When an employment relationship deteriorates, an employer can be tempted to terminate an employee for cause especially where the employee would otherwise be entitled to a substantial payment upon termination. However, a recent decision of the Ontario Superior Court of Justice highlights the risks to employers if they rely on unfounded allegations in an attempt to justify a termination for cause and avoid their contractual notice obligations.

Background

In Gordon v. Altus Group, 2015 ONSC 5663, the plaintiff employee was hired by the defendant employer in November 2008 as part of an asset purchase transaction in which the defendant purchased assets of the plaintiff’s company. The purchase price was a multi-million dollar sum with an adjustment to be made in February 2010 based upon the performance of the business. As part of the deal, the plaintiff was hired for a three year term with provisions for renewal.

As the adjustment date approached, a dispute arose as to the performance of the company. The plaintiff (through his company) triggered an arbitration clause to resolve the dispute. Shortly thereafter the defendant terminated the plaintiff’s employment and took the position that he was fired for cause and therefore not entitled to the termination payments under his employment contract. The defendant alleged it had cause to terminate the plaintiff’s employment and that the working relationship could not be maintained due to the following:

  • The plaintiff was unproductive and very unpleasant;
  • The plaintiff talked of senior personnel in very derogatory terms; and
  •  The plaintiff used excessive profanity.

After the termination, the defendant further alleged that the plaintiff had breached the defendant’s conflict of interest policy by failing to disclose lending money to a company with which the defendant was doing business, and that the plaintiff continued to employ another employee after she had been charged with fraud and misled the defendant about the fraud charges.

Findings

Justice B. Glass held that the defendant did not have cause to terminate the plaintiff’s employment. Specifically, Justice Glass found that the complaints regarding the plaintiff’s conduct and profanity were exaggerated by the defendant after the fact in an attempt to justify the dismissal. Notably, there was no written record of these concerns nor reprimand given to the plaintiff despite an employment handbook requiring that progressive discipline be exercised.

Similarly, Justice Glass held that the conflict of interest allegation was yet another example of the defendant “puffing up complaints to justify its peremptory dismissal” and that the employee had in fact disclosed the issue in accordance with the defendant’s policy.

Finally, Justice Glass found that the allegations regarding the criminal fraud charges against the plaintiff’s employee were a red herring since the employee had resigned within three weeks of the commencement of her employment and there was no evidence of any harm to the defendant.

In assessing damages, Justice Glass held that the plaintiff was entitled to approximately ten months notice of termination in accordance with his employment contract, which amounted to $168,845.00. Justice Glass also found that the defendant’s requirement that the plaintiff comply with his two year non-competition clause effectively prevented the plaintiff from mitigating.

Most significantly, Justice Glass went on to hold that the plaintiff was entitled to an additional award of punitive damages as a result of the defendant’s outrageous conduct and decision to ignore its contractual obligations as the arbitration approached. As a result of the defendant’s failure to honestly perform the employment contract, Justice Glass awarded punitive damages in the amount of $100,000.00 to sanction the defendant for its “harsh treatment” and “terrible conduct.”

Takeaways

This decision serves as a useful reminder to employers that, even where the employment relationship has soured, termination for cause is very difficult to establish and must be based upon demonstrable employee misconduct. Attempting to justify a termination for cause based on unfounded allegations in order to avoid notice obligations may be sanctioned by the court through substantial punitive damages awards.

Here are a few key takeaways for employers:

  1. Employers can rely on employee misconduct discovered after a dismissal to support a termination for cause (i.e., after acquired cause), but the alleged misconduct must be serious and not exaggerated by the employer in an attempt to avoid notice obligations;
  2. A record of progressive discipline will almost always be required to uphold a termination for cause (apart from conduct justifying immediate dismissal, such as theft). Where an employment handbook requires progressive discipline and it is not followed, this will generally be fatal to the position that a termination was for cause;
  3. Broad-ranging non-competition clauses can actually increase the liability of employers if they prevent employees from mitigating, thereby requiring the employers to fully compensate employees for their common law or contractual notice periods; and
  4. Employers should carefully consider the employment provisions and dispute resolution mechanisms in any asset or share purchase transaction to ensure they are properly protected if an employment relationship deteriorates. In this case, the combination of a substantial price adjustment, a lengthy arbitration process, and the plaintiff’s three year term of employment appear to have accelerated the deterioration of the employment relationship and motivated the defendant to abruptly terminate the plaintiff without compensation. Consideration of these issues during the negotiation of the purchase agreement may have allowed the defendant to avoid litigation altogether, not to mention the very substantial punitive damages award it received.