Northern Exposure

Employment contracts, termination clauses, and itchy trigger fingers

by Bruce R. Grist

As there is no employment at will in Canada, most employment lawyers in Canada who act for employers recommend that employers use employment contracts to govern the employee’s relationship with the employer. If there is an employment contract and the employer wishes to terminate the employee’s employment or the employee wishes to resign, the parties’ obligations are clearly set out in the contract.

Properly drafted employment contracts prevent the uncertainty that arises with respect to termination of employment and “reasonable notice.”

In our experience, employers rarely provide “reasonable working notice” as they do not wish an unhappy employee who is told that he or she will be terminated at some time in the future continuing to work within the organization. Instead of reasonable working notice the employer provides an offer of a severance package. However, many employers terminate the employee’s employment and provide the employee with the offer of a severance package either coincident with or shortly before the termination of employment.

By terminating the employee’s employment without reasonable notice and without a severance agreement with the employee, the employer has breached the employment contract. If the employment contract provides for insurance-related benefits such as life insurance, short-term disability, or long-term disability, that insurance coverage may cease to exist upon termination of employment. If the event that the insurance protects against occurs before an agreement is reached, the wrongful dismissal lawsuit may turn into a lawsuit over the failure to have insurance coverage for the employee.

In Thompson v. Cardel Homes Limited Partnership and Cardel Construction Ltd., the Alberta Court of Appeal dealt with the termination of an employee by his employer when the contract was coming to the end of its term. Instead of allowing the contract to expire, the employer “constructively dismissed” the employee by removing the employee from his position shortly before the employee’s fixed-term employment contract expired.

The court held that the removal of the employee’s duties and responsibilities (although the employer continued to pay the employee) was a constructive dismissal and, as such, a termination of the employment contract. The contract was for a fixed term of one year and did not provide for any severance at the end of the term if it was not renewed. However, the contract provided for a severance payment of 12 months’ salary if the contract was terminated during its term.

The employer advised the employee that it would not be entering into a new agreement at the end of the term of the employment contract. However, it then told the employee not to attend work for the remainder of the term of the agreement and that the employee would be paid his compensation through to the end of the term.

The Alberta Court of Appeal held that removing the employee’s duties and responsibilities constituted a constructive dismissal and therefore was a termination of the employment contract during the term of the contract. It therefore triggered the severance payment of 12 months’ salary required under the contract.

The court held:

By not obtaining the employee’s agreement to a parting of the ways prior to the end of the contract, the employer denied the employee the opportunity to complete his tour of duty and all that that entails in an employment relationship. When no attempt is made by an employer to obtain an employee’s consent to early termination of a fixed-term contract, the employer risks a finding of termination. When there is evidence of a unilateral change in the terms of employment, the employer runs the risk of being found by a court to have terminated the employee without cause.

As a result, because the employer constructively dismissed the employee shortly before the end of the term of the employee’s employment contract, the employer was liable for the severance payment of 12 months’ salary. If it had waited a short while until the end of the contract, no severance would have been payable.

Employers in Canada have the ability to have appropriate employment contracts. Appropriate employment contracts minimize risk and potential damages if an employee is being terminated. However, employers must be careful to comply with the terms of the contract when initiating a termination. Failure to do so can result in liability like that visited on the employer in the Cardel Homes Limited decision.

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