A helpful reminder for employers on post-termination situations

8 minute read
08 August 2023

The recent case of Giacomodonato v Peartree Securities ("Donato") provides a helpful reminder of key items that employers need to keep in mind regarding employment agreements, restrictive covenants and post-termination conduct.

Understanding the post-termination situation.

In 2016, the company recruited an employee to serve as its President and Co-Head of Banking. The company terminated the employee's employment without cause in January 2018, following which the employee filed a wrongful dismissal claim.

After the employee went to work for a competitor, the company counterclaimed against the employee for, among other things, breach of restrictive covenants, breach of fiduciary duty and unjust enrichment.

Determining enforceability of the employment contracts.

The employee asserted that he had first signed an employment contract in April 2016. The company argued this initial employment contract was merely an agreement to agree or a non-binding term sheet. The Court rejected the company's argument, noting that all the essential components of a contract were present in the first offer letter: offer, acceptance and consideration.

The company and the employee then negotiated and entered into a second employment contract in July 2016, which governed the employee's entitlements upon termination of employment. The Court rejected the employee's claim that there was no (or insufficient) consideration (i.e. value provided) for the second employment contract:

[91]       It is not [the] role of the court to assess the adequacy of the consideration provided by PearTree or to assess whether or not the economic benefits obtained by Mr. Donato outweigh what he gave up. I observe, however, that neither two additional weeks of paid vacation nor $40,000 can be fairly described as a mere peppercorn…

Even if the company did not provide fresh consideration for the second employment contract, the contract was enforceable based on Wronko v. Western Inventory Service Ltd. When a company repudiates an employment contract by amending fundamental terms of employment: the employee may choose to (1) accept the terms; (2) reject the terms and sue for damages; or (3) continue working on the new terms, while making clear that the employee is rejecting the terms.

The Court found that, after the company repudiated the first employment contract and adopted a "take it or leave it" approach for the second contract, the employee chose to sign the second employment contract. Since the employee did not state he was working under protest, he acquiesced to its terms. It is doubtful the Court would have adopted the same conclusion if there had not been extensive negotiation over the terms of the second employment contract, or if the employee was not a sophisticated party or was not represented by counsel.

The Court determined an enforceable termination provision.

While the employee did not strenuously assert this position, he suggested that the termination provision in the second employment contract was unenforceable because it failed to mention payout of accrued vacation pay.

In a rare win for employers, the Court determined that the termination provision was enforceable, reasoning that the second employment contract's silence regarding accrued vacation pay and outstanding wages was not an attempt to deprive the employee of his statutory entitlements.

Why the Court awarded punitive damages.

Punitive damages awards are relatively rare in wrongful dismissal cases. While a former employee may allege that an employer has acted in an improper manner, courts will only award such damages in exceptional cases for malicious, oppressive and high-handed conduct that offends the court's sense of decency and deserves punishment.

The employee made several assertions about why the company's conduct justified such an award:

  1. The company breached its duties of honest performance, good faith, and fair dealing by misleading him about the terms of his employment.
  2. The company issued a counterclaim that had no merit.
  3. The company failed to pay out his contractual entitlements.

The Court rejected the first two assertions. While the company should have abandoned its counterclaim well before trial, it was not a "strategic and abusive tactic" to pressure the employee into dropping his claim. The Court determined this was appropriate to address in a costs award.

However, the Court awarded $10,000 in punitive damages because the company failed to pay out the employee's contractual entitlements. Following the end of employment, the company required the employee to sign a certificate of compliance stating that he was complying with the restrictive covenants in his contract. Nothing in the second employment contract obliged the employee to provide this certificate. When the employee refused to sign, the company cut off the contractual salary continuation payments and purported to set off money that the company admittedly owed against the salary continuance paid.

The company also provided a cheque but attached a unilateral term that, if the employee cashed the cheque, he would have no further claim against the company. Since the company had no lawful authority to take these steps, the Court awarded punitive damages.

Why the Court dismissed the company's counterclaim.

While the employee did not breach any restrictive covenants, the covenants were unenforceable as being contrary to public policy and overly broad.

With respect to the non-competition covenant, the Court held that the company failed to establish a proprietary interest in the restricted activity, since there was nothing proprietary in its tax or pricing structures. The non-competition covenant was also overbroad because it would prohibit the employee from accepting a much lower job even if for a company in the same industry. Further still, the company had no evidence demonstrating how a twenty-four-month restriction was appropriate.

Similarly, the Court refused to enforce the non-solicitation clause in the employment contract. Of note, the Court took issue with:

  1. How the non-solicitation clause was akin to a non-competition clause.
  2. The ambiguity of the words "customer" and "supplier."
  3. How the clause had no temporal limit, such that the employee could not solicit even a former client from years prior with whom he had no contact.

Key takeaways for employers.

The decision in Donato provides useful reminders for employers:

  1. Letters offering employment may be binding employment agreements and pose enforceability issues for subsequent employment agreements.
  2. Restrictive covenants are difficult to enforce but, to increase the likelihood of enforceability, the restrictions must protect a real proprietary interest and be as narrow as possible.
  3. Failing to provide statutory and/or contractual entitlements upon termination of employment will create the risk of a punitive damages award at trial.
  4. Maintaining meritless or unreasonable legal positions may result in an adverse costs award.

If you would like to discuss the Donato decision further or have any questions, please contact the authors or a member of the Employment, Labour & Equalities Group.

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