Being Clear about Contractual Rights and Obligations Benefits Employers
A recent case out of Ontario demonstrates the importance of incorporating precise, unequivocal terms in an employment contract. In Kielb v. National Money Mart Co., 2015 ONSC 3790, the defendant employer successfully relied on clear contractual language in order to exclude the payment of a bonus at the time of termination of employment.
In December 2008, the plaintiff was hired as the defendant’s Vice President and Division General Counsel. Prior to starting employment, he engaged in a series of discussions and negotiations with the defendant regarding the employment contract. The plaintiff felt the base salary offer of $170,000 was too low. The defendant assured the plaintiff that any deficiencies in his salary would be offset through participation in the company’s bonus program. The program allowed an employee to receive an additional 30 to 60 percent of his or her salary each fiscal year depending on company performance. The plaintiff was told that the bonus program historically provided a return of 45 to 50 percent of salary.
The plaintiff’s employment contract contained a limitation clause, which included the following paragraph:
Any bonus which may be paid is entirely at the discretion of the Company, does not accrue, and is only earned and payable on the date that it is provided to you by the Company. For example, if your employment is terminated, with or without cause, on the day before the day on which a bonus would otherwise have been paid, you hereby waive any claim to that bonus or any portion thereof. In the event that your employment is terminated without cause, and a bonus would ordinarily be paid after the expiration of the statutory notice period, you hereby waive any claim to that bonus or any portion thereof. You also hereby waive any claim to constructive dismissal based on the fact that a bonus is not paid, is less than was previously paid, or is less than is paid to another employee.
The employment contract also contained an entire agreement clause purporting to exclude any other oral or written agreement. The plaintiff testified that he was “surprised” at the “harsh and unnecessary” language in the limitation clause. In spite of this, the plaintiff had accepted the offer of employment.
When the plaintiff was dismissed in April 2010, the defendant offered him a severance package consisting of two weeks of statutory termination pay plus six weeks of salary. This was contingent upon the signing of a full and final release in favour of the employer. The defendant did not pay the plaintiff a bonus as he would not have been an employee on the date of the upcoming bonus payment (September 2010). The plaintiff refused to sign the release and sued for damages in respect of his bonus, arguing that the limitation clause was contrary to public policy, was inconsistently applied and/or was ambiguous, contradictory and illegal.
The Ontario Superior Court of Justice found that the defendant employer had held out the bonus as an incentive for the plaintiff to accept its job offer and, as such, it formed an important part of his overall compensation package. The entire agreement clause did not have the effect of excluding the discussions about the bonus. The Court held that the parties did not intend the discussions to be excluded from the contract and, even if they did, such exclusion would be unconscionable in the circumstances of the negotiations and the exclusion would be unenforceable on public policy grounds. The Court stated that it “ill serves the public interest to permit companies and their recruitment agencies to orally promise automatic financial benefits and bonuses in order to secure prospective employment candidates and then eliminate those benefits without a clear and timely warning”.
Despite the fact that the bonus program was an integral part of the plaintiff’s compensation package, the Court held that the limitation clause was not ambiguous. It effectively excluded the plaintiff from participation in the bonus program for the 2008 to 2009 year as he was not an employee when the bonus was due to be paid.
The Court relied heavily on the clear and explicitly restrictive language in the limitation clause and, in particular, the example provided. The Court noted that the plaintiff testified about the severity of the clause but had chosen to sign the contract anyway.
The plaintiff argued that the limitation clause was inconsistently applied, as the defendant had provided another dismissed employee with the bonus in similar circumstances. The Court found this argument unpersuasive, especially in light of the fact that the other employee’s contract did not contain the same limitation clause as the plaintiff’s contract. As well, the Court held that the defendant was not prohibited from treating the two employees differently as long as it acted in good faith.
The Court stated that the contract was “both enticing in its promises and cruel in its execution”. It went on to say, “[P]ublic policy would be ill served by permitting the plaintiff to accept a potentially lucrative position with the full knowledge that it contained a potentially unfavourable limitation clause and then to complain when that clause was actually executed.”
Lessons for Employers
- Language is key! An expressly restrictive clause in an employment contract can be enforced if the language is unambiguous and both parties were aware of the terms to which they were agreeing.
- Be cautious during negotiations. Inclusion of an entire agreement clause in an employment contract may not be sufficient to bar previous oral or written representations or statements from forming part of the contract.