Cross-Border Views on Canada's Workplace Laws

A REPORT BY LITTLER MENDELSON AND HEENAN BLAIKIE TrueNorth Cross-Border Views on Canada’s Workplace Laws

In This Issue: February 2009 This is the first issue of what we intend to be a regular series of newsletters on Canadian workplace law updates of interest to American employers with operations in Canada. In this issue, we look at several recent decisions from the Supreme Court of Recent Canadian court decisions regarding: Canada and one from the Ontario Court of Appeal. Each of these decisions illustrate the contractual basis of employment in Canada and show how basic tenets of the • Damages for Bad Faith Termination employment relationship, and the laws governing that relationship, sometimes differ • Constructive Dismissal greatly from those on the other side of the border. • Restrictive Covenants American employers doing business in Canada assume different responsibilities in the • Post-Employment Obligations employment relationship than they may be used to assuming in the United States. For example, most American employees are employed “at-will,” meaning either the employer or the employee can end the employment relationship at any time for AUTHORS: any (or no) reason. In contrast, the principle of “at-will employment” is unknown in Douglas G. Gilbert Canada. With every hiring, an implied employment agreement comes into existence Heenan Blaikie that has implications when the employment relationship is terminated, when terms of [email protected] employment are altered, and when the employee competes with the employer. John C. Kloosterman Littler Mendelson, PC Canadian courts have recently tackled a wide range of controversial employment law [email protected] issues, including damages for bad faith conduct in the termination of employment, constructive dismissal, enforceability of restrictive covenants, and duties owed to employees after the termination of employment.

Damages for Bad Faith Termination

In the United States, an at-will employee generally has no claim for wrongful dismissal unless the employee can show the existence of an implied employment agreement or the employee can show that his or her Littler Mendelson, P.C. dismissal violated public policy. Accordingly, when employees are laid off or otherwise dismissed in the United littler.com • 1.888.littler States, there is, for the most part, no requirement that employees receive any specific amount of notice or any severance pay. In contrast, Canadian employees are entitled to receive a certain amount of notice of termination or pay in lieu of notice under minimum employment standards legislation and the common law. Accordingly, in Canada, employees who believe they have not received an appropriate amount of notice may heenanblaikie.com • 416.360.6336 bring a claim for wrongful dismissal. In calculating damages for wrongful dismissal, Canadian courts have often awarded extra months of compensation to employees who have experienced unfair or humiliating treatment at the time of termination.

TrueNorth® is published by Littler Mendelson and Heenan Blaikie in order to review the latest developments in Canada’s Workplace iuslaboris.com • +32 2 761 46 10 Laws. TrueNorth® is designed to provide accurate and informative information and should not be considered legal advice. A REPORT BY LITTLER MENDELSON AND HEENAN BLAIKIE

This trend has been reversed by a recent decision Constructive Dismissal be terminated. Wronko did not report to work the of the Supreme Court of Canada. next day. He sued for constructive dismissal. In the United States, an employee who is not 1 In Keays v. Honda, the employee, a chronic fatigue employed at-will (in other words, an employee who The court of appeal determined that the sufferer, was enrolled in a disability program by works under an express or implied employment employer’s attempt to change the termination his employer, Honda, that required him to submit agreement) may bring a claim for constructive provision through notice was ineffective. The a doctor’s note for each absence. After numerous dismissal if his or her working conditions are so Court observed that an employer seeking to absences, Honda asked Keays to meet with an intolerable that a reasonable employee would substantially modify terms of employment can occupational health specialist. When he refused, be compelled to resign rather than endure such accomplish the objective if the employee is his employment was terminated. The trial judge conditions. Essentially, a constructive dismissal prepared to consent to the change. However, found that Keays had been wrongfully dismissed transfers a resignation into an involuntary the employee is entitled to insist that the terms and awarded him 15 months’ compensation in termination because the employee would not of a contract be fulfilled. In such a case, there lieu of reasonable notice and an additional nine have resigned but for the employer’s actions. are two possible outcomes. The employer may months’ damages because the company had acted give notice of the change and face a claim of in bad faith in harassing him to provide medical In Canada, a constructive dismissal also transfers constructive dismissal from the employee who information and attend medical appointments. a resignation into an involuntary termination. will not consent. Alternatively, the employer may Keays also received a very large award of punitive However, in contrast to the American meaning give notice of termination of employment and damages for harassment and discrimination. of “constructive dismissal,” in Canada, a offer the employee re-employment at the end of constructive dismissal occurs when an employee the period on the revised terms. By giving notice The Supreme Court of Canada upheld the finding who is presented with a fundamental change of termination, the employer avoids liability that Keays had been wrongfully dismissed. On the to the terms of employment chooses not to for constructive dismissal and is positioned to issue of bad faith damages, the Court held that consent to the change. Instead, the employee implement the revised terms of employment. it was not appropriate for courts to extend the claims constructive dismissal. In other words, While the decision is helpful in clarifying the law, notice period to compensate for harsh treatment both countries treat constructive dismissal as a many employers will be reluctant to alarm an at the time of dismissal. In Keays’ case, the Court breach of contract, but the American view holds employee or group of employees with notices of found there was no evidence of bad faith in that the breach must be far more severe than the termination in order to modify a bonus plan, work Keays’ termination because Honda’s request for Canadian view. schedule, benefit or other term of employment. independent medical verification was a legitimate attempt to verify the nature and extent of Keays’ A recent decision of the Ontario Court of Appeal Previous case law had suggested that fundamental disability. On the issue of punitive damages, the considered whether an employer could implement changes could be made on the provision of Court held there was no evidence that Honda a unilateral change to the terms and conditions of reasonable notice. Wronko affirms that employers violated Keay’s rights because neither the disability employment by giving the employee reasonable should provide reasonable notice of fundamental program nor the requirement to bring a doctor’s notice of the change. changes but it also suggests that where an note were discriminatory; rather, the program In Wronko v. Western Inventory Services Ltd.2, Wronko employee continues to object to the new term, itself represented an accommodation and the had signed an employment contract when he the employer may need to provide notice that the need to monitor the absences of employees who was promoted to management that provided employee’s employment will be terminated at the have a history of absenteeism was a bona fide for two years’ salary for termination without end of the notice period and to offer the employee work requirement. Accordingly, the court allowed cause. The employer’s new president considered reemployment pursuant to the new terms and the appeal and reduced the damages from 24 to the termination provision too generous and conditions of employment. 15 months’ pay for wrongful dismissal. sought to reduce the payout to 30 weeks’ The decision in Keays restores the rule that salary. Wronko refused. The employer took the Restrictive Covenants wrongful dismissal damages are calculated based position that it could introduce the change with In the United States, the question of restrictive on breach of contract. An employee seeking reasonable notice. Wronko was advised that the covenants is covered by state law and varies aggravated damages must show that the new termination provisions would come into dramatically from state to state. For example, employer’s action caused mental distress that effect in two years. Throughout the next two California and North Dakota expressly prohibit was foreseeable by the parties. Attacking the years, Wronko expressly rejected the proposed “noncompete” agreements (where the employee reputation of an employee, falsely alleging cause change and continued to work. After the two agrees not to compete with the employer for a for dismissal, or denying the employee a pension year notice period, the employer advised Wronko period of time after the employee’s employment or other right would be examples of employer that the new termination provisions were in ends). But other states allow such agreements conduct giving rise to aggravated damages. effect and that if he did not accept the new and will enforce a restrictive covenant for several terms and conditions of employment, he would years after the employee’s employment ends.

Many employers in Canada require employees of business will be subject to a less stringent Merrill Lynch Canada Inc. At trial, damages were to sign employment contracts that include standard of reasonableness than restrictive awarded against the branch manager for the restrictions on competition and the solicitation of covenants in employment contracts. breach of the implied duty of good faith for failing customers and other employees. Canadian courts to perform his employment duties in good faith by Shafron reaffirms the reluctance of Canadian are generally prepared to enforce nonsolicitation coordinating the mass resignation, participating courts to enforce restrictive covenants in provisions. However, restrictions on competition in the disclosure of confidential files to Merrill employment contracts. In order to be enforceable, are generally unenforceable unless the restriction Lynch and failing to give notice of his departure. the terms must not only be reasonable in is reasonable and necessary to protect legitimate Damages were awarded against all employees for geographic, temporal, and subject matter scope business interests. Further, what a Canadian court failing to give reasonable notice of departure and but also must be unambiguous. Any ambiguity finds to be a reasonable restriction will generally loss of profit resulting from competition during will render the covenant void and therefore have a shorter duration and cover a smaller the reasonable notice period. The court of appeal employers should exercise caution in drafting geographic area than a restriction that an American varied the damages awarded. such covenants. court would find reasonable. A recent decision of The Supreme Court of Canada disagreed on some the Supreme Court of Canada considered the In contrast, some American courts likely would points. The Court found that the branch manager circumstances in which an employer could rely on have come to a different conclusion. Most states owed RBC Dominion an implied duty of good a noncompetition provision. allow a court to rewrite the terms of a restrictive faith in the exercise of his employment duties. The covenant if the parties have included a clause In Shafron v. KRG Insurance Brokers (Western) Inc.3 the Court also found that he had breached this duty allowing the court to do so. Other states (Arizona Supreme Court of Canada held that ambiguous by arranging the mass resignation of employees is an example) allow a court to strike out restrictive covenants in employment contracts and by providing, or participating in the provision objectionable language but do not allow a court are unenforceable. Shafron was employed of, confidential files to Merrill Lynch. However, to add or rewrite the parties’ language. Still other by KRG Insurance Brokers and had signed a the Court overturned the award for loss of profits states (Georgia and Nebraska are examples) series of employment contracts containing a made against all employees for competing during follow the Canadian approach and prohibit restrictive covenant that prohibited him from the reasonable notice period. The Court held that modifying the terms of an otherwise invalid being employed as an insurance broker in the once an employee’s contract for employment restrictive covenant to make it enforceable. “Metropolitan City of Vancouver” for three years is terminated, the employee’s duty of loyalty is after leaving KRG Insurance Brokers. Shafron left at an end unless the employee is in a fiduciary KRG and began working with another insurance Post-Employment Obligations relationship or there is a restrictive covenant in brokerage in nearby Richmond, British Columbia. One area where the employment laws of the place. In these circumstances, the Court noted KRG sought to enforce the terms of the restrictive United States and Canada are in harmony is that an employer generally is limited to recovery covenant. the duty of loyalty. Briefly stated, employees on of damages for failure to provide reasonable notice of resignation unless there is specific The Supreme Court of Canada reaffirmed that both sides of the border have an implied duty wrongdoing that an employee may liable for, such restrictive covenants in employment contracts to perform their duties in good faith and to be as the misuse of confidential information. are unenforceable unless they are reasonable loyal to their employers. Restrictive covenants as in terms of geographic coverage, time, and the discussed above are one way employers try to The decision in RBC Dominion Securities establishes activity prohibited. The onus is on the employer to extend this duty of loyalty beyond the end of the that absent fiduciary duties, which are stronger satisfy the Court that the restriction is reasonable. employment relationship. than the duty of loyalty, or a restrictive covenant, The Court in this case held that where the Recently, the Supreme Court of Canada considered employees are free to compete against their terms of the covenant are ambiguous, the terms what limitations apply to an employee’s right to former employers as soon as the employment cannot be demonstrated to be reasonable and work for a competitor in the absence of a specific relationship terminates even when the employee will be void and unenforceable. In this case, contractual restriction. fails to give reasonable notice of his or her the term “Metropolitan City of Vancouver” had departure. no accepted meaning. The Court held that it is In RBC Dominion Securities Inc. v. Merrill Lynch 4 As noted at the outset, these decisions illustrate inappropriate to apply the doctrine of severance Canada Inc., the Supreme Court of Canada some of the similarities and differences between to clarify the terms of a restrictive covenant held that departing employees are permitted the nature of the employment relationship in because employers would be encouraged to draft to compete with their former employers during Canada and the United States, respectively. In broad restrictive covenants with the expectation the reasonable notice period. In this case, nearly Keays, the Court limited the awarding of damages that courts will work to find the enforceable all of the employees at the RBC Dominion to losses arising from the actual breach of the limit of the provision. The Court also noted that branch in Cranbrook, British Columbia quit their employment agreement itself. Contrast that with restrictive covenants in the context of a sale employment without notice and went to work for the American “at-will” doctrine. In Wronko, we see

TrueNorth® is published by Littler Mendelson and Heenan Blaikie in order to review the latest developments in Canada’s Workplace Laws. TrueNorth® is designed to provide accurate and informative information and should not be considered legal advice. A REPORT BY LITTLER MENDELSON AND HEENAN BLAIKIE how a legal doctrine existing on both sides of the border – constructive dismissal – differs between the United States and Canada. In Shafron, we see that restrictive covenants in Canada must be properly drafted from the outset because courts will not rewrite them. Finally, RBC Dominion Securities shows that employees in Canada, just as in the United States, have an implied duty of loyalty while they are employed. Terminated employees, however, generally are not restricted from competing unless the employee is a fiduciary or has agreed to an enforceable non‑compete provision.

1 2008 SCC 39, (2008), 66 C.C.E.L. (3d) 159. 2 2008 ONCA 327 leave to appeal to S.C.C. refused 2008 CarswellOnt 5913. 3 2009 SCC 6. 4 2008 SCC 54.