Category: Compensation Design, Employee Contracts & Agreements

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Compensation Design, Employee Contracts & Agreements

Employee Loses Stock Option Compensation by Leaving Company Early for “Greener Pastures”

A recent Ontario decision demonstrates the importance of reviewing and understanding the terms of an employment agreement, after an employee lost his stock options by leaving his employment before the agreed-upon term with the employer.

Plaintiff Agrees to Compensation in the Form of Stock Options

The plaintiff founded a business in 1995 which developed real estate information services for both the commercial and new homes markets. By 2014, the business had approximately 40 employees and annual recurring revenues of over $7 million. 

In early 2014, the plaintiff sold his business to another company, which provided real estate consulting and advisory services, software, and data solutions. The plaintiff negotiated a deal in principle with the company’s CEO and the transaction closed on July 23, 2014.

As part of the transaction, the plaintiff agreed to stay on as President of the business under the new company. The parties also agreed that the plaintiff would become eligible to receive stock options in the company as long as he stayed for three years or if the company terminated his position without cause prior to the end of three years. 

This agreement came to be because the company did not want to pay the plaintiff his previous salary of over $600,000 per year. Therefore, the plaintiff agreed to a lower base salary of $300,000 per year plus a grant of 50,000 stock options in the company. The stock options were to give the plaintiff the entitlement to purchase shares of the company at a pre-established price at a future date.

However, the plaintiff claimed that the company terminated his employment after one year and offered him no new role. This, he submitted, amounted to constructive dismissal without cause and entitled him to receive the stock options. 

In response, the company claimed that the plaintiff had worked for it for two years, transitioning from an employment position into a consulting position by mutual agreement after the first year. The company stated that the plaintiff voluntarily left at the end of the second year. Therefore, the company denied that the plaintiff ever became entitled to receive stock options.

The Employment Agreement 

The relevant clause of the employment agreement between the plaintiff and the company read as follows:

“During the first year of the Term of employment, your primary responsibilities will be to continue to manage the […] business in accordance with the business plan for [the business] as may be amended by future determination. In the remaining two (2) years of the Term, the Company is amenable to having discussions with you about redefining your ongoing role and accountabilities with the Company and, if mutual agreement is reached, amending the terms of this Agreement.”

Additionally, the parties agreed that the plaintiff would not become entitled to receive the stock options until the end of the last day of the three-year term. The relevant clause in the agreement provided:

“Except as otherwise provided herein, you must be actively employed with the Company on the last day of the Term or you must have entered into and be providing services to the Company under a consulting agreement on the day that would have been the last day of the Term.”

Finally, the agreement contemplated two conditions under which the plaintiff would become entitled to receive stock options. He could either be actively employed with the company on the last day of the three-year term, or he could be providing services under a consulting agreement on that day.

Plaintiff Not Entitled to Stock Options

The court found that  the plaintiff’s employment was not terminated without cause by the company. The court stated:

“I find that [the plaintiff] was not constructively dismissed from his employment. After one year, by mutual agreement, [the plaintiff] became an independent contractor or consultant. This change in status had been contemplated throughout and was not a dismissal by [the company]. At the end of the second year, [the plaintiff] decided to move on to greener pastures. He left by mutual agreement. [The plaintiff] therefore never became entitled to receive the options.”

Because the court concluded that the plaintiff did not work for three years and his employment was not terminated without cause prior to the three-year period expiring, the court found that he did not qualify for stock options under his agreement with the company.

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Employment contracts are fundamentally important elements of every employment relationship, providing the terms and conditions that govern that arrangement. Whether you are an employer or an employee, it is important to have an employment contract reviewed by a knowledgeable employment lawyer before finalizing and signing it. A lawyer can ensure your rights are protected and help you mitigate any potential risk or liability.

For more than 30 years, the Toronto employment lawyers at Baker & Company have been reviewing, drafting, and negotiating employment contracts for employees and employers across all industries and sectors. We advise on the language and terms included, make changes where required, and negotiate with the other party to ensure that our client is always in the best position possible.

At Baker & Company we take the time to meet with you and understand your unique needs when it comes to drafting the terms of an employment relationship. Call us at 416-777-0100 or contact us online for a consultation.

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Compensation Design, Employee Contracts & Agreements Employment Law Severance Packages And Severance Package Review

Will a Signed Release Always Prevent an Employee From Suing?

Employers typically will have an employee sign a release document at the time of termination, which states that the employee has accepted the employer’s notice of termination and agrees not to bring any civil claims against the employer in the future. Such releases are executed to give employers peace of mind in knowing that the matter has been settled and there is no chance the employee will bring a claim for wrongful termination. However, the Federal Court of a Appeal recently affirmed a decision stating that a release will not bar a federally-regulated employee from bringing such an action, so long as they do so within three months of the dismissal date.

The employee in this matter had been employed with a national bank for six years as a financial advisor. When she was terminated, the bank offered her the option of remaining on the payroll for a period of 18 weeks or accepting a lump sum payment. She chose the lump sum, and in return was asked to sign a release in favour of the employer, which she did. The release contained the following clause:

In exchange for the consideration set out in paragraphs 2-3, the Employee hereby releases and forever discharges BMO, its subsidiaries, affiliates, and successors and each of their respective officers, directors, employees, and agents from any and all actions, causes of action, claims, demands and proceedings for whatever kind of damages, indemnity, costs, compensation, and any other remedy which Employee or Employee’s heirs, administrators or assigns had, may now have, or may have in the future arising out of Employee’s employment or the termination of employment.

Despite having signed the release, the employee later filed a complaint for unjust dismissal and for unpaid wages under the Canada Labour Code (the Code). The bank then requested a preliminary hearing to determine wither the Adjudicator had jurisdiction to hear the matter, given the fact that the employee had executed a release. The Adjudicator ultimately held that they were bound by the decision in National Bank of Canada v Canada (Minister of Labour), which stated that an employee was not precluded from relief under the Code by reason of an agreement made with the employer, including a release. The Federal Court upheld this decision, citing s. 168(1) of the Code.

The court noted that such a finding could create uncertainty in terminations across the country, but found that it would be up to Parliament to amend the legislation to change matters. The Federal Court of Appeal recently upheld the lower court’s decision.

What Federally-Regulated Employers Need to Keep in Mind

Given the fact that a release is not sufficient to prevent an action for unjust dismissal, what can federal employers do to protect their interests following a termination? One option would be to limit the amount paid upon termination to the statutory minimum, since even a generous package may still leave an employer open to a claim. However, the more generous the original payout, the more likely a court would be to find that there is no basis for awarding additional damages to the employee. It is also important to keep existing employee contracts in mind, as the terms set out may indicate an employee’s entitlement to termination pay beyond the legislative minimums. Failure to honour the terms of the contract could also expose an employer to a claim.

Does this Apply to Employees Governed by Provincial Legislation?

While a federal claim for unjust dismissal cannot be barred by the signing of a release, will the same be said for a claim for wrongful dismissal? Currently in Ontario, a release is still viewed by the courts as intended – a document that will prevent any further claims, so long as the release is fair. If the balance of power at the time of signing is uneven, if an employee is asked to sign the release before seeking legal advice, or if the terms are deemed unfair for any reason, the release may be disregarded by a provincial court.

At Baker & Company, we take the time to meet with you and understand your unique needs in order to offer solutions to the diverse problems you may encounter in the workplace. The highly skilled Toronto employment lawyers at Baker & Company can review your employment policies and contracts to ensure that you are meeting your legal obligations while addressing and mitigating risk. Protect yourself, your workplace, and your employees. We rely on our broad base of experience and expertise to provide clear, pragmatic legal advice, and representation in litigation. Call us at 416-777-0100 or contact us online for a consultation.

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Compensation Design, Employee Contracts & Agreements Employment Law Wrongful Dismissal

Employers Cannot Rely on ‘Saving Clause’ to Preserve Unfair Contracts

It is common when starting with a new company, or changing roles with an existing employer, to enter into an employment agreement that spells out, among other issues, the terms that will apply upon termination. Every employer is permitted to set out the terms that they wish, so long as they are meeting their obligations under the provincial Employment Standards Act (the “ESA”) with respect to notice.

If an employment contract does not meet those minimum standards, the employee is then tasked with a) noticing this, and b) enforcing their rights against their employer in court. Relying on the fact that some employees may not know their statutory rights when it comes to termination, many employers have taken to including non-compliant terms, while also including what is known as a ‘saving provision’ in the agreement to preserve the validity of the termination clause in the event that they are challenged on their notice requirements.

A savings provision will generally state that should the provisions within the termination clause fail to meet statutory minimums, that the employee will receive what they are entitled to under the ESA. In a recent decision, the Ontario Court of Appeal has definitively stated that this practice will not be tolerated.

Termination Clause Was in Direct Violation of the ESA

The plaintiff employee had been with his employer, a solar panel manufacturer, for a number of years. He began in the role of Regional Sales Manager and was eventually promoted to a project management role a few years later. At the start of both roles, he was provided with an employment contract containing similar terms with respect to termination.

The contract itself provided for a notice period of two weeks and stated that benefits would cease after four weeks. This language was followed by a clause that stated as follows:

In the event the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement.

Under the ESA, the statutory notice period is dependant on the length of employment. Depending on how long an employee is with an employer, they may be entitled to a minimum of 8 weeks’ notice upon termination without cause. The contract signed in the case at hand was intended to apply for an indefinite period of employment, meaning that the notice and benefits clauses were in conflict with the minimum standards under the ESA once the employee had been with the company for more than three years. Even if the provisions in the contract happened to satisfy the minimum in one particular case, they were intended to apply no matter how long the employee was with the employer.

Certainty and Fairness Must Extend to All Employees

The Court of Appeal found that a saving provision is, on its face, unfair to employees and advantageous to employers. As stated earlier, it relies on the employee to notice that the termination clause does not meet ESA minimums and to enforce their rights against their former employer. Further, there is an unequal bargaining power inherent in the signing of employment contracts. It would not be right to allow employers to exploit that fact.

Employees need to know the conditions, including entitlements, of their employment with certainty. This is especially so with respect to an employee’s termination – a fragile moment of stress and uncertainty.

In this context, saving provisions in termination clauses cannot save employers who attempt to contract out of the ESA’s minimum standards. Holding otherwise creates the risk employers will slip sentences, like the four-week benefits clause, into employment contracts in the hope that employees will accept the terms. This outcome exploits vulnerable employees who hold unequal bargaining power in contract negotiations. Moreover, it flouts the purpose of the ESA – to protect employees and to ensure that employers treat them fairly upon termination.

The ONCA held that when a termination clause fails to meet the minimum standards under the ESA, it will not be preserved via a saving provision. Instead, the clause will be deemed unenforceable, and the employee will be entitled to common law minimums, which are often considerably more than the minimums provided under the ESA.

At Baker & Company, we take the time to meet with you and understand your unique needs in order to offer solutions to the diverse problems you may encounter in the workplace. The highly skilled Toronto employment lawyers at Baker & Company can review your employment policies and contracts to ensure that you are meeting your legal obligations while addressing and mitigating risk. Protect yourself, your workplace, and your employees. We rely on our broad base of experience and expertise to provide clear, pragmatic legal advice, and representation in litigation. Call us at 416-777-0100 or contact us online for a consultation.

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Compensation Design, Employee Contracts & Agreements Employment Law

Non-Compete Clauses: How Far Can They Go?

A non-compete clause in an employment contract can drastically impact a person’s job and career prospects after being terminated from or voluntarily leaving a job. Many employees find themselves wondering if the clause is fair, and in fact, many clauses have been successfully challenged in court. What are the current guidelines for a non-compete clause that will hold up under legal scrutiny in Ontario, and what remedies does an employee have if faced with an overly-broad clause?

What is a Non-Compete Clause?

A non-compete clause is a form of a restrictive covenant, generally built into an employment contract, which spells out restrictions on the employee with respect to future work should they eventually leave their current employer. Courts are generally reluctant to enforce such a clause unless the employer can demonstrate a legitimate need.

Successfully Establishing the Need for a Non-Compete Clause

First and foremost, an employer must establish that they have a proprietary interest that requires protection through the use of a restrictive covenant. If they cannot establish that, it is unlikely a non-compete clause will be enforced. If they are able to meet this requirement, the court will look to a number of factors to aid in their decision:

  • How long was the employee with the employer?
  • How much contact did the employee have with the employer’s clients?
  • How much confidential information was the employee privy to during their employment?
  • How vulnerable the employer is to competition and the overall available market for the employer’s product or service
  • The nature of the business with respect to customer loyalty

In consideration of the above factors, courts will also seek evidence that it is within the public interest to enforce the covenant. Many, if not most, non-compete clauses will be considered too restrictive to be enforced, given the level of scrutiny they must pass through.

A Recent Example of an Overly-Broad Clause

In a recent decision, the Superior Court of Justice found that a plaintiff employer seeking to obtain a temporary injunction against a former employee was overstepping. The injunction the plaintiff sought would have prevented the employee from soliciting and targeting the plaintiff’s customers using the knowledge, experience and relationships he gained while employed with the plaintiff.

The plaintiff company was in the business of providing handyman services to grocery stores, which the plaintiff characterized as a niche market. The defendant employee had been the Chief Operating Officer of the plaintiff company before he was terminated. The parties were at odds as to whether the termination was for cause, or whether he was wrongfully terminated, and were engaged in litigation with respect to that issue. In the interim, the plaintiff brought an application for a temporary injunction to stop the defendant from soliciting the plaintiff’s clients in accordance with a non-compete clause the defendant had signed as an employee of the plaintiff.

In the defendant’s favour, the court found that the non-compete clause was overly broad, and was also signed when the employee had been in a different role than he was at the time of termination and there were no agreements signed as the defendant was promoted. Further, the court found that there was no evidence the defendant had used proprietary information such as price lists, customer databases or other physical property to compete with the plaintiff.

Ultimately, the court found as follows:

The order sought by the Plaintiff would constrain the Defendants in pursuing their livelihoods.  In my view this means that the first branch of the injunctive test requires more than the American Cyanamid/RJR MacDonald test of “serious issue to be tried” and instead demands the Plaintiff demonstrate a strong prima facie case. Given the hurdles the Plaintiff must meet in this case, it is not evident that this test can be met.

 In any event, and more importantly, damages are an adequate remedy if the Plaintiff is ultimately successful.  The evidence does not support a finding that permanent irreparable damage will be done to the Plaintiff’s business if the order is not granted.  To the contrary, the evidence establishes that the Plaintiff has hired replacement employees and its major contract is secure for the time being.  The competition to which the Plaintiff is exposed will impact only a percentage of its potential revenues.  It cannot be seen as an existential threat.  The balance of convenience in this case favours the Defendants.

Any employer seeking to draft or enforce a non-compete clause should seek the advice of a skilled employment lawyer. As established above, clauses must be carefully drafted in order to withstand the scrutiny of a court, and may not apply in every circumstance. A good lawyer will advise on the creation and enforcement of non-compete clauses in order to mitigate damage to an employer’s business and limit their exposure to fruitless litigation.

At Baker & Company, we take the time to meet with you and understand your unique needs in order to offer solutions to the diverse problems you may encounter in the workplace. The highly skilled Toronto employment lawyers at Baker & Company can review your employment policies and ensure that you are meeting your legal obligations while addressing and mitigating risk. Protect yourself, your workplace, and your employees. We rely on our broad base of experience and expertise to provide clear, pragmatic legal advice, and representation in litigation.  Call us at 416-777-0100 or contact us online for a consultation.

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Compensation Design, Employee Contracts & Agreements Employment Law Severance Packages And Severance Package Review Wrongful Dismissal

Resignation & Restarting the Clock on Terms of Service

It may be expected that any employee who resigns from their job and then later returns to the same employer will find that their ‘term of service’ is affected. It is unlikely that someone who had worked with a company for 5 years, left for two and then came back, would be entitled to pick up where they left off. However, what would happen in a situation where a long-term employee submits a resignation, and while still employed by the company, wishes to resume their employment?

A recent decision of the Ontario Court of Appeal has come down on the side of the employer in this situation, holding that the resignation must be taken into consideration, therefore creating an interrupted period of employment. This, in turn, affected the reasonable notice the employee was entitled to upon her eventual termination.

Facts of the Case

The respondent employee was a dental hygienist who had been employed with the appellant employer since 1993. In 2005, she decided to move to a new city with her fiance, and find work elsewhere. She submitted her resignation, which was accepted by her employer. While still working at the practice during the notice period, her relationship came to an end and she requested to be reinstated, as she would no longer be moving. Her employer agreed, and the employee signed a new contract of employment. The contract indicated that should she ever be terminated, she would only be entitled to the minimum notice set out in the Employment Standards Act.

Seven years later, the employee was terminated without cause. At the time of her termination, she was provided with notice pay equivalent to one week of employment. The employee brought an action for wrongful dismissal.

The Lower Court Decision

The Superior Court of Justice found that there was insufficient consideration to support the contract limiting the employee’s common law entitlement to reasonable notice. As a result, the court held that the employee had been wrongfully terminated. Further, it was determined that her damages would be based on the full period she was employed, disregarding the brief period during which she had resigned. She was awarded damages equivalent to 15 months’ notice, totalling $71,650.02.

The Appeal

The employer appealed the decision. The Court of Appeal found that there was valid conisderation to uphold the employment contract signed in 2005. The court further disagreed with the finding regarding the period of employment. The court held:

We agree with the appellant’s submissions that Ms. Theberge-Lindsay’s unequivocal resignation and re-hiring in 2005 marked a break in the employment relationship after which an entirely new contract was reached between her and Dr. Kutcher. There was consideration for that new employment contract, that is, Ms. Theberge-Lindsay’s offer to again be employed by Dr. Kutcher and his acceptance of her offer to again employ her. On this basis, the Employment Standards Act, 2000 minimum notice is the maximum amount to which the respondent is entitled, measured from 2005. On this basis, she is entitled to 7.5 weeks of salary at $1,204 per week, less $1,200 severance already paid.

It remains to be seen whether this decision will be appealed any further, but for now, it appears that a resignation, even a situation in which there is no actual break in the employment, will be found to ‘restart the clock’ with respect to an employee’s term of service.

At Baker & Company, we take the time to meet with you and understand your unique needs in order to offer solutions to the diverse problems you may encounter in the workplace. The highly skilled Toronto employment lawyers at Baker & Company will review and draft employment agreements and advise on termination packages in order to protect employers from future litigation. We also provide practical and effective representation for employees faced with wrongful dismissal by their employer. We rely on our broad base of experience and expertise to provide clear, pragmatic legal advice, and representation in litigation.  Call us at 416-777-0100 or contact us online for a consultation.