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Court of Appeal partially invalidates release of notice entitlements

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Closing out the year, the Ontario Court of Appeal has released a wide ranging decision that touches on statutory minimums, restrictive covenants, fixed term contracts, and mitigation attempts. The decision, Kerzner v. American Iron & Metal Company Inc., 2018 ONCA 989 deals with both an appeal and cross appeal from a motion for summary judgment. This blog will focus on the issues surrounding statutory minimums and waiving out, leaving the issue of restrictive covenants raised in the cross appeal for another day.

The facts

The appellant employee was hired in 1980 by Bakermet, a buyer and seller of various types of metals and steel products. He went on to become a one-third owner of Bakermet and president of the company. In 2008, ArcelorMittal purchased Bakermet for $45 million. The appellant received $17,162,637 in consideration for the sale of his one-third share of the company. The appellant signed a release for any claims arising from his employment prior to 2008. He entered into an employment agreement which was indefinite but with a minimum term of 3 years. If he was terminated without notice, he would be entitled to 12 months notice, inclusive of ESA entitlements. The agreement had a non-compete and non-solicit clause.

In 2011, the parties entered into an new agreement that was largely the same except it was of fixed duration (3 years) and without cause notice was limited to 6 months, inclusive of ESA requirements. In 2014, they entered into a third agreement. This established a 2 year fixed term contract. However, the employer was required to advise in writing that they did not intend to renew at least three months prior to the end of the contract. The employer was also required to give 6 months notice for without cause notice.

In 2015 the appellant was terminated after an asset share. He was provided one week’s working notice and 6 months pay in lieu, pursuant to the 2014 agreement. The appellant commenced an action for 24-30 months of notice based on the 35 years of continuous employment with the employer and its predecessors. Notably, within 2 months he found alternative employment.
The employer counter-claimed, alleging breach of restrictive covenants in the 2014 agreement and breach of fiduciary duty. The judge found that the duration and geographic scope of the covenants were unreasonable given his finding that the 2014 contract was of a fixed term.

The initial decision

On the initial motion, the judge found the plaintiff’s contract was fixed term, rather than indefinite. Notably, the motion’s judge found that this was not a case of endlessly renewing identical contracts which suggested their nature was indefinite, as in other cases. He found each contract was meant to be a fixed term duration and was negotiated as such. In the event he was wrong about it being a fixed term contract, he found the termination clause complied with the ESA because of the 2008 Release. He found that the 2008 Release “wiped the slate clean” and therefore any claims ran from 2008 onward. Notably, he found that while conceivably the employee’s statutory minimum entitlements could be greater than the contractual notice, this would only occur if the employee worked well into his 70s. The judge found this to be an unlikely event and therefore did not render the clause void.

As well, he rejected the counterclaim of the employer. He found the restrictive covenants to be unreasonable in duration and geographic scope, and there was no breach of fiduciary duty.

The appeal – Waiving out of the ESA and indefinite contracts

Both parties appealed. The employee alleged the judge erred by finding he had waived his pre-2008 ESA entitlements with the Release. The employer alleged the restrictive covenants were reasonable in the context of a sale of business transaction.

The Court of Appeal agreed with the employee. It found that the Release did not comply with the ESA because it attempted to contract out of section 9, which dealt with accrual of service in the context of a sale of business.

So while the employee had waived his common law entitlements, he could not waive his statutory entitlements.In summary, the appellant’s pre-2008 service could not be waived or released for the purposes of calculating his ESA entitlements. AIM, as successor to ArcelorMittal Ottawa, was required to count the appellant’s pre-2008 service in calculating his ESA entitlements upon termination. Because the Release did not waive the pre-2008 ESA entitlement, the termination clause was found to be invalid.

The Court also disagreed that the contract was one of fixed rather than indefinite duration. They emphasized the fact that the contracts would renewed automatically unless the employer gave notice. In particular they looked at the nature of the relationship. At the time of his termination in 2015, the appellant had been employed continuously since 1980, and was employed pursuant to an ostensibly fixed-term agreement that required the employer to provide written notice if it intended not to renew or continue the agreement. Although the motion judge acknowledged that unequivocal and explicit language is required to establish a fixed-term contract and that any ambiguities will be strictly construed against the employer his focus on the transactions involving the purchase and sale of the business resulted in a failure to recognize the indefinite nature of the appellant’s employment.
The Court concluded that the appellant was employed for an indefinite term from 2008 onward and, as a result, was entitled to common law notice for the period of August 2008 to September 2015. No common law notice was available for pre-2008 due to the Release. The Court found that seven months of notice was reasonable. However, the ESA minimum entitlements for the employee’s 35 years with the employee and predecessor were 8 weeks of notice and 26 weeks of severance pay. This was greater than his common law notice. Accordingly, the employee was entitled to the statutory minimums. These were not subject to reduction for mitigation, despite his obtaining employment two months later.

The takeaways

There is a lot to take away from this decision. For employers, it once again highlights the risks you face when transitioning employees during the take over or sale of a business. There are several cases that address the best practices to avoid the risk of unexpected notice and severance obligations. It is also important to be aware that in the case of long term employees entitled to significant severance, their ability to quickly mitigate their losses may not necessarily reduce the employer’s exposure. Finally, while not addressed directly in this post, the use of restrictive covenants will continue to be carefully scrutinized by Courts. In particular with non-competition clauses, the Courts will consider whether the clauses are reasonable in their duration, geographic scope and scope of activity.

Devan Marr

Devan Marr is a lawyer at Strigberger Brown Armstrong LLP. With two offices located in Toronto and Kitchener/Waterloo, the firm offers a full range of legal services to our industry partners in insurance and risk management. The firm aims to provide its clients with focused, practical, and cost efficient legal advice. Devan primarily defends insurance claims with a particular interest in the intersection of the contractual, statutory and common law obligations of parties in long-term disability and employment practice liability claims. His practice also includes providing employment related legal advice to both employers and employees in the context of contract negotiations, evaluation of termination clauses, workplace investigations, and assessment of exposure to wrongful dismissal claims.
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