A recent Ontario decision serves as a valuable reminder to employers that failing to comply with termination clauses will prevent them from relying on those clauses to limit their wrongful dismissal liability, even if the clauses would otherwise be legally enforceable.
In Timmins v. Artisan Cells [Timmins], an employer was ordered to pay nearly half a million dollars in wrongful dismissal damages because the Ontario Superior Court of Justice found that the employer repudiated a former employee’s contract by not complying with the termination clause therein. In particular, the employer refused to provide the employee with their contractual termination entitlements until the employee signed a release giving up their right to sue the company, despite that the contract did not require the employee to sign a release.
Timmins illustrates that employers cannot rely on termination clauses to limit their wrongful dismissal liability if they fail to comply with those same clauses.
Background
The employee in Timmins was employed by a gene therapy company for over three years before he was dismissed without cause. At the time of his dismissal, the employee served as the company’s Chief Development Officer, responsible for identifying and proposing new therapeutic products and business opportunities utilizing gene editing technologies. His compensation package included an annual salary of approximately $457,000, an annual bonus, stock options, and benefits.
The employee signed an employment contract shortly before joining the company, which included two termination clauses. One of these clauses provided that the company could dismiss him without cause by providing him with only three months’ pay, or his minimum entitlements under the Employment Standards Act, 2000 (the “ESA”), whichever was greater.
However, when the employee was dismissed without cause after three years of service, the employer failed to provide him with his full statutory or contractual termination entitlements. In particular, the employer only provided him with one week of termination pay. This was despite that he was entitled to three weeks of termination pay under the ESA and three months of pay in lieu of notice under the contract. The termination letter stated that the employee would only receive the full three months of pay in lieu of notice if he signed a full and final release giving up his right to sue the company.
As a result, the employee refused to sign the release and sued the employer for wrongful dismissal, arguing that he was entitled to common law reasonable notice (much greater than his contractual entitlements) because the employer had repudiated his contract.
The Court’s Decision
The court ultimately ruled that the employer had repudiated the contract by failing to provide the employee with his contractual termination entitlements, such that he was entitled to common law reasonable notice.
In reaching this conclusion, the court held that repudiation occurs when the words or conduct of one party to a contract demonstrate that they intend not to be bound by the contract. This legal test is an objective one, meaning that the court must determine whether a reasonable person would consider the words or conduct of the party to evince an intention to no longer be bound by the contract based on: (i) the nature of the contract; (ii) the relevant circumstances; and (iii) the motives which prompted the breach.
Moreover, the court cited its 2021 decision in Perretta v. Rand A Technology Corporation [Perretta], in which it ruled that an employer repudiated an employment contract in similar circumstances. Namely, the employee in Perretta was only provided with her ESA entitlements, despite that her contract contained a termination clause which entitled her to receive an additional two weeks of pay in lieu of notice upon dismissal without cause. Like in Timmins, the employer in Perretta demanded that she sign a release in order to receive her full contractual entitlements, despite that the contract did not require her to do so. The court ruled that this was an intention by the employer not to be bound by the contract, and that the employee was therefore entitled to common law reasonable notice.
After noting the similarities between Perretta and the case before it, the court in Timmins ruled that a reasonable person would conclude that the employer did not intend to be bound by the termination clauses in the employment contract, such that it had repudiated the contract. In the result, the court awarded the employee nine months of reasonable notice, amounting to $456,908.82.
The Bottom Line
Where there is any doubt as to whether the termination clause in an employment contract is legally enforceable, it is a best practice for employers to offer employees an additional amount that they are not already entitled to in exchange for signing a full and final release, in order to prevent them from suing for wrongful dismissal. Moreover, it is also legally permissible for a termination clause to require an employee to sign a release in order to receive any portion of their contractual termination entitlements beyond their minimum entitlements under the ESA, but the employment contract must make this clear and be properly drafted.
On the other hand, it is somewhat common for employers to mistakenly believe that they can withhold an employee’s contractual termination entitlements unless they sign a release. As Perretta and Timmins illustrate, this can be a very costly mistake. Furthermore, even if an employee signs a release in such circumstances, the release will not be legally enforceable due to lack of “consideration”, because the employee is not receiving anything more than what they are already entitled to in exchange for signing the release. This means that the employee would not be precluded from suing the employer after signing such a release.
If you require any assistance with drafting an appropriate Full and Final Release, ensuring that your employment contracts contain legally enforceable termination clauses or navigating a challenging dismissal, please do not hesitate to contact us for expert advice and guidance.
