Coles Notes of Employment Law in Canada: Performance Related Dismissals

Kurtz v Carquest Canada Ltd., 2015 ONSC 7997 (CanLII)

Kurtz v Carquest Canada Ltd. (“Kurtz“), a recent decision of the Ontario Supreme Court, provides one of the clearest statements of the law and the correct procedure in Canada when it comes to terminating an employee for poor performance.  Does the employer have cause?  How is cause determined?  If the employer does not have cause, what constitutes reasonable notice and how should it be determined?  Over and above the appropriate length of reasonable notice, what damages suffered by the employee should be compensated?

Kurtz commenced his employment with Carquest in 2005 at a Carquest distribution centre in Sacramento California.  By 2009, he had been promoted into the position of Director of Operations.  In January of that year, Kurtz was told the Sacramento distribution centre was to be closed.  Carquest offered Kurtz alternative employment as Director of Operations at an Ontario distribution centre. Kurtz accepted the position and commenced work in Ontario in May of 2009.  All of his relocation expenses were paid by Carquest.

After serving 2 years in Ontario, Carquest determined Kurtz was not performing up to its standards and he was immediately terminated.  His total tenure at Carquest, in California and Ontario, amounted to 5.5 years.

The issues addressed by the court were; first, did Carquest have legal cause to terminate Kurtz and secondly, if Carquest did not have legal cause, what  employee’s damages?

With respect to the first issue, the court laid out the test for determining whether  an employer has established legal cause for termination.  After reviewing the general common law rights and obligations of employers and employees when it comes to termination of the employment relationship, the court went on to list six criteria the employer must satisfy in order to establish legal cause for termination:

  1. Has the employer established reasonable objective standards of performance?
  2. Have those standards been communicated to the employee?
  3. Has the employee been given suitable instruction such that those standards can be met?
  4. Has the employee failed to meet those standards?
  5. Has the employee been warned of the substandard performance and that termination will be the consequence if the substandard performance continues?
  6. Was the employee given a reasonable amount of time to correct the substandard performance?

The burden of proving legal cause for termination rests on the employer.  The test is often difficult to meet and in the absence of documentary evidence, can become extremely difficult to meet.  The employer must satisfy the court on a balance of probabilities that it has fulfilled each of the six criteria.  Failure on the part of the employer to satisfy the court it has fulfilled any one criterion out of the six means the employer has failed to discharge its burden of proving legal cause.  The result is, the employee will be found to have been wrongfully dismissed and the employee will be entitled to damages.

In Kurtz, the court found that Carquest met the burden of proof on the first four criteria, but that it failed on the 5th criterion and the 6th criterion.  Kurtz was found to have been wrongfully dismissed and the court turned its focus to assessing the resulting damages

With respect to the damages suffered by Kurtz, the court laid out the key questions to be answered.

  • What was the proper period of reasonable notice?
  • What is the appropriate amount of compensation during the notice period?
  • Was Kurtz entitled to relocation back to California at Carquest’s expense?
  • Was Kurtz entitled to post-termination accounting costs and tax reimbursement?
  • Is vacation pay owing to Kurtz?
  • Did Kurtz reasonably mitigate his damages?
  • Did Carquest’s conduct justify an award of moral damages?
  • Did Carquest’s conduct justify an award of punitive damages?

What was the proper period of reasonable notice?

In answering this question, the court turned to a review of the standard factors generally considered in determining reasonable notice.  These include, amongst others depending on the facts of the case, the age of the employee, the nature of the work performed, the length of service, the likelihood of finding suitable replacement employment.  Kurtz wanted 16 months.  Carquest was offering between 5 and 8 months.  The court emphasized the need to arrive at a length of notice that is “fair” for both parties. On the basis that Kurtz was a senior management employee and that it was likely he would have to relocate back to the United States to find suitable replacement employment, the court determined he required a lengthier notice period than what otherwise might have been appropriate.  Kurtz was awarded an 8 month notice period.

What is the appropriate amount of compensation during the notice period?

The various heads of damage used by the court to calculate the appropriate amount of compensation included:

  1. Eight months base pay;
  2. Out of pocket expenses for health care. The court determined that Kurtz’s actual health costs were a more accurate measure of his damages than the cost of continuing coverage during the notice period;
  3. The cash equivalent of 8 months personal use of the company car;
  4. The court determined Kurtz was not eligible for either the performance bonus plan or the stock options plan;
  5. Reimbursement of additional taxes owing from 2009, the year of Kurtz’s move to Canada.

Was Kurtz entitled to relocation back to California at Carquest’s expense?

Kurtz claimed relocation costs under Carquest’s International Expatriate Policy.  In addition, because he had to leave 4 months early before the expiry of his lease in Ontario, he claimed 4 months rent.  He also claimed for certain household goods that had to be left behind in Ontario since they would not fit in the moving truck.

The court determined that the International Expatriate Policy only applied to employees in a continuing relationship with Carquest and not to employees after they had been terminated.  Kurtz was not entitled, therefore, to recover any costs of relocation back to the United States.

 

Was Kurtz entitled to post-termination accounting costs and tax reimbursement?

When Kurtz originally moved from California to Ontario in 2009 he claimed the costs of the move on his 2009 income tax return.  He was later audited and the moving costs deduction was disallowed.  Carquest was ordered to pay the resulting tax owing.

 

Is vacation pay owing to Mr. Kurtz?

Kurtz was paid out for the two days he had remaining from his vacation entitlement in 2010.

Did Kurtz reasonably mitigate his damages?

An employee who is wrongfully dismissed is legally bound to make every reasonable effort to find suitable replacement employment in order to minimize his or her damages.  Failure to discharge this obligation can lead to a reduction in the length of the notice period.  It is the employer’s burden to prove the employee has failed in the discharge of this obligation.

Kurtz had made some effort to find employment both in Ontario and back in California.  He refused to consider several specific locations in the United States because of family concerns.  The court found that Carquest did not prove on a balance of probabilities that Kurtz failed to mitigate his losses.

Did Carquest’s conduct justify an award of moral damages?

Awards of moral damages in wrongful dismissal cases require medical evidence supporting mental distress arising from the behaviour of the employer in dismissing the employee.  The mental stress must be something more than the expected stress that would normally be experienced when being terminated from employment. In addition to the fact that Kurtz failed to introduce any medical evidence, the court determined there was nothing in the evidence to prove that the methods used by Carquest in the termination justified any moral damages award.  In the termination of Kurtz, Carquest did not act callously, or in bad faith, or in any other manner perceived by the court to be egregious.

 

Did Carquest’s conduct justify an award of punitive damages?

Punitive damages are a discretionary costs award designed to punish a wrongdoer for the egregious way they treated the other party and, or for the egregious way they conducted themselves in the court.  They are rarely awarded.  The court determined in this case that there was not anything in the employer’s behaviour that even remotely justified an award of punitive damages.

NOTE: The value in the decision in Kurtz v. Carquest is not so much in the facts of the case as it is in the procedure articulated by the court for determining when an employee has been wrongfully dismissed and what the quantum of damages should be.

 

Municipalities v Oil Companies: How far can a municipality go?

Imperial Oil Limited v. McAfee, 2005 BCCA 402

It is not an infrequent event when hydrocarbons from a local gas station leak into the ground and then migrate off-site to contaminate surrounding properties.  In numerous instances, those surrounding properties can include municipal streets.

In Imperial Oil Limited v. McAfee, Imperial operated a gas station on a street corner in the City of Vancouver between 1981 and 2000 when the station was decommissioned and the pumps and underground storage tanks were removed.  A major hydrocarbon spill had taken place at the station in 1986.  Attempts by Imperial to remediate the contamination failed and the contamination migrated to surrounding city property including streets.

When Imperial applied to the City of Vancouver for a permit to construct a new gas station at the site, the City made the approval subject to a number of conditions, one of which required Imperial to remediate all off-site contamination on City property before approval to build the new gas station would be given.

Imperial submitted and sought approval of its remediation action plan (the “Plan”) under the British Columbia Environmental Management Act (the “Act”).  Pursuant to the Plan, Imperial removed a substantial amount of contaminated soil from the site and from the streets affected.  The provincial ministry in charge of the administration of the Act, thereafter issued an approval of the Plan (the “Approval”).  As a result of the Plan and the Approval, Imperial was positioned to apply for a development permit to redevelop the site as a new gas station and it did so. It was common ground amongst all concerned that redevelopment of the site would not affect remaining remediation efforts and no remaining off site contamination was believed to be a threat to the redevelopment.  The City of Vancouver, nonetheless, refused to approve Imperial’s application for a development permit until such time as Imperial agreed to clean up the off site contamination to the City’s standard, which standard was higher than that of the Province’s.  Vancouver cited the Vancouver Charter as authority for its position.  The Charter states, in part:

“Council may make by-laws…

 (b) providing that a development permit may be limited in time and subject to conditions….

“The Council may provide for the good rule and government of the city”

It is well established law that when reviewing a municipalities actions and decisions, the courts must construe or interpret municipal legislation using a broad and purposive approach.  In some case the courts talk of a “benevolent” approach to interpreting municipal statutes.  All of which to say is that the courts must respect the municipal level of government and, except where municipal government has acted outside or in excess of its statutory authority, the courts should defer to the municipal government and not substitute the courts view of good government for that of the municipal government in question.

The trial judge determined that the Vancouver Charter did not provide authority to the City to impose conditions on a developer that are not related to the development proposed.  In other words, clean up of off-site contamination was not related in any way to the proposed development so the City did not have the authority to require it as a condition of issuing the development permit.  The City acted outside its authority.  The trial judge also determined that the specific purposes relied upon by the City to impose the clean up condition, could not be brought within the general authority to provide good rule and government.  The Court of Appeal upheld the trial decision.

The key principles to be taken away from this case are:

  1. A municipality in British  Columbia does not have the jurisdiction or authority to impose conditions on the issuance of a development permit that are not related to the development in question.
  2. A municipality in British Columbia cannot use a general “good government” rule as authority for imposing conditions on the issuance of a development permit that are  unrelated to the development in question.

While this is a decision of the British  Columbia Supreme Court and Court of Appeal, it likely would be similarly held by courts in most if not all other provinces and territories throughout Canada.

Can an oral agreement be enforced?

Jeffrie v. Hendriksen, 2015 NSCA 49

The parties  in this case (“Jeffrie” and “Hendriksen”) were equal shareholders in a fishandrew-montgomery-lg buying company called Three Ports Fisheries Limited (“Three Ports”). Three Ports was in the business of purchasing fish from harvesters and selling that same fish.

As can sometimes happen in small business, the relationship between Jeffrie and Hendriksen began to deteriorate after Jeffrie fell ill and was absent from the business for an extended period of time.  The parties commenced negotiating terms of the sale of Jeffrie’s shares to Hendriksen and this resulted in an oral agreement between the parties conveying full interest in Three Ports to Hendriksen.  Hendriksen subsequently refused to honour the agreement.  Jeffrie sued Hendriksen for breach of the agreement of purchase and sale.to processors.

At trial the court found that the parties had, indeed, reached an oral agreement for the sale of Jeffrie’s shares in Three Ports to Hendriksen.  The trial judge, however, dismissed Jeffrie’s law suit because the oral agreement made was not put in writing.  The court held that putting the agreement in writing was a prerequisite to it becoming legally binding and enforceable.  Jeffrie appealed the trial judge’s decision.

When disputes arise between parties to an oral agreement, a trial judge is heavily dependent on his or her assessment of the credibility and reliability of the oral testimony of the parties to the alleged agreement.  The court of appeal found that the trial judge strongly preferred the evidence of Jeffrie and rejected the evidence of Hendriksen in concluding that the parties had reached an oral agreement on the sale of Jeffrie’s shares to Hendriksen.

Specifically, the trial judge rejected Hendriksen’s evidence that:

  1. Hendriksen  had to confirm financing and get his wife’s approval of the purchase before the agreement could be made legally binding;
  2. He allegedly called Jeffrie’s accountant and advised the accountant he was not able to honour the agreement, and
  3. Hendriksen had prepared an altogether new counter proposal which he attempted to introduce through his lawyer.

The court of appeal found that the trial record fully supported the credibility findings made by the trial judge.

Although the judge at trial found there to be more than sufficient evidence of an oral agreement having been reached between the parties, he went on to conclude that the agreement was not  legally enforceable and, consequently, not binding.  It was the determination of the trial court that the oral agreement reached by the parties would only be legally binding once it was set down in a written document and signed.

The appeal court disagreed. In reviewing the law the appeal court stated, “It is well settled that an agreement need not be in writing to be enforceable”The appeal court also referred to one of its earlier decisions in which it stated, “Parties may agree that they will execute a future, more formal document.  If they have agreed on all of the essential terms and it is their intention that their agreement be binding, there is an enforceable contract;  it is not unenforceable simply because it calls for the execution of a further formal document.”  Setting apart specific examples such as  contracts of purchase and sale of real property or, contracts that carry on beyond one year,  contract law recognizes that agreements that are legally binding and enforceable do not always have to be put in writing.

The most important question that must be answered is whether reducing an oral agreement to writing is a condition that must be fulfilled before the agreement becomes legally binding or is the written form merely a descriptive document about how an agreement, already in place, is to be carried out.  In order to answer this question, the court uses a test based on the reasonableness of the parties expectations (the “Test”).  The application of the Test requires the court to look at the entirety of the agreement in the context of how it came about and what its ultimate purpose is. The court must determine whether the parties committed themselves to a firm agreement or, did one or the other retain the discretion to back out of the agreement if certain conditions were not met?  This determination is made by considering what a hypothetical, reasonable person, under the same conditions and circumstances would believe the expectations of the parties were.

The appeal court found that the trial judge failed to properly apply the Test in coming to his decision.  He mistakenly split the Test into two separate steps and then made contradictory findings at each step. At the first step, the trial judge found there was clearly an oral agreement that the parties, including Hendriksen, had committed themselves to.  At the second step, however, the trial judge contradicted his finding at that first step by concluding there could not be a binding enforceable contract because the agreement was never put into writing. On review, the appeal court held that inconsistent findings on the essential question before the court constitutes an error of law.  If there was an oral agreement on the essential terms of a contract between the parties, that should have been the end of the analysis.  An oral agreement on all of the essential terms of an agreement can be legally binding and, therefore, enforceable without having to be put in writing.

To illustrate the principle more clearly, the appeal court quoted from a decision of the Ontario Court of Appeal: “When [the parties] agree on all of the essential provisions to be incorporated into a formal document with the intention that their agreement shall thereupon become binding, they will have fulfilled all the requisites for the formation of a contract. The fact that a formal written document to the same effect is to be thereafter prepared and signed does not alter the binding validity of the original contract.” In the case of the Ontario Court of Appeal, there was no requirement that lawyers prepare a written form of the agreement before it came binding.  The Nova Scotia Court of Appeal held similarly in Jeffrie v. Hendriksen.  Hendriksen was determined to have breached the terms of a binding oral agreement to purchase Jeffrie’s shares.  Jeffrie was entitled either to specific performance (a legal remedy obliging Hendriksen to follow through on and conclude the oral agreement) or to an award of damages equal to the value of purchase price of his shares.

While the oral agreement in Jeffrie v. Hendricksen was upheld by the court of appeal as legally binding and enforceable, this result should not be taken as recommending or favouring the use of oral contracts.  In thes writer’s opinion, it is always prudent and wise to put the terms and provisions of an oral agreement into writing so that it can be made clear to all, what the intentions of the contracting parties are. The written terms should be as precise and clear as possible.  A commercial lawyer is skilled in preparing written contractual agreements.