Employment relationships can be challenging to navigate, particularly when there are power imbalances and disputes between the parties. Therefore, it is essential for both employers and employees to be clear of their contractual and statutory entitlements, in addition to their rights and responsibilities in the event of termination. These items are often provided for in an employment contract between the parties. However, further issues can arise concerning the employment agreement itself, particularly with regard to the enforceability of specific provisions and the terms governing the employment relationship.

In a recent case, the Ontario Superior Court of Justice was asked to consider various issues relating to post-termination conduct. Mainly at issue was an employee’s claim for wrongful dismissal and an employer’s counterclaim concerning a breach of restrictive covenants within the employment agreement.

Employee claims wrongful dismissal; employer argues employee breached restrictive covenant

In Giacomodonato v. PearTree Securities Inc., PearTree Securities Inc. (the “employer”) recruited the plaintiff employee to serve as President and Co-Head of Banking in 2016. The employee was a successful investment banker with experience in the mining sector. In January 2018, the employer terminated the employee’s employment without cause.

The employee commenced a claim against the employer for wrongful dismissal and sought amounts he claimed that the employer owed to him, totalling up to $3.927 million.

Conversely, the employer argued that the employee was owed between $240,000 and $627,516. Further, the employer counterclaimed against the employee, claiming the employee breached the restrictive covenant in the employment agreement after he began working for one of the employer’s competitors approximately nine months following his termination.

Parties entered into two employment agreements

The employee claimed he signed an employment contract with the employer in April 2016. However, the employer argued that this contract was “merely an agreement to agree or was a non-binding term sheet.” However, the Court disagreed with this argument after finding that all of the necessary components of a contract were present: an offer, acceptance, and consideration.

In July 2016, the parties negotiated and entered into a second employment contract, setting out the employee’s entitlements upon termination of employment. The employee claimed there was no consideration provided for this agreement. However, the Court disagreed with this argument, finding the second agreement provided the employee with an additional two weeks of paid vacation and a $40,000 payment.

Employer repudiated first employment agreement

The Court noted that even if the employer did not provide fresh consideration for the second employment agreement, the contract was still enforceable based on the principles set out in Wronko v. Western Inventory Service Ltd. The Wronko case held that when a company repudiates an employment contract and unilaterally amends fundamental terms, an employee may:

• Choose to accept the terms either expressly or implicitly;
• Reject the terms and sue for damages if the employer persists in treating the relationship as subject to the varied term (otherwise known as constructive dismissal);
• Make it clear that they are rejecting the new term while continuing to work under the new terms, to which the employer may terminate the employee with proper notice and offer re-employment on the new terms.

The employee told the Court that he signed the second agreement because he believed the employer would terminate his employment unless he agreed to its terms. The Court found the employer repudiated the April 2016 employment contract. Despite providing the employee with a “take it or leave it” option, the employee signed the second agreement and worked under its terms without indicating that he was working under protest.

Employee bound by terms of second employment agreement

The Court found a power imbalance between the parties arising from structural inequity between a company and an employee and acknowledged the employee’s personal situation, which was impacted by his wife’s serious illness. However, the Court also noted several factors which mitigated this power imbalance, including:

• The employee was represented by counsel throughout negotiations;
• The negotiation process took over one month, which provided the employee a reasonable amount of time to consider the proposed terms and his options moving forward; and
• The employee was a sophisticated party who was comfortable negotiating.

Based on these factors, the Court found that the employee was bound by the terms of the second employment agreement.

Concerning the termination provision in the second employment agreement, the employee asserted that it was unenforceable as it failed to provide for accrued vacation pay. However, the Court found that the termination provision was, in fact, enforceable, as the contract’s silence on accrued vacation pay and outstanding wages was not an attempt by the employer to deprive the employee of statutory entitlements.

Court awards $10,000 in punitive damages against employer

The employee sought punitive damages in his claim against the employer for wrongful dismissal. In support of this claim, the employee asserted the company failed to pay out his contractual entitlements, issued a meritless counterclaim, and breached its duties of good faith, honest performance and fair dealings as he was misled as to the terms of his employment. The Court noted that punitive damages awards are rare in wrongful dismissal cases, as they are only awarded for malicious, oppressive, and high-handed conduct deserving of punishment. While there must be an “independent actionable wrong” for a Court to make such an award, an employer’s breach of their implied duty of good faith or failure to comply with the Employment Standards Act can satisfy this requirement.

The Court did not accept the employee’s submission that the employer breached the duties of good faith, fair dealing and honest performance, nor that the employer misled the employee regarding the terms of his employment. Further, the Court rejected the employee’s claim that the employer’s counterclaim warranted an award of punitive damages.

However, the Court found that the employer’s failure to pay the employee amounts owing to him following the termination of his employment justified an award of punitive damages. The Court determined that the employer knew it owed the employee “a significant amount of money” in compensation and terminated the employee without notice in accordance with the second employment contract. Therefore, the Court awarded $10,000 in punitive damages to the employee.

Employer’s counterclaim dismissed by Court

Concerning the employer’s counterclaim, the Court noted that nine months after his termination, the employee entered into an employment contract with Sprott Private Wealth LP as Managing Director of Charitable Flow-Through Services. The employer did not seek injunctive relief at the time and only commenced an action after the employee sued the employer for outstanding compensation.

In its claim, the employer asserted that the employee:

• Breached the restrictive covenants in the second employment agreement, namely the non-competition, non-solicitation, and confidentiality clauses;
• Failed to uphold his fiduciary duty owed to the employer; and
• Was unjustly enriched.

The employer filed an expert report in support of this claim, alleging it suffered damages of $1.599 million and sought punitive damages of $1 million. However, the Court dismissed the counterclaim in its entirety, finding the non-competition and non-solicitation clauses unenforceable as they were overly broad and contrary to public policy. Further, there was no evidence to suggest the employee breached his fiduciary duties, which survived the termination of his employment.

The Importance of Employer Conduct Upon Termination

This decision reminds employers that even where restrictive covenants are permitted under the law, they are difficult to enforce unless they are adequately narrow in scope and protect a genuine proprietary interest. Further, employers should be mindful that an offer letter to an employee may become a binding employment agreement, which may pose enforceability issues concerning subsequent employment contracts. Finally, it is critical for employers to provide terminated employees with their contractual and/or statutory entitlements, as a failure to do so may lead to a risk of a punitive damages award at trial.

Contact the Toronto Employment Lawyers at Grosman Gale Fletcher Hopkins LLP for Advice on Termination Entitlements and Wrongful Dismissal Claims

At Grosman Gale Fletcher Hopkins LLP in Toronto, our trusted employment lawyers frequently advise and represent employers and employees in various employment law disputes, including wrongful dismissal and constructive dismissal claims, human rights issues, and workplace conflict. We also advise on and draft comprehensive employment agreements to minimize the risk of future disputes. To schedule a consultation with one of our employment lawyers and learn more about how we can help you, contact us by phone at 416.364.9599 or reach out to us online.