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By Joel Smith

A recent decision by the Ontario Superior Court of Justice (ONSC) serves to remind employers of the serious – and expensive – risks associated with alleging just cause for termination without a reasonable basis for doing so.

Employee misconduct must typically be egregious in order for it to constitute just cause for dismissal. It’s therefore rare that just cause for termination will exist. However, in efforts to circumvent their reasonable notice obligations when dismissing employees, some employers will allege just cause when it is clear that just cause does not truly exist.

This manner of attempting to reduce the (often high) financial cost of terminations has, however, been increasingly backfiring for those employers.

When an employer improperly alleges just cause for termination, the employee may commence wrongful dismissal litigation against the employer. In the event that a court agrees that there was no just cause, the court will award damages, either for reasonable notice or pursuant to an enforceable termination clause in the employment contract. However, courts may also award additional damages – generally called extraordinary damages – in these cases if they find that the employer acted unfairly or dishonestly in alleging just cause when the employer knew or ought to have known that it did not exist.

The ONSC’s September 2015 ruling in Gordon v. Altus (“Altus”) is the latest in a series of decisions across Canada in which courts have awarded substantial extraordinary damages awards against employers that alleged just cause without justification."

The facts in Altus

In Altus, the plaintiff, Alan Gordon, sold his business to the defendant, Altus Group Ltd. (the “Company”), for several million dollars in 2008. The purchase price was subject to an adjustment in 2010 based on the Company’s performance after the sale. Following the 2008 sale, Gordon was hired by the Company on a three-year, fixed-term employment contract.

In early 2010, the Company advised Gordon that the purchase price would be reduced based on its calculations of the Company’s performance since it purchased Gordon’s business. Gordon disagreed and advised the Company that he would trigger the arbitration clause in the purchase and sale agreement in order for an independent arbitrator to determine any adjustment to the price of Gordon’s business.
The dispute over the purchase price of Gordon’s business strained the parties’ relationship. The Company suddenly began alleging that Gordon had committed various types of misconduct, then terminated Gordon’s employment in March 2010, allegedly for cause and therefore without notice or further payment.

The ONSC’s decision in Altus

In the view of the ONSC, the Company decided to end the employment relationship because Gordon triggered the arbitration clause in the purchase and sale agreement, and therefore “conjured up” allegations of misconduct by Gordon to support an untenable position of just cause. The ONSC held that Gordon had in fact been dismissed without cause and was therefore entitled to a payment of slightly less than one year’s salary in accordance with the termination clause in the employment contract.

In addition to the contractual termination payment, the ONSC held that Gordon was entitled to extraordinary damages in the amount of $100,000 to sanction the Company for its “terrible conduct.” The ONSC held that this was warranted because the Company got “mean and cheap” in coming up with an “unfounded allegation to fire” Gordon.

Lessons for employers

The ONSC’s decision in Altus contains four key lessons for employers to follow in order to avoid similar extraordinary damages awards:
1. Implement a progressive discipline policy.
2. Apply the progressive discipline policy when it is warranted.
3. Do not allege just cause without a clear and viable basis for doing so.
4. Include enforceable termination clauses in employment contracts that reduce the financial obligations to employees upon termination without cause.

The Company in Altus would have benefitted from these lessons. The Company had an employee handbook that contained a progressive discipline policy. However, the Company did not use the policy in Gordon’s case. As the ONSC suggested in its decision, if the Company had progressively disciplined Gordon, it may not have been liable for punitive damages.

Employers should always follow their progressive discipline policies and provide written warnings and any escalation of discipline along with instructions for improvement to employees who misbehave. Not only does this approach maximize the chances that the employee will improve, it also creates a written record of misconduct that the employer can rely on in the event that it later sees fit to terminate for just cause.

The threshold for just cause is very high in Canada. Employers should only terminate for just cause when a single instance of employee misconduct is sufficiently egregious or after progressive discipline for less severe but repeated misconduct. An employer does not, however, need to be certain that it has just cause to avoid extraordinary damages awards; the employer must simply be able to reasonably justify a just cause position.

If an employer seeks to dismiss an employee whose contract includes a termination clause, the employer may terminate on a without cause basis and pay out only the contractual termination entitlement, which can be as low as the minimum standards legislated by the Employment Standards Act, 2000.

When in doubt regarding whether just cause exists, payment of a contractual termination entitlement carries much less risk than termination for cause, as it greatly reduces the risk of costly litigation and a possible extraordinary damages award.

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