered company.

In 2018, the employer, which owns and operates a number of pain and cannabis clinics and related facilities across Canada, expressed interest in acquiring the employee’s business through the purchase of the numbered company’s shares.

During the ensuing negotiations, and as part of the overall transaction, it was proposed that the employee would stay on as the employer’s employee for a term of three years. The employment agreement also provided for payment and notice pursuant to the  Employment Standards Act (“ESA”) if he was terminated without just cause. It also provided a provision stating: “Termination by the Company for Just Cause – The Company has the right, at any time and without notice, to terminate your employment under this Agreement for just cause.”

Both parties were represented by lawyers in the negotiation and execution of the transaction and the employment agreement.

Employee Begins Working for Employer

The parties signed the employment agreement in September 2018. However, the share purchase was only completed in March 2019.

Even though the employment agreement stated that it would only take effect when the share purchase was completed, the employee began working in the role of vice president in September 2018 and was paid a base salary of $120,000, as well as other benefits. Thus, the employee was essentially working under an unwritten employment contract until the completion of the share purchase in 2019. Upon the share purchase closing, the employee was paid the signing bonus contemplated by the employment agreement and was paid outstanding amounts for “pre-employment Contract work”.

Employee Laid Off During Pandemic, Then Fired for “Just Cause”

On March 27, 2020, owing to a substantial COVID-19 pandemic-driven decline in the employer’s business, the employee was advised that he was being temporarily laid off from his employment. He was told that the layoff was temporary and that his group employee benefits would continue during the temporary layoff. He was provided with a Record of Employment so that he could apply for Employment Insurance benefits as well. Subsequently, his temporary layoff was converted to a deemed Infectious Disease Emergency Leave, with retroactive effect to the first day of the temporary layoff.

Then, on August 31, 2020, the employee received a further letter, advising him that his employment was being terminated, effective immediately. The employer further advised the employee that the employment agreement entitled him to 24 weeks of termination pay in lieu of notice if he executed a full and final release in favour of the employer. 

However, the employee refused to sign the release and was only paid two weeks of termination pay.

The employee applied to court, arguing that the “Termination by the Company for Just Cause” provision was contrary to the ESA and, as such, invalidated the other components of the termination clause.

Court Reviews Meaning Of “Just Cause” Under Common Law and ESA

The court began by noting that the employment agreement did not provide a definition of “just cause”. The court, therefore, set out to survey the meaning of “just cause” in common law and under legislation.

The court began by observing:

“[T]he phrase [just cause] is understood as a common law notion connoting a basis, from an employee’s performance or conduct, justifying termination of the employee’s employment without the need for advance notice.”

However, the court noted that “just cause” may be contrasted with the requirements of the ESA. Specifically, the court noted that under s. 2(1), para. 3, of the ESA’s Termination and Severance of Employment regulation, an employer can only withhold termination pay, severance pay and the continuation of relevant benefits in response to workplace conduct that amounts to “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”.

Thus, the court observed that what constitutes behaviour or performance that falls under “just cause” under common law will not necessarily meet the more stringent standard under the ESA. To illustrate its point, the court observed that, for instance, an employee’s termination for incompetence may meet the common law definition of “just cause”, but would not meet the ESA standard of “wilful misconduct, disobedience or wilful neglect of duty”.

The court then set out to review recent case law on the matter, ultimately concluding that employment agreement provisions should clearly comply with the ESA and that if they do not, they are invalidated. The court noted that this is especially true where there is an imbalance of power between the employee and employer in negotiating the contract.

Court Considers Impact of Parties’ Sophistication and Representation by Counsel

The court then considered the employer’s argument about the impact of both parties’ sophistication and representation in the negotiation of the employment agreement alongside the share purchase. The employer submitted that there was no imbalance of power present in the case and relied on the Supreme Court of Canada’s decision Payette v. Guay inc., in which the court stated:  

Thus, the common law rules for restrictive covenants relating to employment do not apply with the same rigor or intensity where the obligations are assumed in the context of a commercial contract. This is especially true where the evidence shows that the parties negotiated on equal terms and were advised by competent professionals, and that the contract does not create an imbalance between them. 

However, the court was ultimately not persuaded by the employer’s argument, finding that, despite both parties’ relative sophistication and representation by counsel in the share purchase, there was no compelling reason why the employer should be permitted to rely on termination provisions that did not comply with the ESA.

In the result, the court found that the termination provisions in the employment agreement were void and awarded the employee the balance of the three-year fixed term. However, the court also deducted the employee’s CERB payments received during the balance of the term.

Contact Mississauga Employment Lawyers For Experienced Advice on Employment Matters

At Bader Law, our knowledgeable employment lawyers can counsel you on all your termination matters, advise you on your options, and help you create a plan for moving forward. We represent employees in Mississauga and areas west of Toronto. Contact us online or at (289) 652-9092 to learn how we can help.