By Marisa Victor and Yael Wexler
An employment contract can provide certainty and protection for both the employer and employee. But what happens when it comes time to renew it? A recent Ontario case shows what can go wrong when an employer offers an existing employee a revised contract in order to address performance or other employment problems.
Assume your employee is causing some problems. You have warned the employee with a series of disciplinary letters and threats of termination. You then decide to work things out by drafting a new employment contract. The employee refuses to sign. Can you now terminate him for cause?
“No”, said the Ontario Superior Court of Justice in Hinke v. Thermal Energy Inional Inc. [2011] O.J. No. 4576. The employee’s refusal to sign a new contract did not amount to just cause for termination.
Facts
Hinke was the founder, CEO and principal shareholder in Thermal Energy Inional (TEI). After 12 years, his performance was called into question by the company’s board of directors. In 2003 the board warned Hinke of the risk of dismissal if he did not resolve certain performance-related issues.
Despite the threat to terminate Hinke, the parties agreed to a new, two-year employment agreement. Nearing the end of the two years in 2005, TEI and Hinke entered into the negotiation of a four-part framework agreement. The framework agreement dealt not only with the a new, two-year employment agreement, but also with a convertible debenture settlement, certain debts owed from and to Hinke, and business expenses Hinke had incurred.
Hinke responded to TEI’s draft employment agreement, within the time alloted, with a different proposal. Not liking his response, TEI terminated him. Their position was that Hinke’s refusal to accept TEI’s proposed agreement constituted just cause for termination.
Court’s findings
On the matter of wrongful termination, the trial judge found in favor of Hinke. He was awarded damages. The judge found that the offer of a new employment agreement, albeit in a framework-form, demonstrated that TEI “clearly presumed that the employment relationship would continue.” This was “hardly consistent” with the intention to terminate Hinke for cause. The court also found that the offer of a new employment agreement meant the employer could not pursue allegations of Hinke’s prior misconduct as additional and supporting grounds for termination with cause.
Despite the ruling on wrongful termination, the case was a mixed success for Hinke. The Court found against him on the other elements of his claims under the framework agreement.
Conclusions
It appears that this employer may have been trying to address too many problems at once. It is difficult to address performance-related issues while also offering new employment terms and settling other financial interests in a single offer. It may be wise for employers to make a clear separation between the employment contract and other issues.
This case also highlights some of the potential problems that can arise when an employer offers an existing employee significantly revised terms of employment. While this can sometimes solve a problematic employment situation, you must consider your liability if the negotiations break down. Employers are advised to consult a member of our Labour, Employment and Human Rights Group in these tricky situations.