Written agreements in the employment relationship are valuable

August 25, 2011 Earl Altman Employment/Labour Standards, Human Resources, Recruiting and Hiring

I have written in this blog and elsewhere, of the value in written employment contracts, written offers of employment, and written employment policies. Much like the break up of a marriage, the parties to the dissolution of the employment relationship often have widely divergent recollections of the understanding of the terms of the relationship when they were entered into. In particular, employers are prone to making representations as to the attractiveness of the position when seeking to fill it, but are then met with the less than desirable result of an employee seeking to enforce that representation. Written agreements will generally short-circuit disputes arising form such divergent recollections.

A decision released by the British Columbia Court of Appeal on June 7, 2011, considered the effect of such pre-hiring representations. The court was reviewing a trial judgment in a wrongful dismissal case. The employee had sued his employer, a large forest products company, for wrongful dismissal and for negligent misrepresentation in the course of his hiring.

The employee had been hired in April 2007 as the Regional Controller. In June, the company eliminated the employee’s position but reassigned him to another position in a different plant. The employee resigned from this latter position after three months. He sued for constructive dismissal. The employee alleged that the employer had misrepresented the financial health of the company in the course of the interview process. In particular, the employee alleged that he was advised by the company executives with whom he negotiated his employment that the financial health of the company was good, and, in particular, relied on a statement that the company was “holding its own”. The employee also alleged that the company withheld relevant information that it was contemplating the elimination of certain positions, as well as the closure of the division in which he was hired. Finally, the employee alleged that the company’s executives with whom he dealt during the reorganization advised him that if he did not like his new position, he would be given a severance package.

The judge at trial rejected the employee’s evidence as to the statement that the company was holding its own. In addition, the judge held that there was no evidence to support the allegation that the corporate executives involved in the hiring process were aware of the pending internal reorganization at the time they made the job offer to the plaintiff. The trial judge pointed out that the reorganization was, in fact, initiated by the new C.E.O. some time after the plaintiff was hired. The trial judge therefore dismissed the claim.

The employee appealed that decision. The Court of Appeal commenced its analysis by reference to the leading Supreme Court of Canada case in Queen v. Cognos , decided in 1993. In that case, the Supreme Court held that, where there is a “special relationship” between the parties, as there is in the employment relationship, the parties are each under a duty to exercise reasonable care to ensure that any representations they make are correct. Breach of this duty gives rise to potential liability. The Supreme Court of Canada also held that the failure to disclose relevant information has the potential to give rise to liability. However, there first must be a finding of misrepresentation. In this case, the Court of Appeal upheld the judge’s findings that there was no misrepresentation, as it was not known at the time of hiring that the division would be closed. Similarly, the Court of Appeal decided that the trial judge had grounds to find that the executives involved in the hiring process were not aware of the pending reorganization of the division.

If there was no evidence of knowledge of the impending closure, the only other basis upon which to hold the company liable would be the allegation that the executives failed to accurately predict the company’s future performance. The trial judge rejected this based on the context of the discussions between the employee and the company’s executive. He held that the discussions, while focusing on the difficult economic climate, made reference to their beliefs that the company was in a good position to survive. The trial judge found that the company executives honestly held this belief and did not withhold any relevant information from the plaintiff. The Court of Appeal found no basis upon which to interfere with the trial judge’s finding.

Finally, the Court of Appeal upheld the trial judge’s rejection of the employee’s allegations of an agreement that he be entitled to a severance package if the new position did not work out. The Court deferred to the trial judge’s findings of credibility in accepting the employer’s version of the discussions at the time of the employee’s re-assignment.

From the employee’s perspective, the decision of the B.C. Court of Appeal highlighted the importance of securing written confirmation of representations upon which you are relying. At the level of seniority of this employee, accepting a position is a significant decision. While employers and applicants are in the “courting stage” representations are often made by both parties as to their attractiveness. While the employer generally has greater resources to verify the applicant’s qualifications and references, employees lack those resources in most cases.

In order to better protect their interests, employees should insist on an offer letter for any position, and, where appropriate, that the terms of the offer letter be incorporated into an employment agreement. Employment agreements have been gaining popularity over the last number of years, and, in the case of most senior employees, are becoming the standard. However, potential employees should be wary of employment agreements drafted by the employer. These are often based on precedents from previous hires, and often do not address the particular circumstances and concerns of the employee. At the very least, any draft employment agreement provided by the employer should be carefully reviewed by independent counsel acting on behalf of the employee. Obviously, employees should be wary of counsel suggested by the employer. While it is not unusual to have the employer offer to pay the cost of such independent review, the lawyer chosen to do that review, should be solely the choice of the employee.

No doubt there will be further pronouncements on the issue of pre-contractual representations in employment relationships. We will keep you up dated as to new developments from the Canadian courts.

Earl Altman
Garfinkle Biderman LLP

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Earl Altman

Legal consultant at EA Consulting

Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more

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constructive dismissal, employment contract, employment contracts, employment law, employment policies, employment relationship, hiring process, negligent misrepresentation, offers of employment, resignation, severance package, written agreements, wrongful dismissal

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