Employers 'Repudiating' Employment Contracts

There's a highly dubious line of case law coming out of Ontario dealing with termination language in employment contracts.

Ontario lawyers who read that line will initially wonder "which one?" There are a lot of evolving doctrines in Ontario right now that make it difficult to enforce termination language. The reality is that I agree with most of those, on their principles.

But not this one: Courts are finding, increasingly, that employers who do not comply with their termination obligations under written contracts of employment are not able to later rely on the termination clause.

I understand the motivation to take this approach, but it's completely irreconcilable with first principles of employment law.

Background

A brief primer: By default, every employment contract is presumed to contain an implied term that neither side will terminate it without 'reasonable notice' to the other. This concept is most often applied when employees are dismissed without cause, and employees are found to be entitled to significant pay in lieu of notice based on factors like their age, length of service, character of employment, and availability of replacement employment.

Under most circumstances, reasonable notice periods are anywhere from about 2 months to 24 months, though there are outliers at both ends.

To reduce their risk of having to pay several months' wages upon dismissal, many employers try to displace the implied term (of reasonable notice) with an express term that allows them to dismiss on provision of some lesser amount of notice and/or pay in lieu of notice.

For many reasons, these are difficult to enforce. Employers have a lot of bargaining power at the start of the employment relationship, and tend to be the more commercially sophisticated party, and so courts hold them to a high standard when they're trying to impose a term that allows them to put the employee out of work on provision of notice that is, well, less than reasonable.

Every Province has a statute that specifies a minimum entitlement on termination. The frameworks vary a little, but it's universal that attempts to contract out of those minimums are void. In the same way that you can't contract for less than minimum wage, you can't contract for less than minimum notice entitlements.

A very normal scenario, for employees entitled to reasonable notice, is that employers will pay out the statutory minimum (because it is illegal not to do so), then make a proposal to pay out the rest of any 'reasonable notice' in exchange for a release. Basically, there's always a bit of uncertainty as to how much money the employee is entitled to, as pay in lieu of reasonable notice, so paying it out typically needs a binding settlement.

The Repudiation Cases

The scenarios we're seeing involve employers taking a similar approach with reference to contractual severance amounts: They have a contract entitling the employee to $X on termination; they pay out the statutory minimums on dismissal; and they say "Sign this release and we'll pay you the rest of X."

Perretta

This new line of case law starts in 2021,with a decision by Justice Sanfilippo: The employer in that case used a termination formula that I refer to as "ES+". (I've written about this before, and it's been my preferred approach for years, because of its ease of drafting and relative readability and clarity.) Basically, it promised Ms. Perretta her statutory minimums, plus an additional two weeks of notice. (The 'just cause' provisions of the contract turned out to have a Waksdale problem, but no challenge was made against the ES+ language itself.)

When Ms. Perretta was dismissed, the employer paid out her statutory minimums (three weeks), and then told her that it wouldn't pay her the additional two weeks until and unless she signed a release and agreed to a number of other terms.

The court concluded that, by insisting on those additional terms prior to paying out Ms. Perretta's entitlement, the employer 'repudiated' the employment contract, and was no longer entitled to rely on the termination language of the agreement.

Therefore, Ms. Perretta was awarded pay in lieu of reasonable notice - of 6 months.

Timmins

Last month, the decision was released in Timmins v. Artisan Cells, involving an Executive Vice President for a medical laboratory company. (Artisan withdrew their statement of defence just before trial for some reason, so the trial proceeded undefended.)

Artisan used a 'greater of' termination clause - entitling him to 3 months of notice or the statutory minimum. (I don't like these clauses in the first place, and this was badly drafted, but that's not the problem here.)

The employer paid out his statutory minimums (though appears to have calculated them wrong), but again, refused to pay the balance without agreeing to additional terms, including a release.

Justice Callaghan followed Perretta, and awarded Timmins 9 months of notice.

Analysis - Departures from Principles

I have no difficulty with the findings that the employers in these cases repudiated the employment agreements.

However, I have a great deal of difficulty with the conclusion that repudiation leads to an entitlement to reasonable notice. There's no legal principle that allows that connection to be made.

The Law of Repudiation

Let's start with what 'repudiation' really means: When I repudiate a contract, it means that I'm evincing an intention to no longer be bound by the terms of the contract. It's a type of breach that permits the other party to treat the contract as being ended by my conduct, to cease to perform their obligations under the contract, and to seek damages based on the termination. It doesn't change the contract; it just means that I'm no longer obligated to carry out my obligations under the contract, and I'm entitled to compensation that puts me into the same position I'd be in if the contract were fully performed.

So if I contract with you that I'm going to shovel your driveway within 24 hours of every snowfall all winter, and one day I'm an hour late, then that's a breach that could entitle you to recover losses from my failure to meet my obligation, but it's probably not a repudiation. However, if I just don't show up at all and I ignore your calls, then that's more likely a repudiation that entitles you to say, "Never mind, don't bother coming at all for the rest of the winter." You could then retain another service provider and sue me for any excess cost my non-performance put you to. Because of my repudiation, you are no longer bound to the 'all winter' contract we signed.

There's no utility to the question of repudiation in Perretta-type cases. The refusal to pay the agreed-upon contractual notice/pay-in-lieu, if that term is otherwise valid, is absolutely a breach; the question of whether it's a repudiation asks whether the employee is entitled to treat the employment relationship as at an end - and, seeing as the employer has explicitly terminated the relationship, that's a moot point.

Contract Formation

There's a misunderstanding here about the interplay between the implied term of reasonable notice and express termination provisions in a written contract of employment.

It's not the case that 'reasonable notice' forms some underlying obligation in every agreement, subject to an enforceable written term. Rather, it's an 'either-or' phenomenon: These are mutually exclusive terms, and by inserting an enforceable written termination clause into the employment contract, you are rebutting the presumption of an implied term of reasonable notice. (If your express written term isn't incompatible with a contractual term of reasonable notice, then it doesn't accomplish its goal anyways.)

Therefore, in an employment contract where the parties have agreed to an otherwise-enforceable termination clause that displaces the implied term of reasonable notice, there is no contractual right to reasonable notice.

When we void a termination clause because it's non-compliant with the statute, we're relying on a statutory mechanism that voids this language ab initio - as if it didn't form part of the employment contract in the first place - and therefore the implied term is left intact.

However, once a contract is established on certain (or, sometimes, not-so-certain) terms, a contractual term isn't typically voided, or rendered voidable, by breach. Rather, breach confers remedies upon the non-breaching party to put them into the same position they would be had the contractual terms been met.

This is literally 'Contracts 101' stuff here, going back to Hadley v. Baxendale in 1854, that the non-breaching party is entitled to be put into the same position they would occupy if the contract had not been breached. This means that, when an employer breaches a contractual obligation to pay severance in keeping with a contract, the employee is entitled to be put in the position they would occupy if the employer had complied with its obligations - that is, had the employer paid the contractual termination amount.

(I'd caution lawyers, too, against applying an Open Window analysis here: This isn't a scenario of multiple modes of performance, where the contractual language is the less onerous. This is a scenario where the contractual language creates the only mode of performance.)

Rescission

The outcome here appears to be more in line with a 'rescission' remedy. Rescission is a type of equitable remedy that allows a court to unravel a contract from formation, putting the plaintiff in the position they'd occupy had the agreement never been entered into.

It's not really rescission, though, because it's just one term of a contract that had complex consideration flowing both ways, typically for years, and the courts clearly aren't trying to unravel that.

Regardless, rescission is only available in a narrow set of circumstances, such as misrepresentation/deception by one party. It's built for scenarios where a party's initial agreement to material terms is tainted by an inability to understand the terms or to say no - and not just "I didn't read the contract", but situations where they were actively misled or under duress.

If there's ever a rescission analysis to be undertaken in these cases - and I think it's strained at best - it would require more. An examination of the contents of an employer's good faith obligations, and a pre-existing practice/intention to hold its contractual obligations as leverage to secure additional concessions from the employee at the end of the relationship...and maybe we can have a conversation about whether equity can allow us to unravel the termination clause on its own.

But the mere fact of repudiation doesn't do it.

Other Scenarios Where Repudiation Matters More

There are cases where post-employment obligations exist, such as restrictive covenants limiting an employee's ability to compete with their employer after leaving.

Repudiation matters in those cases. It's not entirely uncontroversial, but General Billposting is clearly the law in Alberta, and probably the law elsewhere in Canada: When an employer repudiates the employment contract (e.g. by terminating without complying with its termination obligations by giving adequate notice), it is no longer entitled to hold the employee as bound to their ongoing obligations under the contract.

But that's not the same principle here: When you repudiate the employment contract, you're no longer entitled to insist on the other party's continuing performance, but you are still entitled to have your liabilities calculated with reference to what the other party would have gotten if you'd complied with the contract.

An Understandable Error, and Other Approaches

From a principled perspective, the idea of unraveling the terms of the contract itself simply because of breach (even repudiatory breach) is absurd, even silly.

But there are reasons why the courts sometimes take that approach.

The doctrine of 'reasonable notice' is an effort by the courts to develop a fair approach to determining the rights of parties to terminate employment relationships. Employees are particularly vulnerable, because they're reliant on their jobs to provide for themselves and their families, and finding themselves suddenly out of work can put them in a particularly precarious situation.

There is, generally speaking, a well-recognized imbalance of power in the employment relationship in the first place, and courts have recognized that employers owe a duty of good faith and fair dealing (at least at the point of terminating the employment relationship). This is part of why courts, particularly in Ontario, are comfortable holding employers to a very high standard in how they draft their contracts in the first place.

So when an employer uses their bargaining power to coerce an employee to accept a bargain that allows unilateral and sudden termination, without any reason, on remuneration that is less than reasonable, and the employer later exercises that right and tries to hold even that lesser amount as leverage for additional commitments from the employee that they're not entitled to...

...yes, we should all be a little uncomfortable with that. I understand wanting to send a message to employers that this is not okay, and I agree with that. But this isn't the way, and this kind of unprincipled law has other implications.

I would suggest that, to the extent that we want to deter oppressive misconduct by employers, the proper mechanism to do that is punitive damages. And it's undeniable that punitive damages are a difficult threshold to achieve, but I'd argue that a recalibration of this, to bear in mind issues like vulnerability and bargaining power, would be appropriate.

Historical Fetters on Punitive Damages

Most of contract law is historically built around an assumption of more-or-less equal bargaining power. Between sophisticated commercial actors, we're generally pretty willing to say "a deal is a deal is a deal," and hold parties to the bargain they struck.

In employment law, in recognition of the difference in bargaining power, we've developed a lot of special treatments for public policy reasons.

In many circles, for this reason, employment law is regarded as a niche, and perhaps 'lesser', area of contract law.

However, I would argue that employment law is at the cutting edge of contract law, trying to find treatments to address problems that our general framework doesn't have an answer to. If contract law were physics, then the law as we apply it to commercial actors is Newtonian physics, and employment law is quantum physics.

And in reality, employment contracts and consumer contracts are, if anything, more ubiquitous and impactful than commercial contracts.

Bhasin is a sign of this: For decades, we've treated good faith duties as arising only in specific types of contractual relationship, such as employment contracts and insurance contracts. However, recognizing an organizing principle of good faith in contractual relationships hints that we're moving away from a dispassionate view of contractual relationships generally into a mode of thinking where we have a general expectation that people are going to deal with other fairly - which, to employment lawyers, isn't a new idea.

By tradition, contract damages are very constrained to pecuniary (monetary) damages: Most contracts are just commercial arrangements, after all. It used to be that any sort of additional damages, like aggravated or punitive damages, required some separate actionable wrong beyond the breach of contract itself. Punitive damages, in particular, are typically out of reach in contract contexts, because our contract milieu on the whole doesn't actually mind contractual breach - there's a celebrated concept called "efficient breach", where it might be cheaper for a party to breach the contract and pay the other party their damages, rather than complying with the contract. Doing so is seen as a win-win.

Over time, we've created special treatments for things like 'contracts for peace of mind', recognizing that not all contracts are about buying something for its pecuniary value. If I contract with a resort for a vacation, and they don't hold up their side of the bargain, then surely my damages - having my finite vacation time turned from the rest and relaxation I was promised into a stressful nightmare - are more than just the financial value of what I paid for.

In Fidler v. Sun Life, the Supreme Court of Canada moved away from any sort of pigeonhole treatment for aggravated damages, concluding that any aggravated damages that flow foreseeably from a breach can be compensable.

For a while, 'bad faith damages' were awarded routinely in wrongful dismissal cases, under Wallace, but the Supreme Court pulled back on that in Honda.

Still, the 'separate actionable wrong' requirement for punitive damages has been eroded a great deal. It's not generally a difficult threshold to satisfy that threshold.

The main remaining hurdle to awarding punitive damages for the kinds of conduct we see in Perretta...is a view that punitive damages are reserved for cases with exceptionally egregious misconduct.

A Necessary Recalibration

There's something to be learned from these cases: Specifically, why is it that we look at this behaviour and say, "We need to deter employers from acting like that"?

I'd suggest that there are a few factors in play:

• Bargaining power: To a large extent, employers are able to dictate terms at the start of the employment relationship, and most employees lack both the sophistication and the leverage to push back meaningfully on terms that limit their job security.
• Contractual authority: During the life of the employment contract, employers have incredible power over employees, including dictating what, where, when, how, and by whom work is performed. To a large extent, employees have to just...do what they're told. (There's even case law suggesting that employers are entitled to compel employees to do absolutely anything so long as it is 'lawful and reasonable'. I disagree with this, and think that approach has no place in the non-union context, but that seems to be where the law has gone.)
• Post-employment vulnerability and duress: The very point of the entitlement to reasonable notice and/or severance packages is to ease the hardship otherwise caused by job loss. For an employer to not only trigger that hardship, but to also leverage additional concessions from the employee based on that hardship by otherwise refusing to comply with its obligations to provide those entitlements...seems a little off, when viewed in a certain light.

Consider Whiten v. Pilot Insurance - up until recently the high watermark for punitive damages in Canada - where the Whitens' house burned down, and Pilot refused to pay their fire insurance claim. They suspected arson, but there was no real evidence of it, and the main reason they suspected it was because the Whitens were known to be in financial difficulty. So the Whitens had an insurance policy to cover their expenses in precisely this type of catastrophic scenario; the scenario arose; they were in deep financial distress; and Pilot played hardball and forced them to sue. (Which is hard to do without any money.) The court ultimately awarded a massive punitive damage: If you just make Pilot pay out the claim plus some legal fees, it becomes a sound business decision to do this sort of thing as a matter of course, figuring that most people won't be able to seek a remedy, and the excess cost, for the ones who do, will be less than the savings by denying those other claims. The point of punitive damages is to change that calculus.

There seem to be parallels, in the sense that an entitlement to notice and/or severance serves a similar 'financial security' function to a fire insurance policy. (At least Pilot can't be said to have created the Whitens' financially vulnerable situation in the first place.)

Hardball tactics after termination are generally regarded as inconsistent with the employer's duty of good faith and fair dealing, but it's rare to see damages awarded on the basis of them, and we don't typically even view 'not paying their contractual/common law entitlements' as a breach of the duty of good faith and fair dealing.

There are exceptions: In Brito v. Canac Kitchens, Canac took a pretty typical course of action for a dismissal scenario. They dismissed the plaintiff (one Mr. Olguin) and provided only his statutory minimums. He got a new job right away, so they figured they didn't have to pay him anything more. (Up until this point, this is actually a pretty common scenario, and nothing Canac did was all that unusual.) However, his new job didn't have benefits, and within the notice period, Olguin had to undergo treatment for laryngeal cancer, including multiple surgeries, chemo, and even a tracheostomy tube for six months. In addition to awarding him compensation for his lost disability benefits, Justice Echlin - a noted employment law jurist - took a dim view of Canac's actions: They basically had no defence to a 16 month notice period, and yet had provided him with compensation for only the bare minimum statutory period. Justice Echlin awarded "ancillary damages", which the Ontario Court of Appeal overturned simply on the basis that they hadn't been pleaded.

That was 13 years ago, and nothing else has come of Justice Echlin's commentary in that case. With the possible exception of extending benefit coverage if possible, no management lawyer would recommend providing pay in lieu of common law notice without a release - it just doesn't happen, and the general view is that employers don't need to.

But it's not unthinkable that courts could take a different approach to this question, particularly when dealing with vulnerable employees: By leveraging the financial hardship and vulnerability created by the termination without notice - whether by withholding the 'extra two weeks' under Ms. Perretta's contract, or by withholding pay in lieu of common law notice altogether - in order to secure a release and/or other concessions, the employer's breach of their contractual obligations actually enhances their already-significant bargaining power. This, despite uncontroversially owing a duty of good faith and fair dealing under those circumstances.

As I've noted before, the employment contract is rich with 'rights without remedies' for employees - ostensible contractual rights of employees that employers can largely ignore with impunity, because employees can only recover for quantifiable pecuniary losses, and constructive dismissal law has a couple of high thresholds.

I published a paper last year in the Canadian Labour and Employment Law Journal, "Deconstructing Constructive Dismissal", where I argued - and I'm paraphrasing - that courts are weirdly reluctant to take employers to task for breaching their contractual obligations, in an area of law that is, otherwise, largely built upon recognition of the vulnerability of employees and good faith obligations on the employers.

This reticence extends deep into the realm of remedies for breaches of the employer's duties of good faith: Since Honda, it's fairly rare for courts to award a remedy for bad faith.

The Perretta approach is a judicial attempt to work around that reticence, to find a way to compensate employees for their employers playing hardball, beyond the relatively small pecuniary loss they may have suffered due to their employers' breach of contract. But it's an unprincipled and results-driven approach, that doesn't really get at the heart of the problem.

If we think that employers need to be pushed off of a practice for moral reasons, then the solution has to be punitive damages, not retroactively rewriting the contract.

*****

The author is an in-house lawyer in Alberta. Views are the author's alone. This article does not contain legal advice, but general legal information. If you have a legal issue, consult a lawyer.