Canada: You Raise The Issue - Compensation And Terminating Executives

Question: Our company is considering terminating a longterm, senior executive. What is our maximum financial exposure?

Answer: Twenty four months has generally been considered to be the upper limit for reasonable notice of termination without just cause. However, in a recent Ontario case the Court awarded a relatively short-term employee damages in an amount equivalent to 30 months salary and benefits.

The Plaintiff in this case was Mr. Kilpatrick who had previously been employed as the President at the Moncton Hospital. He had worked for that organization for about 29 years and was secure in his position. The Peterborough Civic Hospital actively recruited Mr. Kilpatrick and eventually persuaded him to relocate and accept the position as Chief Executive Officer with their organization.

About six years later the Peterborough Civic Hospital terminated Mr. Kilpatrick's employment and he sued for wrongful dismissal. While Mr. Kilpatrick's employment of six years was not overly lengthy, the Court put great emphasis on the fact that Mr. Kilpatrick was induced away from a long-term secure position with his former employer. The Court concluded that

during the recruitment process the Peterborough Civic Hospital led Mr. Kilpatrick to believe that his employment with them would be long-term. The Court also noted that Mr. Kilpatrick's chances of obtaining a similar position elsewhere were slim given the restructuring and downsizing that was taking place in the Ontario health care sector. As a result of all of these factors the Court ordered the Hospital to pay Mr. Kilpatrick 30 months salary and benefits even though he had been employed for only six years.

There are two important lessons for employers from this case. Firstly, employers are reminded that improper terminations carry with them the risk of huge financial losses. As a result, employers must carefully plan terminations and obtain appropriate advice. Secondly, an employer's financial exposure from a termination is much larger where an employer utilized a "headhunting" approach and convinced an employee to leave their current secure, long-term employment.

The easiest and most practical method by which employers can manage the financial risk of termination is by utilizing written employment contracts with their employees. "Reasonable notice" of termination is generally only required where there is no employment contract which specifies the amount of notice or severance pay upon termination. Peterborough Civic Hospital would have avoided the damage award of 30 months salary and benefits if it had agreed with Mr. Kilpatrick prior to his employment on the amount of severance to be paid in the event of termination. It is always advisable for employers to utilize written employment contracts especially for senior staff. However, an employment contract is even more useful in managing risk when employers are actively trying to convince an individual to leave their current employment to join them. In these circumstances, if both the individual and the company agree on the amount of severance which will be paid in the event of termination then the company will avoid the types of claims which were advanced by Mr. Kilpatrick.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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