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Resignations, Releases, and Representations, Oh My! Still Not Enough to Curb Employee Termination Pay

By November 24, 2020October 21st, 2021Buying a Practice, Employment Law

We wrote recently about the risks of not having clear, unambiguous and specific language in your employment contracts, especially when it comes to termination costs. Well, here’s another case that complicates things even further. After selling and resigning from his business, one former owner continued his employment and was still awarded hefty termination payments. How did the combination of a Resignation, a Share Purchase Agreement, a Release and a Saving Provision not prevent this?

Background

When an employee is terminated, they are owed “notice of termination or termination pay in lieu of notice.” The amount of notice or pay in lieu of notice can range between the minimum approximately 1 week for every year worked up to a maximum of 8 weeks amount dictated by the Ontario Employment Standards Act (ESA) and the maximum approximately 1 month for every year worked up to a maximum of 30 months amount dictated by the common law (also known as judge-made law).

An employer and an employee can contract into the minimum amount of notice or pay in lieu of notice by way of a written employment agreement that clearly and validly limits the employee’s rights to the ESA’s minimum standards and removes any claims the employee has to the common law. Suppose an employment contract is not clear or validly drafted, or the wording is such that it could potentially allow the employer to violate the ESA. In that case, the termination provision will be void and unenforceable. The employee will then be entitled to the maximum common law reasonable notice.

The ESA is clear that an employee’s employment continues notwithstanding the sale of an employer. So, when a person buys a company, they stand to inherit all employee termination liability. This includes liability for the seller themselves if the seller continues to be employed by the buyer after the sale. For this reason, the buyer’s lawyers will do everything in their power to curb the termination liability of employees or at least shift it back to the seller. This includes representations and warranties in a purchase agreement, seeking resignation of employees, seeking releases of liability from the employees, etc. But all is for naught if the court finds a flaw – as they did in the case of Groves v UTS Consultants (Goves).

The Facts of Groves

In 1991 Mr. Groves founded UTS Consultants Inc. In 2014, Groves, his spouse and a third shareholder sold their shares in UTS to Oakville Enterprise Corporation (OEC), resulting in ~$2.4 million for Groves and his spouse. After the sale, he entered into an employment agreement with OEC and continued to work there until 2017, when he was terminated without cause and offered 13 months of pay and benefits. Groves disputed the amount of payment in lieu of notice he received upon termination and filed a suit for wrongful termination.

Groves was represented by counsel throughout the sale process. Under his counsel’s watchful eye, he negotiated and signed the following documents at the time of sale (all of which attempted to limit his termination rights to notice or pay in lieu of notice):

  • a “Resignation” stating that he resigned “as an officer and director of the above corporation, such resignation to take effect immediately”
  • a “Release” releasing UTS and OEC from “all claims, demands, actions, causes of action, debts… which the undersigned in any capacity whatsoever (including, without limitation, as officer, director, shareholder, employee, creditor or otherwise) had, now has or hereafter can, shall or may have, for or by reason of or in any way arising out of, relating to or in connection with, any cause, matter or thing whatsoever existing up to the present time and, without limiting the generality of the foregoing, arising from: (1) the undersigned having been an officer, director, shareholder, employee or creditor of the Corporation, or (2) any Claims for unpaid remuneration, termination or severance pay“. [emphasis added]
  • an “Employment Agreement” which had a termination provision stating:

This agreement may be terminated in the following manner in the specified circumstances: …

  • By the Company at any time for cause without notice or pay in lieu;
  • By the Company at any time without cause provided that the Company provides you with notice in writing or pay in lieu of notice (as salary continuation) or some combination thereof equal to four (4) weeks base salary for each year of service that you have with the Company calculated from the date of this letter (and, for greater certainty, excluding any period of service you had with the Company prior to the date of this letter) with a guaranteed minimum notice or pay in lieu of notice equal to three (3) months base salary; provided that the maximum notice period or pay in lieu of notice that you will receive shall in no circumstances exceed twelve (12) months. Notwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario). In addition, the severance package will also include continuation of medical and dental benefits during the severance period. Any variable pay owing to you will be prorated for the year’s service and paid at the time of termination. For greater certainty, you agree that for purposes of calculating any entitlement which you may have arising from the termination, without cause, of your employment with the Company, any prior service with the Company is excluded and you hereby waive and release any prior service entitlements. [emphasis added]

Even though the Employment Agreement was negotiated in the context of the sale of the business and Groves was represented by legal counsel at all times, the court found that the Employment Agreement was NOT enforceable because it failed to comply with the ESA.

Among the reasons why the termination provision was unenforceable was because it attempted to re-start Groves’ clock for the purposes of termination entitlements in violation of s.9(1) of the ESA, which says explicitly:

If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

What About the “Resignation”?

The court took heed that despite signing the “Resignation,” the letter of intent and share purchase agreement both contemplated that Groves continue his employment there, which he did. Consequently, they found that the “Resignation” was “an entirely artificial attempt to create an interruption in employment when in fact there was none,” and the “Resignation” and Employment Agreement, taken together, were more accurately viewed as a new contract continuing Groves’ employment at the company.

What About the “Saving Clause”?

The “Saving Clause” within the termination provision was written to save the termination provision from invalidation should the wording be ambiguous or in contravention of the ESA. It stated:

Notwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario).

Once again, the court ruled in favour of Graves on this front, saying, “when the employer has sought to contract out of the ESA, a saving provision cannot be used to rewrite the express language in an agreement to cause it to comply.”

What About the “Release”?

The “Release” language sought to clear the company of all claims that Groves had from “having been an officer, director, shareholder, employee or creditor” of the company, or any claims “for unpaid remuneration, termination or severance pay.” The court found that this amounted to an attempt to contract out of the ESA. Therefore, the “Release” was not a proper means of limiting the company’s liability under the ESA (the minimum requirement). But what about the common law (which is the maximum liability)? Well, the court finessed this a bit and found that the “Release”:

releases and discharges “any claims” for “termination or severance pay” which are not common law entitlements, but rather entitlements under the ESA. Given that this violates the ESA, it is null and void for all purposes.

Bottom Line

The Groves case was appealed to the Court of Appeal of Ontario, and the appeal court stood with the trial judge on all issues. The judgment was not overturned. So, unfortunately, this case will most likely encourage many sellers who remain employed after a sale to claim wrongful dismissal if they are terminated with less than the full extent of the common law. Mr. Groves got a whopping 24 months of pay in lieu of notice, and none of the safeguards put in place to prevent him from getting the maximum worked!

But, there is a silver lining. The good news is that this is a good learning opportunity. Smart lawyers all over Ontario and Canada are thinking up new ways to limit a buyer’s employee liability. At DMC, we are continually following current cases and updating our strategies based on the outcomes. So if you find yourself in a similar situation after purchasing a new practice, we can help. And even better, if you are thinking of purchasing, let us know. We can set up the agreements to put you in a much better position to avoid such an issue altogether.

We not only have expertise in helping buy and sell dental practices, but we are also ready and happy to help with employment contracts, office policy manuals and any other employment issues. DMC is dedicated to helping dentists understand and minimize the risks associated with being an employer. Send us an email or call our Employment Law Team directly at 416-443-9280 extension 206.

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