Despite the fact that an employment contract contained enforceable termination language, the British Columbia Supreme Court recently found that an employee was entitled to common law reasonable notice and $25,000 in punitive damages as a result of the employer's repudiatory conduct towards the employee.
We have previously written on what happens when an employer does not follow the terms of a written employment contract and then attempts to rely on it later. Klyn v. Pentax Canada Inc., 2024 BCSC 372, released on March 3, 2024, is a reminder for employers wishing to rely on the termination arrangements in their employment contracts that the work is not necessarily finished once the paperwork has been signed.
What Happened?
The employeewas a sales territory manager for a medical imaging equipment company. He initially worked for the employer as an independent contractor before being hired on as an employee.
The employment contract that the employee signed upon hire contained a termination provision that allowed the employer to terminate his employment without cause by providing working notice or pay in lieu of notice, plus severance pay, if applicable, equal to the greater of (1) his minimum entitlements under the British Columbia Employment Standards Act or (2) four weeks per year of service prior to the signing of the contract, plus an additional four weeks under the contract, to a maximum of 18 months. The employment contract also provided that pay in lieu of notice would be calculated based on an average of the employee's historical commissions and would be provided as salary continuance, subject to the employee's duty to mitigate.
Initially, the employee's compensation was 100% commission-based. In February 2014, the employer amended his employment contract to pay him a base salary and commissions. The employee signed an acknowledgement and was paid a signing bonus in consideration for this amendment.
On April 4, 2022, the employer terminated the employee's employment without cause. The termination letter stated that the employee was required to sign a full and final release included with the letter in order to accept the employer's "offer", which was essentially to pay the contractual entitlements.
The termination letter also required the employee to report his mitigation efforts on a monthly basis in order to receive his termination payments. The employer advised that a failure to properly report his mitigation efforts could result in the employer ending the payments.
Following the termination, the employer paid only the salary portion of the termination pay to the employee, and not the commissions as required by the contract. The employer also stopped making any payments three months into the notice period, because the employee stopped reporting his mitigation efforts.
What did the British Columbia Superior Court decide?
The Court found that the employer had repudiated the contract when it:
- failed to pay the employee his commissions during the notice period, as required by the employment contract. While the employer argued that it did not pay the commissions because there was a dispute between the parties as to how those commissions were calculated, the Court found that this did not justify the employer's failure to pay. At the very least, the employer should have paid the commissions based on its own interpretation; and
- stopped its payments to the employee three months into the notice period. While the contract provided that the employee had a duty to mitigate his damages, it did not impose a reporting requirement.
The Court concluded that the employer's failure to comply with its own understanding of its obligations under the contract was a clear repudiation of the contract, entitling the employee to reasonable notice at common law. As is often the case, common law notice was more generous than an otherwise enforceable contract of employment.
The Court also ordered $25,000 in punitive damages against the employer for what it characterized as "rather egregious" breaches of the duty of good faith. On this issue, the Court found that the employer's repudiatory conduct, combined with the implication in the termination letter that the employee's contractual entitlements were contingent on his signing of a release, amounted to "oppressive" and "reprehensible" behaviour.
Takeaways
Repudiation occurs where a party – whether employee or employer – breaches a fundamental term or condition of a contract. In circumstances where an employer fails to fulfill its obligations under an employment contract, there is risk that they will be prevented from relying on that contract later on.
This case is another reminder of the importance for employers to be careful in their conduct upon and following termination of employment, as it will be subject to scrutiny both as it relates to the duty of good faith and the enforceability of the employment contract itself.
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