A whirlwind review: Ontario Court of Appeal employment cases 2018 - 2019

The Ontario Court of Appeal has a well-earned reputation of being an extremely hard-working and prolific court. The last 12 months have been no exception. This review highlights the decisions that have emphasized or even shifted key principles of employment law.

1. There is a difference between an individual's rights as a shareholder and as an employee:

Mikelsteins v. Morrison Herschfield Limited, 2019 ONCA 515 ("Mikelsteins");

Evans v. Paradigm Capital Inc., 2018 ONCA 952

This year, the Court of Appeal had no issues distinguishing between an employee's rights as an employee and an employee's rights as an owner of shares. In both these cases, the individual employees also owned shares in corporations that were governed by the terms and conditions of a shareholders' agreement. Once an employee was terminated, the agreements stipulated that the employee was deemed to have issued a Transfer Notice and the former employee's shares were purchased back by the corporation (or by a designated buyer). This type of arrangement is standard.

The Court of Appeal observed in Mikelsteins that:

There is a very plain and obvious reason why a corporation, that is employee owned, and which has terminated an employee who also happens to be a shareholder, would wish to commence the process of repurchasing the employee's shares the moment that employee is told of his or her dismissal, rather than at the end of the notice period. Understandably the corporation would not wish an employee to be able to exercise all of the rights of a shareholder once their employment is terminated.^[1]

Interestingly, the Court of Appeal determined the general prohibition in section 60(1)(a) of the Employment Standards Act, 2000 against altering "any … term or condition of employment" during the notice period was inapplicable to the individual's rights as a shareholder.^[2]

This is an important clarification for business lawyers. It will remain to be seen if this approach will also be used for quasi-equity arrangements, such as Phantom Stock Options.

2. Employer can change terms of employment, if the right to change is in the contract

Manastersky v. Royal Bank of Canada, 2019 ONCA 609

Variable compensation plans are often at issue in wrongful dismissal case. This case illustrates how important the actual language of variable compensation plans can be.

Mr. Manastersky was employed by RBC Dominion Securities ("RBCDS"), an affiliate of Royal Bank of Canada ("RBC"), in its Capital Partners unit. Mr. Manastersky was a director of the funds. His responsibility was to find investment opportunities in companies with "positive cash flow". He was awarded participation or "points" in incentive plans that were based on the performance of specific funds or pools of investments, known as "mezzanine investments". He was awarded approximately 50% of the value of the incentive plan, which, in turn, represented approximately 15% of the profitability of the fund.

In late 2013 or early 2014, a decision was made to pursue these types of investment opportunities directly through the commercial banking arm of the Royal Bank of Canada and not through RBCDS. RBC offered Mr. Manastersky an opportunity to join RBC as "Managing Director, Mezzanine Finance, National Client Group", which Mr. Manastersky declined. It appears that a major friction point was that RBC did not offer the type of participation-based incentive that he enjoyed at RBCDS.^[3] His earning potential would be significantly reduced.

The trial judge found that the reasonable notice period was 18 months, which was not challenged on appeal.

During the reasonable notice period, new mezzanine investments were funded through RBC and not RBCDS. Secondly, RBCDS started winding up its existing mezzanine investments, both by winding up its existing portfolios and ceasing to make new investments. Mr. Manastersky was paid for his allocated "points" in the existing funds, but there was a significant drop in the value of the compensation, as the funds were being wound up and no new mezzanine investments were being funded during the notice period.

Mr. Manastersky argued that he should be compensated for his "points" during the notice period, even if RBCDS made the decision to wind up its mezzanine investment activities. The trial judge had allocated compensation based on the average incentive over the life of the various funds.

The Court of Appeal started its analysis with the general principle established in Taggart v. Canada Life Assurance Company, 2006 CanLII 53345 (ONCA); Lin v. Ontario Teachers' Pension Plan Board, 2016 ONCA 619; Paquette v. TeraGo Networks Inc., 2016 ONCA 618:

The analysis in each of the three decisions proceeded from the general principle that where an employer terminates an employee without cause, the employer is liable for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned during the reasonable notice period.^[4]

Nonetheless, the Court of Appeal carefully reviewed what Mr. Manastersky would actually have earned during the notice period. It carefully reviewed the terms and conditions surrounding the various mezzanine funds:

1. RBCDS was entitled to "terminate the Plan effective as of the end of any Investment Period with respect to future investment Periods";
2. Points were granted with respect to specific portfolios;
3. Points in specific portfolios or funds were specifically allocated in writing;
4. An employee's status as a participant did not give him "the express or implied right …. to any Points for any future Investment Period".^[5]

In short, RBCDS had the right to terminate the mezzanine fund (and concomitantly, the value of the participation points in the fund).

The Court of Appeal distinguished Taggart, Paquette and Lin on the basis that the underlying basis of compensation (pension plan, bonus plan) in those other cases actually continued during the notice period. In those cases, the employer was trying to distinguish between the rights of a terminated employee and rights of an employee actively employed in a manner that the Court considered impermissible

In the Manastersky case, the underlying investments were wound up and new investments were not being funded. The Court of Appeal found that RBCDS clearly established that it had the contractual right to make these decisions, which would necessarily reduce Mr. Manastersky's variable compensation during the notice period.

In short, during the notice period, even if Mr. Manastersky had worked out the notice period, he would not have received additional points or compensation in lieu.

The case points out two important factors:

1. The Court will look carefully to whether a contractual term purports to treat a terminated employee differently from an employee who is actively at work; and,
2. The Court will recognize an employer's rights to make business decisions that might impact on an employee's variable compensation, especially if there are clear contractual provisions that preserve this right.

3. Aggressive litigation tactics can backfire – employer side

Ruston v. Keddco MFG. (2011) Ltd., 2019 ONCA 125

As young lawyers, we were often warned that if a court views a lawyer's tactics as overly-aggressive, it could backfire. This case and the next illustrate this warning.

In June 2015, Keddco MFG terminated Scott Ruston, its President, allegedly for just cause and fraud. The nature of the "just cause" allegation appeared to be significant financial mismanagement of the operations. At the time of termination, no details were provided of the actual fraud, but Mr. Ruston was warned that if he pursued legal action, there would be a counterclaim for fraud.

When sued for wrongful dismissal, Keddco MFG brought a counterclaim in the amount of $1.7 million for fraud.

At trial and at the Court of Appeal, it appeared that the fraud was most likely significant financial mismanagement. Mr. Ruston had worked himself up through the ranks to President, but only had a grade 12 education. At trial, Justice Chiapetta, observed:

The plaintiff made every effort to listen to the question posed to him and to answer it. He answered every question posed to him in a direct and straight forward manner. The plaintiff was easily confused however and often unable to answer questions about the financial business of the defendant in a sophisticated manner. For example, the plaintiff was unable to fully explain all line items on the defendant's financial statements, unable to explain in detail the tax concerns of an international inter-related company sale and unable to speak in an informed manner about basic accounting principles. In contrast, the plaintiff had an impressive recall about the products sold by the defendant, the prices and margins of these products and the total sales per year of the company. In my view, having observed the plaintiff throughout his testimony, the described ability was directly related to his years of experience in domestic sales and the described inability was directly related to the plaintiff's lack of education and training in accounting and business administration. I found the plaintiff to be honest and credible and I accept his evidence.^[6]

Although there were allegations of Mr. Ruston having benefitted personally from the "fraud", those allegations were not pursued at trial. Many witnesses who apparently had direct knowledge of the financial fraud were not called at trial. Justice Chiappetta rejected the employer's position completely.

At trial, and in a subsequent costs endorsement, Justice Chiappetta awarded 19 months' pay in lieu of notice, aggravated damages of $25,000.00, and punitive damages of $100,000.00. This was an aggregate award of $604,627.09 plus interest and costs. In addition, Justice Chiappetta awarded costs of $546,684.73, including HST and disbursements on a substantial indemnity basis. The combined award was approximately $1,151,311.82.^[7]

The Court of Appeal rejected any argument that Justice Chiappetta had over-compensated Mr. Ruston. It noted that the employer had threatened to counter-claim for fraud if Mr. Ruston pursued its rights. It emphasized that the employer reduced its damage claim to $1 at trial, further substantiating the observation that the counter-claim was pretextual and a tactic "to intimidate".^[8]

Interestingly, the appellant had also appealed the quantum of costs, arguing that costs ought to be approximately half of what was awarded. The Court of Appeal found that although the costs were "unusually high", the appellant was unable to establish that "the costs award was not fair and reasonable in the circumstances of this case".^[9]

In short, this case illustrates the well-known observation that "hard-ball" tactics often backfire on the employer.

4. Aggressive litigation tactics can backfire – employee side

Colistro v. Tbaytel, 2019 ONCA 197

The same observation applies to employee-initiated litigation. Linda Colistro worked for Tbaytel (and its predecessor, the Corporation of the City of Thunder Bay) over 22 years, when her employment was constructively dismissed on February 6, 2007. The circumstances of the constructive dismissal were extremely unusual. Tbaytel had hired Mr. Steve Benoit as its Vice-President of Business Consumer Markets.

Ms. Colistro (and others) had experienced sexual harassment by Mr. Benoit and Mr. Benoit had been terminated in 1996 by Tbaytel's predecessor, the Corporation of the City of Thunder Bay. Upon being advised of the allegations of sexual harassment in 1996, Tbaytel offered to move Ms. Colistro to another location and indicated it would "discuss appropriate behaviour with Mr. Benoit".^[10]Ms. Colistro was diagnosed with PTSD. She never returned to work. She ultimately went on LTD. She commenced an action, claiming:

For constructive dismissal from employment $100,000.00, being 18 months' salary, plus "Wallace" damages of $250,000.00;

For the intentional infliction of mental suffering:

The trial judge awarded wrongful dismissal damages of 12 months, less amounts already paid by way of salary continuation and long-term disability benefit, to create a net award of $14,082. The trial judge also awarded another $100,000.00 in Honda or Wallace damages, arising from the manner of the termination.

The award was effectively for $114,082.00.

Justice Fregeau dismissed the claim based on the "intentional infliction of mental distress". Justice Fregeau found that insisting on continuing the employment of Mr. Benoit constituted "flagrant or outrageous" conduct and that the conduct did result "in a visible and provable illness." Justice Fregeau, however, rejected that Tbaytel's conduct was "calculated to produce harm." It was this finding that was appealed to the Ontario Court of Appeal.

The Ontario Court of Appeal found:

The requirement that the defendant have intended to produce the harm that occurred, or known that the harm was substantially certain to follow as a result of his or her conduct, is an important limiting element of the tort and distinguishes it from actions in negligence. It is now well established that a plaintiff can recover in negligence for psychological injury. A plaintiff seeking recovery in negligence for mental injury must show that: (1) the defendant owed a duty of care to the claimant to avoid the kind of loss alleged; (2) the defendant breached that duty by failing to observe the applicable standard of care; (3) the claimant sustained damage; and (4) such damage was caused, in fact and in law, by the defendant's breach … Frequently, the issue will be whether it is reasonably foreseeable that a person of ordinary fortitude would suffer the mental injury incurred …^[12]

In reviewing the evidence, the Court of Appeal found that "in light of that offer of accommodation, a finding that Tbaytel had subjective knowledge that serious psychological injury was substantially certain to follow from its February 6, 2007 decision and offer to accommodate was not reasonably available on the evidence."^[13]

The Colistro decision is important because it (a) confirms the availability of Honda or Wallace damages as compensatory damages; and, (b) re-affirms the limitation of the scope of the claims for mental distress against employers.

From this author's perspective, it is, however, the impact on costs that is the most intriguing. After trial, it became evident that Tbaytel had made offers to Colistro that exceeded her award at trial. The trial judge ordered that Colistro pay Tbaytel costs of $150,000.00 and the City of the Corporation of Thunder Bay an additional $50,000.00. The Court of Appeal observed that the trial judge treated the defendants as being substantially successful at trial.

The aggregate cost award exceeded the damage award. One of the issues was the impact of taxation on the settlement in comparison to the award in court. The Court of Appeal refused to hear the cost appeal. While generally unclear, it is still obvious that it is incumbent on counsel to educate the court on the impact of taxation, if that becomes an issue on the interpretation of an offer to settle.

The net result was disastrous for Ms. Colistro. Leave to appeal was refused by the Supreme Court of Canada.^[14]

In short, this case illustrates the well-known observation that "hard-ball" tactics can backfire on the employee.

5. The tort of harassment has not yet been recognized by the Court of Appeal

Merrifield v. Canada (Attorney General), 2019 ONCA 205

Mr. Merrifield, a former RCMP officer, alleged that he had been harassed. The facts relate to the period of 2005 to 2007, where Mr. Merrifield sought the nomination to be the candidate for the Conservative Party, without following strict RCMP rules. In addition, there was an issue about Mr. Merrifield's use of his RCMP credit card for personal expenses. The RCMP also alleged that he was in a conflict of interest position when the RCMP investigated threats made against Belinda Stronach shortly after she had crossed the floor to the Liberal party. Mr. Merrifield alleged that the court should recognize that he was harassed by the RCMP. Mr. Merrifield's counsel proposed a four-fold test:

The tort of harassment should exist where the defendant's conduct was:

1. Outrageous;

2. Was intended to cause him emotional distress;

3. Caused extreme or severe emotional distress; and,

4. Was the proximate cause of the emotional distress.^[15]

The harassment was not alleged to have been based on any of the grounds protected by the Ontario Human Rights Code. The harassment also occurred before the federal and provincial occupational health acts were amended to require protection against harassment as part of workplace health and safety.

The Ontario Court of Appeal rejected the creation an independent tort of harassment.

It reiterated, however, the existence of the tort of the intentional infliction of mental distress, which required:

1. flagrant and outrageous conduct;
2. was calculated to harm the plaintiff; and,
3. caused the plaintiff to suffer visible and provable illness.^[16]

Nonetheless, from a practical perspective, it is evident that many cases of "harassment" will, in fact, continue to be pursued as being an intentional infliction of mental distress.

6. A Release is a Release! (Sort of)

Swampillai v. Royal & Sun Alliance Insurance of Company, 2019 ONCA 201

Mr. Swampillai worked for his employer, Royal & Sun Alliance ("RSA"), starting in 2001. In 2013, he went on short-term disability due to degenerative disc disease, spinal stenosis of his lumbar spine and osteoarthritis.^[17] Although he was paid for two years of disability, his disability benefits were discontinued in 2015 on the basis that he did not meet the standard of being disabled from "any occupation".

RSA terminated Mr. Swampillai's employment, offering 26½ weeks in addition to the ESA minimums in exchange for a full and final Release. The Release included a release of all claims for benefits.

Mr. Swampillai was represented by a personal injury law firm, Sokoloff Law. His lawyer at Sokoloff confirmed that the firm did not offer employment law services and suggested that Mr. Swampillai obtain advice elsewhere. Mr. Swampillai signed the Release without legal advice, but did negotiate the terms of the settlement package.

After signing the Release, Mr.Swampillai sued both the employer (who was self-insured) and Sun Life (who administered the benefits) for long-term benefits to age 65, which Mr. Swampillai estimated was worth $300,000, if approved.

Mr. Swampillai indicated that he did not "closely read" the Release, assuming it was a legalistic version of the termination letter.

On a summary judgment motion, Justice Cavanagh found that the transaction was unconscionable and set aside the Release. The Court of Appeal agreed that the test for unconscionability was:

1. a grossly unfair and improvident transaction;
2. the victim's lack of independent legal advice or other suitable advice;
3. an overwhelming imbalance in bargaining power caused by the victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
4. the other party knowingly taking advantage of this vulnerability.^[18]

Mr. Swampillai, however, did not adduce any information about the merits of his appeal of the denial of long-term disability benefits. As such, the Court of Appeal found that "it is difficult to know the respondent's [Mr. Swampillai's] risk in giving up his entitlement to a claim for long-term disability benefits or whether the admittedly enhanced severance adequately compensated for what may have been released. In other words, there was insufficient information against which the fairness of the transaction could be considered."^[19]

The Court of Appeal set aside Justice Cavanaugh's decision and referred the issues of the unconscionability and enforceability of the release for determination at trial. We await a trial decision, if the matter does not settle before then.

7. Employers have to prove limits on bonus clauses and 24 months continues to be the "normal" limit for notice

Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512

Mr. Dawe worked for Equitable Life for 37 years and was approximately 63 years of age when things went sour. Mr. Dawe invited an exit package. Justice Gordon found that the actions of Equitable Life were "tantamount to a forced retirement".^[20] His decision provided a thirty-month package that extended just beyond Mr. Dawe's 65^th birthday.^[21] Justice Gordon also pointed out that the province of Ontario had rejected mandatory retirement.

The Court of Appeal rejected Justice Gordon's analysis and emphasized that the law requires the presence of "exceptional" circumstances, before notice is extended beyond 24 months.^[22]

The Court of Appeal reduced the overall package to 24 months in light of any proof of extraordinary circumstances.

The Court of Appeal also had to deal with the enforceability of provisions in the Short-term Incentive Plan ("STIP") and Long-term Incentive Plan ("LTIP") that purported to limit payments during the notice period. The Court of Appeal found that the language of the STIP and LTIP was, in fact, sufficient to limit payments during the notice period, if Equitable Life could prove that Mr. Dawe had, in fact, known about the provisions. Despite the fact that the language was contained in the various plans, there was actually no proof of Mr. Dawe's knowledge regarding the limitations in the STIP and LTIP. Explanatory memos about the STIP and LTIP never contained clear language regarding the implications of termination of employment.

In short, Equitable Life should have insisted that Mr. Dawe executed copies of the STIP or LTIP. Unfortunately, the Court of Appeal refused to consider whether Justice Gordon was correct in holding that Equitable Life's insistence on the execution of a release before payout of the amounts under the STIP and LTIP was unenforceable, because they violated the minimum standards of the Employment Standards Act, 2000. That determination will have to await another day!^[23]

8. Not everything constitutes constructive dismissal

DeBon v. Hillfield Strathallan College, 2019 ONCA 409

The plaintiff in this case was an excellent teacher at  a private college in Hamilton, Ontario, teaching English and Writer's Craft. Due to a number of events in 2012 to 2013, the plaintiff came to believe that the college no longer wanted her as an employee. The incidents involved the plaintiff’s allegations that her authority over students and marking were being undermined by the principal. In two instances, a student who had not completed course requirements due to illness was given a grade based only on work completed, instead of also considering the work left incomplete. In a third case, the principal indicated that a student's work would be co-marked by the plaintiff and another teacher, because the student and his mother had complained about her marking.^[24] The Court of Appeal had no difficulty in dismissing the plaintiff’s appeal, finding there was no evidence that the employer sought to alter the terms of employment or breached any policy of the educational institution.

9. New offer after resignation constitutes consideration for new employment agreement

Theberge-Lindsay v. 3395022 Canada Inc. (Kutcher Dentistry Professional Corporation), 2019 ONCA 469.

Jasmine Theberge-Lindsay began working with Dr. Kutcher in 1993, although the legal entity changed due to some tax planning conducted by Dr. Kutcher.

Between 1999 and 2011, Ms. Theberge-Lindsay signed three agreements during the course of her employment with Dr. Kutcher. It was argued that all three agreements were unenforceable, due to lack of consideration.

On appeal, the Court of Appeal focused on the 2005 agreement. In March, 2005, Ms. Theberge-Lindsay resigned her employment effective July 7, 2005. Dr. Kutcher advertised for a new hygienist and interviewed a number of candidates, but did not extend an offer to another employee because he believed that Ms. Theberge-Lindsay might not be moving to Guelph after all.

In May, 2005, Ms. Theberge-Lindsay rescinded her resignation. On June 30, 2005, Dr. Kutcher presented her with a new employment agreement, effective July 1, 2005, which contained an ESA minimum termination clause.^[25] Rather surprisingly, the Court of Appeal found that the resignation, which had been accepted by Dr. Kutcher, broke the continuity of employment. Therefore, Dr. Kutcher's agreement to re-employ her constituted sufficient consideration for the 2005 agreement, which was found to be enforceable in late 2012.^[26]

The author finds this a surprising result, in that there was no break in service. I would have thought the rescission of the resignation and the lack of break would have undermined the argument for fresh consideration. I also note the unusually tight timing, i.e. an offer of June 30, 2005 for work starting July 1, 2005. It would have been impossible to obtain legal advice in such a short time. This decision is an outlier in this year's largely pro-employee decisions.

10. Termination clauses are hard to enforce

a. An employee cannot waive prior service in a sale

In Ariss v. NORR Limited Architects & Engineers, 2019 ONCA 449, the issue was whether an employee could waive service with a prior employer. Ariss is a professional architect who started full-time work with Dominik Thompson Mallette ("DTM") in 1986. In 2002, the business was sold to NORR. Mr. Ariss was terminated by DTM due to the sale. NORR offered full-time employment pursuant to a written offer that referred to a "policy" that limited compensation on termination to the minimums established by the ESA.

In early 2013, Mr. Ariss wanted to transition to part-time employment. NORR indicated that he would have to resign his full-time position and accept employment as a casual part-time employee and waive his prior years of service. In addition, Mr. Ariss was required to agree that "termination, notice and severance will not form part of the new terms of employment". Despite this language, there was an attachment to the offer that specifically referred to the right of either party to terminate the agreement "by providing the minimum notice under the Employment Standards Act of Ontario". It did not refer to severance. It also does not appear to explicitly waive common law notice. It appears that NORR wanted to treat the part-time relationship as "new" employment.

The Court of Appeal agreed the 2013 agreement was instigated by Mr. Ariss' desire to move to part-time employment and concluded there was adequate consideration for the agreement.

However, it did not create a break in service. Therefore, Mr. Ariss was entitled to full recognition of his service from 1986 under the ESA. However, the language, "by providing the minimum notice under the Employment Standards Act of Ontario", was found to be rebut the presumption of reasonable notice at common law. ^[27]

Nonetheless, Mr. Ariss was entitled to full recognition of his entire length of service from 1986. The effort to create an artificial break in service was completely ineffective.

b. Even language that provides for "greater of" ESA or formula can be challenged

Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679

Mr. Andros worked for Colliers Macaulay Nicolls for approximately 8 years (2001 to 2004; 2009 to 2017), ending up as Managing Director. His employment was governed by an employment agreement, which purported to limit his rights on termination. The agreement provided:

The termination provision is found within clause four of the employment agreement:

4. Term of Employment

The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director's entitlement pursuant to the Ontario Employment Standards Act or , at the Company's sole discretion, either of the following:

a. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.

b. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary.^[28]

The Court of Appeal found that 4(a) and 4(b) contracted out of the ESA.^[29] The Court of Appeal then found that it was impossible to simply void the portion of the termination clause that was void under the ESA. Therefore, the entire clause was invalid. The Court of Appeal rejected the argument that the "greater of" represented a form of "failsafe" agreement that was equivalent to the ESA-saving clause found in its earlier decision in IBM v. Amberber. ^[30]

The Andros case also re-affirms the general proposition that bonuses form an integral part of an employee's compensation package. Language such as "in good standing" or "actively employed" is ineffective to waive the right of an employee to a bonus. Even if the bonus is otherwise payable well after the expiry of the notice period, the court will award compensation in lieu of the bonus, both for the portion of time worked and the notice period.^[31]

Conclusion

This has been a whirlwind tour of only a few Ontario Court of Appeal employment law decisions over the past 12 months. Many of the cases leave questions unanswered. We will continue to monitor the case law for future updates.