Contractual Severance: Failure to Pay Means Employer Pays More
A recent Ontario court decision confirms the approach under Canadian law to cases where an employer fails to pay the contracted severance amounts: if the employer does not comply with the terms of the contract, that amounts to repudiation, and the employee will have a more valuable, common law claim for enhanced severance.
In Timmins v. Artisan Cells, CanLii 2387, Justice Callaghan of the Ontario Superior Court found that the employer, Artisan, had, 'by their correspondence and actions,' repudiated the agreement it had with Nicholas Timmins. In particular, the case arose when Timmins was dismissed without cause in 2023. When he was terminated, Artisan said in the termination letter that it would provide one week of termination pay, plus other amounts in exchange for a release.
When he sued for wrongful dismissal, the employer attempted to claim that his claim was limited to amounts owing under the Ontario Employment Standards Act, 2000 (ESA). This argument was based on the wording of an employment agreement which Timmins signed when he commenced employment in 2019.
The employer’s argument was rejected by the Court, which found that the employer failed to refer to or seek to rely upon the contractual severance amount, which at the time of termination was three weeks in accordance with the ESA. This amounted to a failure by Artisan to meet the obligation to pay the terminated executive his contracted severance.
The implications for the employer were substantial: rather than being limited to owing three weeks pursuant to the ESA, the Court awarded Timmins nine months of common law notice, which amounted to $456,908. This figure was based on the value of all elements of compensation, including bonus, benefits and stock options.
The Court’s noted that repudiation of a contract occurs when one party to the contract, by their words or conduct, shows an intention not to be bound by the contract. Proceeding with a termination of employment where the termination letter provides for terms which are different from the contract provisions is an example where repudiation can be found.
On the facts of the particular case, the Court held that a reasonable person would conclude that the employer did not intend to be bound by the contractual severance provision based on the termination proposal it made. In this regard, it was notable that the receipt of the severance payment under the employment agreement was not stated as being conditional upon the receipt of a signed release. In addition, the form of release which had been sought was broader than simply releasing claims for severance-related amounts, and also include confidentiality and non-disparagement provisions.
The Court in Timmins refused to award punitive damages. While the employer’s conduct effectively nullified the contractual termination provision, the judge held that there was sufficient deterrence by virtue of awarding nine months of compensation to the dismissed executive
Takeaways for Employers
This decision confirms the importance of carefully reviewing employment agreement provisions prior to proceeding with a termination. Employers must essentially decide if they have a contractual termination provision which limits amounts payable upon termination, and if such a clause is in place then it must be followed in the termination letter and any related proposal. In practice, this means that a release cannot be demanded if there is a termination provision which does not contain wording which requires that a release be signed in exchange for any amounts which exceed applicable statutory requirements. Failure to properly consider these issues may well result in Canadian employers snatching defeat (in the form of substantial common law notice) from the jaws of victory (in the form of a contractual provisions which limits obligations upon termination).