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It has long been established in British Columbia that, absent... the common law will imply that ... WORKING NOTICE UPDATE – ASSESSING THE RISKS
WORKING NOTICE UPDATE – ASSESSING THE RISKS I. INTRODUCTION It has long been established in British Columbia that, absent express agreement to the contrary, the common law will imply that an indefinite term employment agreement may only be ended with just cause or reasonable notice: Henderson v. Canadian Timber and Saw Mills Limited (1906) 12 B.C.R. 294 (C.A.). For more recent case authority, see: Machtinger v. HOJ Industries Ltd. [1992] 1 S.C.R. 986. Reasonable notice is a working notice period of reasonable length.1 Many, if not most, employers provide pay in lieu of reasonable notice when ending an employee’s employment. Where the pay is by lump sum it is commonly called severance. Where the pay is spread over the notice period, it is commonly called salary continuance. In this paper, I ask why more employers do not provide reasonable working notice as is lawfully required? Making a severance payment or providing salary continuance instead of providing working notice is not an implied term of an employment agreement. This is explained by the Court of Appeal in Dunlop v. B.C. Hydro and Power Authority [1988] B.C.J. No. 1963 (C.A) at p.3: The implied term is a term to the effect that each party must give reasonable notice of termination to the other. The implied term is not a term to the effect that the employer may give pay in lieu of notice. This means, employers who end an employment agreement immediately have wrongfully dismissed an employee. An offer of payment, even a generous one, be it as a lump sum or over a period of time, is merely compensation for damages. In the words of our Court of Appeal in Dunlop, supra: … when an employer gives pay in lieu of notice, he does so as an attempt to compensate for his breach of the contract of employment, not as an attempt to comply with an implied term of the contract of employment. So, should employers choose to pay in lieu? Or, is it better to provide reasonable notice? II. WORKING NOTICE OR PAY IN LIEU Before discussing the merits of providing notice, this paper briefly examines the alternative: immediate termination in breach of the employment agreement. The decision whether to provide working notice or to breach the agreement and pay compensation in lieu of the notice is often driven by the operational requirements of the business. 1 A. Considerations For Providing Pay In Lieu As payment in lieu of notice flows from a breach of the employment agreement, it should only make sense for an employer to breach and provide pay in lieu where it is furthers the business’ purposes. Employers may wish to consider the following in deciding whether to breach the employment agreement and pay compensation for damages rather than complying with the agreement and providing notice: Why the employee is being dismissed. If, for example, the employee is being dismissed for poor work performance, providing working notice means enduring the poor work performance for the notice period. It may be more efficient for the business to pay compensation in lieu of notice. Whether the employee’s position continues to exist. If, for example, the employee’s position has been eliminated, there may not be a place to allow the employee to work out his or her notice period [Query, however, why the employer did not give notice prior to the position being eliminated]. As another example, if the employer has hired a replacement employee who is performing the terminated employee’s duties, there may be no work for the terminated employee to perform during the notice period. [In fact, the terminated employee’s presence may actually be disruptive to the new employee]. Whether the employee poses a security risk during the notice period. For example, does the employee have access to sensitive computer data, and if so, is the employee of a temperament that he or she would try to sabotage this data? Whether the employee poses a business risk during the notice period. In the movie Jerry Maguire, Tom Cruise’s character returns to the office after being dismissed to spend the next hour trying to convince the business’ clients to come with him on his new venture. In B.C. similar conduct would be subject to considerations of fiduciary duties and conflict of interest, however, an employer may still wish to ask whether an employee is likely to use the working notice period to advance interests which compete with or are otherwise prejudicial to the interests of the business. Whether the employee’s working would negatively affect morale. Receiving notice of termination is an emotional blow for most employees. Having in the workplace an employee who is unhappy, angry, or otherwise negatively affected by the notice may decrease morale for other employees. Whether to provide notice or pay in lieu is the employer’s decision. After all, it is the employer’s breach that is the condition precedent to a payment in lieu. From an employee’s point of view, the employee generally prefers to be terminated immediately and receive a lump sum severance as this allows favourable tax structuring through the use of retiring allowances and places the employee in the position where he or she may receive a 2 windfall by quickly finding new employment. However, the employee is usually a passive participant in the employer’s decision to immediately terminate or provide reasonable notice. Some employees will ask for a package, but (absent express contractual agreement to the contrary) an employee may not compel a payment of severance. I have had employees suggest they could behave poorly or antagonize management to maximize the likelihood the employer would offer a severance package. However, this creates a risk for the employee that the employer will discipline for misconduct, and may even terminate the employee for cause prior to the end of the notice period. B. Potential Problems With Immediate Termination Given the foregoing, it may appear breaching the employment agreement by immediately terminating the employee and making a payment in lieu of notice is always in the best interests of an employer; such is not the case. Some of the disadvantages with making a lump sum severance payment may include: Losing the employee’s services during the notice period. By breaching the agreement, the employer pays compensation for those services and receives no benefit from the employee in return. Allowing the employee to realize a windfall. An employee who mitigates quickly by finding new comparable employment will suffer no loss of income and may realize a windfall severance package. [I note two points: First, employers have tried to avoid the windfall issue by providing pay in lieu as salary continuance and providing for an incentive or “balloon” payment if the employee finds a new job. (Please see the next section for a discussion on the option of salary continuance). Second, often employers will build into lump sum payments discounts to account for the contingency of an employee mitigating]. Liability for non-salary losses. Most insurance plan coverage ends on the employee’s last active day of employment. However, absent a release, employers may be liable for insurance benefit losses incurred during the notice period by the employee: Prince v. T. Eaton Co. (1992) 67 B.C.L.R. (2d) 226 (C.A.). This can be a significant liability. By giving the employee working notice, an employer can continue insurance coverage and protect itself from claims for loss of same. Costs of lump-sum payment. A lump-sum payment is more costly to a business than smaller salary payments over the notice period. If one adds to this the additional costs of retaining legal counsel to assist negotiate the amount of the lump sum payment, the cost increases. For businesses who are experiencing tight cash flow, a lump sum payment on termination may not be an option. Risk of immediate litigation. Once the employer breaches the employment agreement, the employee can begin litigation forthwith. Defending litigation costs an employer time and money. By providing notice, the employee risks repudiating the employment agreement by bringing an action during the notice period. [This issue is discussed later in this paper]. 3 III. THE OPTION OF SALARY CONTINUANCE Salary continuance is where an employer ends an employee’s employment, but continues to pay to the employee that employee’s regular salary and benefits during the notice period. Salary continuance may be offered by an employer as compensation for its breach of the employment agreement, imposed on a without prejudice basis pending negotiations about pay in lieu of notice, or a combination of these two. A. Salary Continuance Language A simple form of a sample termination letter offering salary continuance is attached as Appendix “A”.2 The sample termination letter provides for a “balloon” clause. These types of clauses are fairly common in salary continuances and provide that if an employee finds a new job, salary continuance payments will end, and the employee will receive an incentive bonus payment. This incentive bonus payment is commonly set as a percentage of the balance of the salary continuance payments left in the notice period (in the sample letter, it is set at 50 percent). In effect, the employee’s new job triggers an immediate payment (i.e., the “balloon”) of a smaller portion of the balance of the salary continuance. The purpose of the balloon clause is to encourage the employee to find a new job; the faster the employee becomes re-employed, the larger the balloon payment. Of course, the employer benefits from the employee quickly finding a job as the new job mitigates any damages the employee may suffer as a result of the ending of employment. Although salary continuance does address several of the negative aspects of providing a lump sum, it may not assist with the issue of benefit coverage during the notice period. Some insurers insist that for coverage to continue, the employee must be actively at work (a term often defined in the insurance policy). In theory, and from an employer’s perspective, salary continuance combines many of the best elements of immediate termination and working notice; it allows an immediate end to the employment relationship, while spreading the cost of the termination over the notice period and minimizing the likelihood of the employee realizing a windfall payment. In practice, and as a result of several recent Court decisions, there are problems with salary continuance. B. Jurisprudence On Salary Continuance In the 1990s, the British Columbia Courts issued several decisions which approved of salary continuance: see, for example, Spooner v. Ridley Terminals Inc. (1991), 39 C.C.E.L. 65 (B.C.S.C.); Marshall v. Artek Group Ltd. (1993), 47 C.C.E.L. 229 (B.C.S.C.); Polak v. Surrey Memorial Hospital Society [1996] B.C.J. No. 131 (S.C.). The ratio behind these decisions was that even though an employer had breached the employment agreement by ending the employee’s employment without notice, providing salary 4 continuance was a bona fide form of damages available to compensate the employee for this breach. In Marshall, supra, at p. 231, Meredith J. characterizes salary continuance as follows: The plaintiff argues that “the defendant cannot deprive the plaintiff of the right to obtain a judgment in a lump sum by paying him periodically”. I think the submission is in error. It overlooks the fundamental aim of a damage award, that is to say, to put the plaintiff, so far as is possible, in the same position as if there had been no breach of the contract. Thus, the plaintiff should be awarded an amount resembling as closely as possible what he would have received had he been given adequate notice and had worked out the period of notice. In that case, if the notice period was adequate, the plaintiff would have received his salary, pay period by pay period. It follows that if the employment of the plaintiff is terminated, he will be fully, appropriately and adequately compensated if the defendant continues to pay his salary. In recent years, the British Columbia Courts appear to be resiling from the position that damages paid out over a period of time will always adequately compensate an employee for a breach of the employment agreement. In Light v. City of Richmond [1998] B.C.J. No. 102 (S.C.), the Court rejected an employer’s attempt to provide salary continuance following termination and failed negotiations about the quantum of a lump sum severance payment. The Court held salary continuance is only available where an employer offers it in the original termination letter. In this case, the City of Richmond's termination letter had only offered a lump sum payment. The Court disallowed the employer’s attempt to unilaterally begin salary continuance and ordered a lump sum award. Further limitations on the availability of salary continuance as a method of compensating a plaintiff for a breach of the employment agreement as a result of termination without notice were imposed in Albach v. Vortek Industries Ltd. 2000 BCSC 1228. In Albach the defendant offered the plaintiff (formerly a senior executive in the company), 18 months’ salary continuance. The salary continuance offer contained a balloon clause which provided salary continuance would end and the plaintiff would receive 50 percent of the balance of the payments as a lump sum. The defendant also offered to continue the plaintiff’s health and welfare benefits, except for long term disability. The defendant offered to pay an amount equal to the cost of the long term disability premiums for the length of the notice period, or the actual cost the plaintiff incurred replacing the long term disability benefits. The Court in Albach accepted the plaintiff’s argument that the defendant’s offer of salary continuance did not adequately compensate him for the breach of the employment agreement. While recognizing that the use of salary continuance has been approved in British Columbia, Brooke J. held that offers of salary continuance will not be automatically sanctioned by the Courts. Brooke J., citing Polak (and considering both Marshall, supra and Spooner, supra), held that the Courts will consider two factors in assessing the appropriateness of salary continuance [at para. 16]: (a) “the conditions attached” to the salary continuance; and 5 (b) whether the salary continuance is for a period “reasonably equivalent to a lump sum award in lieu of notice”. Brooke J. further qualified the second condition by holding that the reasonable notice period for which salary continuance is offered must be at “the higher end of the appropriate range” [para. 18]. The learned trial judge noted in obiter that if the defendant had offered 24 months (the higher end of the notice range) instead of 18 months (the lower end of that range), he may have approved the use of salary continuance. In rejecting the defendant’s offer of salary continuance, Brooke J. commented as follows [paras. 20-21]: It seems to me that salary continuance may be appropriate on termination where it is expressly provided for by contract of employment or where it is offered and accepted upon termination. An unaccepted offer has no contractual consequence. If, as in Polak the offer of salary continuance is equivalent to a lump sum award in lieu of notice that may discharge the employer's obligation. If it is not equivalent then in my opinion the court should be slow to make what may be seen as the equivalent of a contract for the parties. In the result I am satisfied that the notice was unreasonable, the dismissal is therefore wrongful and I see no reason to depart from the principle that damages are awarded in a lump sum once and for all. In Moody v. Lafarge Canada Inc. 2000 BCSC 1847, the Court followed the Albach decision and rejected the defendant’s offer of salary continuance. The Court ordered a lump sum payment of damages based on the following reasoning [para. 25]: I am not satisfied that a salary continuance is appropriate. Lafarge terminated the plaintiffs’ employment which it was entitled to do. It did not however provide reasonable notice of that. … The breach by Lafarge is in failing to give reasonable notice. The plaintiffs’ claim for damages is based on a calculation of the notice period multiplied by their monthly salary. There is no agreement to accept salary continuance in the event of dismissal nor an acceptance by the plaintiffs, upon their termination of employment, of a payment on a monthly basis for the appropriate notice period. In Leung v. MDSI Mobile Data Solutions Inc. 2002 BCSC 1597, the defendant’s offer of salary continuance provided payments to the plaintiff would be cancelled if the plaintiff found new employment during the notice period. The Court, again following Albach, held that because of this condition, the salary continuance was less valuable than a lump sum payment. The Court, accordingly, refused to accept the salary continuance as an acceptable form of compensation for the employer’s breach of the employment agreement. The Court ordered a lump sum payment of damages. C. Employer Considerations About Salary Continuance An employer who wants to implement an effective salary continuance today must generously estimate the notice period range and offer a salary continuance at the upper end of that range. This could make an offer of salary continuance potentially more expensive than a lump sum severance package or providing working notice. 6 The employer is also restricted in the conditions it can impose on a salary continuance offer. Preconditions such as termination of the salary continuance on the employee finding a new job (even perhaps termination with a balloon clause) may result in a Court awarding lump sum damages instead of upholding the salary continuance offer. It is possible other common conditions on salary continuance offers would also serve to render those offers insufficient compensation for the breach of the employment agreement, including requiring an employee to: report on his or her job hunting progress and efforts; agree to restrictive covenants, such as non-solicitation or non-competition provisions; and execute a general release in favour of the employer. An interesting future issue is what happens where an employer does offer unconditional salary continuance which is accepted by the employee, and the employee finds work during the notice period. Is the employer obliged to continue the salary continuance? Will this not result in the employee being double compensated for his or her original loss from the breach of the employment agreement? It appears salary continuance is considered to be a new offer following the breach of the employment agreement. Accordingly, if it is made without preconditions, and the employee does find new employment during the notice period, there appears to be a good argument that the employer is required to continue the salary continuance payments. Given the foregoing, is there any advantage to salary continuance for employers? While not as useful as it once was, salary continuance still: spreads out the cost of termination, which may help cash flow; may allow for some benefit continuation, which would protect the employer from claims for benefits which arise in the notice period; may deter an employee from bringing an action as the employee is receiving income; and is effective to discharge an employer’s liability for immediate termination of the employment agreement, subject to a challenge in Court. D. Employee Considerations About Salary Continuance An issue for many employees is how to respond when an employer offers salary continuance. On the one hand, the salary continuance offer is likely not to be as favourable as a lump sum payment. It will probably have preconditions attached which result in a smaller total payout if employment is found during the notice period. It may also be less favourable from a tax perspective. 7 On the other hand, the employee no longer has a job, needs an income, and will likely be tempted to accept the salary continuance pending negotiations about a lump sum severance or court action. There is a risk to an employee in accepting salary continuance pending negotiations about severance. A Court may find the employee, by his or her conduct, agreed or acquiesced to the salary continuance offer. Employee counsel may wish to ensure if the employee is continuing to accept the salary continuance payments while negotiating or litigating the quantum of severance, that this acceptance is on a without prejudice basis to the employee’s right to demand a lump sum payment. IV. WORKING NOTICE A. Giving Working Notice Working notice must be clearly communicated to the employee. The notice must be specific, clear and unequivocal such that a reasonable person would be led to the clear understanding that his or her employment is at an end as of some date certain in the future: Kalaman v. Singer Valve Co. (1997), 31 C.C.E.L. (2d) 1 (B.C.C.A.). The Court will examine the notice objectively and consider all the circumstances of each case to determine whether the notice is sufficiently specific, clear and unequivocal. Mister Justice Wood, writing for the Court of Appeal in Gibb v. Novacorp International Consulting Inc. (1990), 48 B.C.L.R. (28) (C.A.), described the requirement for notice as follows [at p. 34]: I do not think that in order to be specific and unequivocal, the notice given must necessarily use the words “you are hereby dismissed effective …” or some such equivalent. If the words used are such as would lead a reasonable person to the clear understanding that his employment is at an end as of some date certain in the future, it may well be that specific, unequivocal notice has been clearly communicated. It must in every case depend on all the circumstances in evidence. Notwithstanding Mister Justice Wood’s directions in Gibb, it appears good practice to clarify in writing that the employee is “hereby dismissed” after a period of working notice and as of a set date. At the trial level in Kalaman, [1996] B.C.J. No. 814 (S.C.), the Court held that a notice which suggested the employee may be rehired in a different capacity at the end of the notice period was not sufficiently clear and unequivocal. Even though this finding was reversed on appeal on the authority of Gibb, a clearer notice may have avoided this litigation. In Elderfield v. Aetna Life Insurance Co. [1995] B.C.J. No. 1018 (S.C.), the trial judge held that notice which suggested that the employee would receive a severance package or an alternative position in the company did not constitute proper working notice. The Court of Appeal affirmed this finding of fact. 8 A sample termination letter offering working notice is attached as Appendix “B”.2 Although I am not aware of a common law requirement which specifically requires notice to be in writing, it appears good practice to ensure that it is. Oral notices are subject to misinterpretation and are less likely to be clear and unequivocal than written notice. Further, if the notice is not in writing, the employer will not discharge its statutory liability for termination pay. The Employment Standards Act, R.S.B.C. 1996, c.113, section 63, requires notice of termination to be in writing; oral notice is not valid. B. Working Beyond The Notice Period Allowing an employee to work beyond the end of the notice period likely vitiates the working notice at common law and certainly vitiates it under the Employment Standards Act. Section 67(1)(b) of the Employment Standards Act provides that notice is not effective where an employee works beyond the end of the notice period. For example, take an eight month notice period which ends December 31, 2003. Even though this notice period is clearly in excess of anything required by the Employment Standards Act, if the employee worked on January 1, 2004, the employee would be entitled to a new statutory termination notice period or pay in lieu. At common law, an employer who allows an employee to work beyond the end of the notice period risks creating confusion and uncertainty about the notice (e.g. did the employee’s employment really end, or is it continuing?). If the notice becomes unclear and equivocal, there is a risk a Court would hold that it is not valid. Where the employer finds that it needs an employee to work a few days beyond the end of the notice period, it appears better practice to enter into a new written employment agreement with the employee which recognizes the employee’s employment has ended, and that the employer is retaining the employee’s services on new terms and conditions for a set period of time. C. Retracting Working Notice Once working notice has been provided, an employer likely will not be able to unilaterally amend or retract that notice. The Court of Appeal in Elderfield v. Aetna Life Insurance Co. of Canada [1996] B.C.J. No. 1817 (C.A.) considered this issue. In Elderfield, the employer gave improper and invalid working notice. The improper notice suggested the employer would provide a severance package or provide alternative work. Prior to the notice expiring, the employer sought to give proper, specific and unequivocal working notice. The employee refused to accept the latter notice and brought an action. The employer argued as its improper notice had not yet been accepted, the employment agreement continued to exist for the benefit of both parties. This, the employer said, is in accordance with the general principles of contract law, and allowed the employer to retract the improper notice and issue proper, lawful working notice. The employer further argued the 9 employee’s refusal to work during the notice period set out in the proper, lawful notice amounted to a resignation. Madam Justice Huddart agreed with the employer’s argument, but held that, on the facts, that the employer by its conduct had otherwise repudiated the employment contract. The employee was entitled to accept the employer’s repudiation at the end of the improper notice and to sue for damages. Madam Justice Newbury, writing concurring reasons, held that once notice has been given, an employer may not unilaterally re-elect to provide additional working notice. In Zaraweh v. Hermon, Bunbary and Oke [2001] B.C.J. No. 1896 (C.A.), the B.C. Court of Appeal appears to have adopted Madam Justice Newbury’s reasoning in Elderfield. The Court in Zaraweh, citing Elderfield with approval, held that in the absence of mutual agreement, an employer is not entitled to unilaterally alter working notice. Based on Zaraweh, the law today appears that notice, once given, may not be unilaterally amended by an employer. D. Illness, Pregnancy and Other Absences During the Notice Period Under the Employment Standards Act, notice given to an employee has no effect if the notice period coincides with the employee’s pregnancy or a leave or illness: Section 67(1)(a).3 The Branch’s interpretation guidelines describe the statutory requirement as follows: A notice period cannot begin while an employee is on vacation, jury duty, strike, lockout, banked time, temporary layoff, or other leave (either employer-granted or as provided by statute). If, after notice is given, an employee is on leave under Part 6, Leaves and Jury Duty, strike or lockout, or is unavailable for work … for medical reasons, the notice period is interrupted and resumes upon conclusion of the interruption. An employer cannot require an employee to take vacation during the notice period. Similar considerations appear to apply for common law notice. In Elderfield, supra, the Court of Appeal recognized it was “common ground that the [plaintiff employee’s] period of notice could not coincide with her vacation leave … or her pregnancy and parental leaves” [at para 13]. The law appears clear that time spent on pregnancy and parental leave will not count as part of the reasonable notice period: Whelehan v. Laidlaw Environmental Services Ltd. [1998] B.C.J. 847 (S.C.); Winterburn v. Domtar Inc. 2002 BCSC 1418. The policy behind this is ostensibly to prevent unscrupulous employers from giving working notice immediately prior to an employee beginning a pregnancy leave. It is less clear how a period of illness affects the reasonable notice period. Where an employee is dismissed without notice, a subsequent period of illness will not affect that employee’s claim for damages: Sylvester v. British Columbia [1997] 2 S.C.R. 315. In Sylvester, the Supreme Court stated this principle as follows [at para. 9]: The fact that an employee could not have worked during the notice period is irrelevant to the assessment of these [wrongful dismissal] damages. They are based on the premise 10 that the employee would have worked during the notice period. Therefore, an employee who is wrongfully dismissed while working and an employee who is wrongfully dismissed while receiving disability benefits are both entitled to damages consisting of the salary the employee would have earned had the employee worked during the notice period. This reasoning suggests a period of illness would not count towards the notice period. To conclude otherwise would result in the employee who received working notice receiving less compensation than the employee who was wrongfully dismissed. In other words, the Court would be putting an employee whose employment agreement was breached in a better position than the employee whose employment agreement was honoured. This is contrary to the principles of contract law and strongly indicates that periods of illness do not count as part of the notice period. Working notice issues with respect to pregnant or ill employees are usually further complicated by human rights considerations. These considerations are beyond the scope of this paper. However, even without human rights considerations, the foregoing reasoning creates a dilemma for employers. This dilemma is well illustrated in the following examples: Example A: Employer A chooses to comply with the employment contract and gives Employee X working notice. Working notice is 18 months. During the working notice period Employee X is ill for an aggregate of four months and on pregnancy leave for the final five months. Employee X demands nine months pay in lieu of notice. What are Employer A’s options given that, under Zaraweh, supra, Employer A cannot amend of extend the notice period without Employee X’s consent. Example B: Employer B also complies with the employment contract and gives Employee Y working notice. Working notice is six months. After receiving working notice, Employee Y becomes depressed and stressed and takes medical leave for the entire working notice period. At the end of the notice period, Employee Y demands six months’ severance. Providing Employers A and B continued the normal pay of the employees, notwithstanding that these employees were off work and may not have been entitled to pay, likely would eliminate subsequent liability. However, such action may also create an apparently incongruous result. An employer may have two employees absent on sick leave concurrently. The employer may have to pay the one who has been given working notice, but not pay the other who has not. Perhaps the answer to the foregoing examples is that pay need not continue during an absence (if the employee would not normally be paid), but that notice will be extended for the period of the absence. 11 I anticipate we will not have to wait long before a Court considers these issues. These types of dilemmas and the jurisprudence underlying them have created uncertainty for the employer who wishes to honour an employment agreement and give notice. It is ironic that the same jurisprudence has created certainty, and thereby increased the incentive, for employers who breach the employment agreement and pay damages in lieu of notice. E. Employees’ Duties During The Notice Period An employer has the right to expect an employee to make his or her services available during the notice period: Suleman v. B.C. Research Council [1990] B.C.J. No. 2707 (C.A.). In Suleman, the employer provided six months’ working notice. The employee, who was ill, did not attend work, but brought an action for wrongful dismissal. The Court of Appeal held [p. 4]: In other words, the contract of employment is not terminated until the end of the notice period and during that period the employer has the right to the services of the employee. It follows that the employee must remain ready and willing to carry out the contract of service. While the law appears clear that an employee must remain ready and willing to provide services during the working notice period, at least one decision in British Columbia suggests that an employee who has been given notice may divide his or her time between acting in the best interests of the employer and seeking alternative employment: Elms v. Hywel Jones Architect Ltd. [1997] B.C.J. No. 1084 (S.C.). The apparent ratio behind Elms, although not yet expanded upon by other British Columbia courts, has been addressed in New Brunswick. In New Brunswick, the Court of Appeal held that the principle purpose of a notice period is to provide the employee time to find a new job. The New Brunswick Court requires an employer to provide an employee the opportunity to seek alternative employment during the notice period for the notice period to be considered valid: Bramble v. Medis Health and Pharmaceutical Services Inc. [1999] N.B.J. No. 307 (C.A.). A trend toward requiring employers to provide employees the opportunity during the working notice period to job hunt raises a sociological question about notice periods: is a notice period a judicially mandated social safety net following loss of a job and before the public safety net (i.e., employment insurance) takes effect? If notice periods are social safety nets, then allowing time to job hunt appears imperative. If they are not, there appears no basis in contract law to justify amending the employment agreement to allow the employee to reduce his or her duties in favour of seeking alternative employment. F. Effect Of An Action An employee who brings an action for wrongful dismissal against an employer during the working notice period risks repudiating the employment agreement. Mr. Justice Hutcheon, giving his judgment in Suleman, supra, said [p.2]: 12 It seems to me that the commencement of the action was either an acceptance by Mrs. Suleman of a constructive dismissal, if she could establish that result, or a repudiation by her of her contract of employment if she failed to establish that result. In Podas v. Pacific Press Ltd. (1991), 61 B.C.L.R. (2d) 196 (C.A.) the Court held at page 199: In Suleman, as here, there was a repudiation of the contract of employment by the issue of the writ and statement of claim. In C.A.I.M.A.W, Local 4, v. British Columbia (Director of Employment Standards Branch) (1993), 48 C.C.E.L. (B.C.C.A.), the Court noted at page 176: ... having failed on the issue of constructive dismissal, the writ amounted to the employee's repudiation of the contract of employment. At the trial level in Zaraweh, (2000) 49 C.C.E.L. (2d) 77 (B.C.S.C.) the Court distinguished Suleman, Podas and Hulme on the basis that the employees involved in those cases appeared to have refused to do any further work for the employer. The Court concluded: I do not consider that an employee who does no more than issue a Writ and file a pleading alleging a wrongful dismissal when given working notice that is less than reasonable is to be denied her remedy if she is prepared to continue working for her employer and does so until the employer terminates the contract. This finding was reversed on appeal where the Court in Zaraweh, supra, held [at para 21]: On my view of the pleadings and the case law, I do not consider that [the trial judge’s] view can hold, and I am of the view that the acts of issuing the writ and statement of claim and serving them on the [employer] were conduct incompatible with continuation of the contract of employment. Absent a prior repudiation by the [employer] which would allow Ms. Zaraweh to elect to end the contract, or which alternatively could be viewed as justifying her termination of the contract, such actions must be viewed as unjustified repudiation by Ms. Zaraweh. Accordingly, the law in British Columbia remains that an employee who brings an action for wrongful dismissal during the working notice period will have repudiated the employment agreement. An employer may accept the employee’s repudiation and end the employment agreement summarily. It should be noted, however, the Court in Zaraweh emphasized that not every action by an employee against an employer will amount to a repudiation of the employment agreement. The Court held [at para 22]: … I refer only to the facts of this case which were issuance of a writ of summons and statement of claim seeking general and punitive damages, some time before the end of the working notice. It may be that not all actions by an employee against an employer are of the same nature. For example, an action for a declaration as to a contract’s continuance, or for an injunction … may have a character compatible with performance, not breach, of a contractual obligation. 13 From an employer’s perspective, a restraint on an employee from bringing an action is a tremendous advantage. There is a good chance the employee will mitigate his or her damages during the notice period by finding a new job. The notice period and possible mitigation may well reduce an employee’s claim to a point where it is no longer worth pursuing damages in Court. The restraint on an employee bringing an action is not necessarily unfair. If an employer provides a reasonable working notice period or if the employee mitigates during the notice period or both, the employment agreement is either honoured or damages are not suffered. In such circumstances the employee continues to receive an income and the workload for the Courts is reduced. The only disadvantage is the employee does not have the chance to realize the windfall he or she would with a lump sum severance payment. Plaintiff’s counsel who do not want to be fettered by waiting for the notice period to end may be best served bringing an immediate action for a declaration as to the appropriate reasonable notice period. Given the prohibition against employers unilaterally amending the notice period, a finding that the reasonable notice period exceeds the notice provided likely will lead to a prompt resolution of any dispute (subject to discounts for possible mitigation). G. The Requirement To Provide Work Historically, the English Courts, with certain exceptions, held that there was no obligation on an employer to provide work during the working notice period: Freedland, The Contract of Employment (Oxford, Clarendon Press: 1976). The exceptions set out by Professor Freedland are [at pp. 24-25]: (a) Employees whose remuneration is based on commission or piecework and who, if they do not work, earn no remuneration. (b) Employees who have specifically contracted for a specific job with specific duties. (c) Employees who gain publicity or experience from employment, such as senior executives and directors of companies, or actors. With respect to this final category, Professor Freedland notes [at p. 25]: In general, the cases where damages may be recovered for loss of publicity or experience are very much the exception rather than the rule. This line of jurisprudence was considered by the British Columbia Courts in Park v. Parsons Brown & Co. (1989), 39 B.C.L.R. (2d) 107 (C.A.). In Park, the defendant company gave the plaintiff, its President and CEO, 18 months’ working notice. The defendant treated the plaintiff as still on the payroll and gave him access to his office and parking space. The defendant took away the balance of the plaintiff’s duties. 14 The trial judge held “the suggestion that the Company had not relieved the plaintiff of his function as Chief Executive Officer by inviting him to sit in his office and use his parking space as usual can be no more than a pretence.” The Court of Appeal recognized that historically there was no obligation to provide work. The Court further recognized the exceptions to this principle. Hutcheon J.A. writing for the majority held that the plaintiff as a senior manager fell within these exceptions. Southin J.A., concurring on this issue, held that the terms of the plaintiff’s contract did not empower the employer to provide working notice without work. In Suleman, supra, Mister Justice Hutcheon summarized his reasoning in Park, as follows [at p. 143]: In Park v. Parsons Brown & Co [citations omitted], I referred to long standing authority that the employer’s obligation to keep an employee retained and employed does not necessarily import an obligation to supply work. This principle was also noted and followed in Spooner v. Ridley Terminals Inc. (1991), 39 C.C.E.L. 65 (B.C.S.C.) where Macdonald J. wrote [p. 70]: … I accept that the law does not in most cases require an employer to provide work during the notice period … Accordingly, the current law in British Columbia appears to allow an employer to provide working notice without requiring the employee to attend at work, absent the existence of one of the above cited three exceptions. There continues to be uncertainty on this issue due to a conflict between providing notice without work and constructive dismissal. This conflict is discussed in the next section. Not requiring the employee to attend at work during the notice period may be a benefit to the employee. It provides the employee ample opportunity to seek alternative employment. If the notice period is to provide the employee a chance to find a new job (as suggested in Elms v. Hywel Jones Architect Ltd., supra), then surely an employer, by not requiring attendance at work, is maximizing the notice period’s utility to its employee. From an employer’s perspective, providing notice without having to provide work is a tremendous advantage as: It allows the employer to realize the benefits of salary continuance without the risks; Working notice without work removes the employee immediately from the workplace, thereby avoiding problems of negative morale, poor work performance, or compromises to security or business interests; It avoids a cash crunch by allowing the employer to make periodic payments to the employee; 15 It eliminates the chance of the employee receiving a windfall payment as, if the employee finds new employment, the employer can end the employee’s salary and benefits; It may allow continued benefit coverage during the notice period. This will depend on the actual terms of the contract between employer and benefit provider; and It provides a disincentive for the employee to bring an action during the notice period, as the employee risks a finding he or she repudiated the employment agreement by bringing the action. From an employee’s perspective, working notice without working is likely not as favourable as a lump sum; the working notice removes the possibility of a windfall and is not subject to as favourable tax structuring. For most employees, I would anticipate, it likely is preferable to actually having to attend at work. I have recently seen an expansion in the numbers of employers using working notice without working. I anticipate as more employers adopt this technique, the Courts will be asked to adjudicate on the merits and legality of working notice without work. In particular, I anticipate the issue of reconciling working notice without work and salary continuance will arise. Working notice without work appears substantively the same as salary continuance. The difference is the date the employer says the employment agreement ends – the end of the notice period for the former and the beginning of the notice period for the latter. For an employer to be able to obtain an advantage by electing one method over the other appears to put form ahead of substantive rights. H. Working Notice As A Constructive Dismissal – Change Of Terms During Notice An employer may not unilaterally alter an employee’s terms and conditions of employment during the working notice period. A unilateral alteration of terms and conditions will amount to a constructive dismissal and allow the employee to stop working and to bring an action for damages: Farquhar v. Butler Bros. Supply Ltd. (1988) 23 B.C.L.R. (2d) 89 (C.A.); Suleman, supra. If there is no obligation to provide work during the notice period, removing completely an employee’s duties would not appear to be a constructive dismissal. This was an issue in Suleman where the employer replaced 50 percent of the plaintiff’s duties with other duties. The Court found there was no constructive dismissal. Likewise, in Podas v. Pacific Press Ltd. (1991) 61 B.C.L.R. (2d) 196 (C.A.), the Court rejected the plaintiff’s argument that he had been constructively dismissed. The Court upheld the trial judge’s finding that the plaintiff had retained the core functions of his employment and that 75 percent of his duties had not been removed. So, why is the degree of job change during the notice period relevant if all duties can be removed? The answer may be because even during the notice period a unilateral change to a fundamental term of the employment agreement can result in constructive dismissal. Perhaps, 16 while a complete removal of duties may not be a constructive dismissal, a demotion with its accompanying reduction in status and duties may be. A concern for employers who provide working notice without working will likely be the employee who claims removal of his or her duties is embarrassing or a reduction in responsibility, and as such a constructive dismissal. An employee would make this claim to secure a lump sum payment instead of notice. Employees who claim constructive dismissal and lose are held to have resigned; this is the risk any employee faces when deciding whether to claim constructive dismissal. Another issue for employers who provide working notice without working will be the risk of not being able to continue benefits. Many benefit providers refuse to provide benefit coverage to employees who are not actively attending work. Accordingly, an employer who gives notice without work may have to discontinue the employee’s benefits for the notice period. Depending on the scope and value of the benefits, this discontinuation of benefits may amount to a constructive dismissal. I. Working Notice As A Constructive Dismissal – Insufficient Notice Can the working notice itself be a constructive dismissal? This was the question for the court in Zaraweh, supra. In that decision, the trial judge found reasonable notice was 10 months. The employer had given three months’ notice (which the employer had later unilaterally extended to four months). The plaintiff argued that since providing reasonable notice was a term of the employment agreement, she had been constructively dismissed when the employer breached that term and provided less than reasonable notice. The employer relied on Suleman, supra, for the proposition that the employment relationship was not terminated until the end of the notice period. It argued provision of notice which is less than reasonable cannot therefore amount to an act of termination. The employer also argued that the principle that an employee's employment is not terminated until the end of the notice period, regardless of the amount of notice provided by the employer, was confirmed by both the majority and those in dissent in C.A.I.M.A.W., Local 4 v. British Columbia (Director of Employment Standards Branch) (1993), 80 B.C.L.R. (2d) 337 (C.A.). Chief Justice McEachern, delivering the dissent, said [page 179]: Termination of employment, whether at common law or under the terms of a collective agreement or statute, takes effect not at the date of notice, but rather on the maturity date of the notice unless previously withdrawn. The Suleman Court reached its decision on this issue based largely on the English case of Hill v. C.A. Parsons & Co. [1972] 1 Ch. 305. The Court in Zaraweh reviewed both Suleman and Hill and concluded [at para 27]: 17 Thus, the Suleman case, while saying that the contract of employment is not terminated until the end of the notice period, did so in a theoretical framework which posed the possible repudiatory act of the employer as being a constructive dismissal. The Court then went on to find that the employer’s provision of three (or four) months’ notice was a breach, but not a repudiation of the employment agreement. Given the Court’s finding that the employee repudiated the contract by suing for wrongful dismissal, the Court was left to establish an appropriate remedy. The Court held the plaintiff’s remedy was the difference between the reasonable notice entitlement and the working notice provided; in the case of Zaraweh, the difference between the 10 months found to be reasonable by the trial judge and the three months given by the employer. The Court does suggest that there may still be instances where notice is so unreasonable it amounts to a repudiation. In Zaraweh the Court found there was no intention by the employer to repudiate the agreement and that its offer of three months was “an honest misapprehension” as to its obligations. V. REFLECTIONS ON ZARAWEH I conclude this paper by considering the implications of Zaraweh on employment law, and in particular on the provision of working notice. Zaraweh balances the equities involved in ending the employment relationship by creating the following incentives for employers and employees: An employee is basically obliged to work out a notice period (assuming no other repudiatory conduct by the employer, including provision of a wholly unreasonable notice period). Refusal to work during the notice period is a resignation. Assuming the notice period is not so unreasonable as to be a clear repudiation of the employment agreement (e.g. a two week notice period for a 20 year employee), an employee has an incentive not to bring an action for wrongful dismissal until the end of the notice period. Bringing an action for wrongful dismissal is likely a repudiation of the employment agreement which would allow an employer to accept the repudiation and end the employment agreement summarily. An employer has an incentive to provide notice periods in the range of reasonable notice. Provision of a lesser period exposes the employer to an action for damages. Provision of a wholly unreasonable notice period may amount to a constructive dismissal. Overall, the result of Zaraweh appears to be that those employers who do choose to provide notice should provide notice in the reasonable notice range (or very close to it). Employees will have every incentive to work out the notice period, ideally finding alternative employment prior to the end of the notice period. Actions will be kept to a minimum given the employer’s compliance with its contractual obligations and the risk to the employee of repudiating the employment agreement. 18 APPENDIX “A” – SALARY CONTINUANCE LETTER <Company Letterhead> <Date> Private and Confidential <Employee name> <Employee address> Dear <Employee>: It is with regret that we must inform that <Company> has decided to end your employment effective immediately. We made this decision as <Reason for termination>. Kindly return all company property, including your office keys and company credit cards to us as soon as possible. The company wants to provide you every assistance in your career transition to a new organization and should you require a reference letter or other assistance locating alternative employment, please do not hesitate to ask. As a severance package, and to assist you financially until you find a new job, the company will pay to you your regular salary, less required deductions, for a <Number> month period, until <End date>, subject to you finding alternative employment. If you find and start alternative employment, prior to <End date>, the company will pay you a lump sum payment, less statutory deductions, equal to fifty percent of the salary you would have been entitled to receive from the date you start your new employment to <End date>. <Address benefits issues.> The company is pleased to be able to offer you what we believe is a generous severance package, and one that exceeds what is required by employment standards legislation. You may wish to seek professional advice in this regard. Kindly sign and return the enclosed copy of the Release to confirm that you understand and accept the terms of this offer in full and final satisfaction of any and all claims you may have against the company by no later than <date>. The company wishes you every success in your future endeavours and hopes the transition period to your new organization is a short one. Yours truly, <Signature> 19 APPENDIX “B” –WORKING NOTICE LETTER <Company Letterhead> <Date> Private and Confidential <Employee name> <Employee address> Dear <Employee>: It is with regret that we must inform that <Company> has decided to end your employment effective <End date>. We made this decision as <Reason for termination>. The company will provide you a reference letter to help you find new employment. While the company requires you to actively attend at work until <End date>, the company will accommodate your reasonable requests for time off to attend job interviews during the working notice period. During the working notice period, we require you to take vacation time currently owing. Our records show you have <number> days of vacation. Please contact <Person> to arrange for when you will take vacation. Your full salary and all benefits will continue until <End date>, or until you begin alternative employment, at which time salary and benefits will end. Yours truly, <Signature> 20 END NOTES 1 Unless stated otherwise, all references in this paper to employment agreements are to agreements of indefinite term without express conditions about their termination. 2 Letters in this paper are provided for discussion purposes only. As with all precedents, these letters are inherently generic and should not be used without modification reflecting the specific issues of an individual case. For example, employers should consider whether to mark the letter “Without Prejudice”. Such considerations are beyond the scope of this paper. These letters are not meant to be legal advice and readers should seek legal advice before using these forms of letters. 3 Section 67(1)(a) also invalidates notice given during a strike or lockout. As strikes or lockouts only affect unionized workers, I have not considered these circumstances.
