Canada: Risky Business: Alleging Cause If You Don't Have It

Last Updated: September 27 2019
Article by Mary Lou Brady

So you have a problem employee that you want to terminate. Your employment lawyer reminds you that you would owe nothing to the employee in a "for cause" termination, but that it's unlikely that you could prove cause in the circumstances. She then goes on to assess your common law reasonable notice obligation in a "without cause" termination as being somewhere in the 10 to 12 month range.

You decide to take the risk and terminate the employee alleging cause. You feel that the employee is undeserving of a large termination payout and, in any event, hope that alleging cause will put pressure on the employee to go away or, at the very least, accept something far less than if terminated without cause.

While this strategy may work some of the time, it can also backfire. Below are two case summaries of recent decisions where employers learned the hard way to exercise caution when alleging cause.

Gordon v. Altus1

Altus terminated Mr. Gordon's employment, claiming that it had cause to do so, in an effort to avoid paying the severance amounts to which he was otherwise entitled under his employment contract. Altus did no performance management prior to the termination, and enforced a non-competition provision that prevented him from seeking alternative employment. They also claimed, without merit, that he used an inordinate number of obscenities in the workplace, hired someone accused of fraud, and engaged in a conflict of interest by lending money to a company with which Altus did business.

In the words of Justice Glass, Altus "ran roughshod over [Mr. Gordon] and put together a process to justify their actions after the fact . . . The conduct of [Altus] is outrageous because [it] got mean and cheap in trying to get rid of [him]. . . That appears to me to amount to Altus wanting to have its cake and to eat it. Now, there is no free lunch in this world and Altus cannot expect to have one."

It turned out to be a very expensive lunch indeed! Mr. Gordon was awarded his contractual entitlement to severance ($168,845), plus punitive damages in the sum of $100,000.2 Subsequently, Mr. Gordon was also awarded legal costs on a partial indemnity scale in the amount of $262,722.3

Ruston v. Keddco4

Keddco learned an even more expensive lesson when it told its President, Mr. Ruston, that he was being terminated for cause and further that he had committed fraud. No specifics were provided, even after Mr. Ruston asked.

Mr. Ruston was 54 years old and had worked for Keddco for 11 years at the time of his termination. His average annual earnings were $278,000. His highest level of education was grade 12, the majority of his work experience was in sales, and he was tied to remaining in the Sarnia area for family reasons. He was offered no Separation Package.

When Mr. Ruston indicated that he would be hiring a lawyer, Keddco threatened a counterclaim that would be "very expensive". Mr. Ruston sued for wrongful dismissal and, as threatened, Keddco counterclaimed in the amount of $1.75M for unjust enrichment, breach of fiduciary duty, fraud and punitive damages.

After an 11-day trial, the trial judge found that cause did not exist. Keddco failed to prove any of the serious allegations made against Mr. Ruston. The trial judge also found that the termination had been devastating on Mr. Ruston. The publicly-made allegations of "financial fraud would follow him on his career path for the rest of his life." With the exception of a short 3-month stint of employment, he was still unemployed as of the trial (i.e. almost 3 years after termination). He had to sell his house for under market, access his pension funds and return his leased vehicle early – all in order to support himself after being terminated by Keddco.

The trial judge also found that Keddco's counterclaim had been "a tactic to intimidate" Mr. Ruston to drop his wrongful dismissal action. Further, its behaviour in the legal proceedings caused unnecessary delay, increased legal costs and stress. Among other things, Keddco introduced a list of 25 witnesses that it intended to call at trial, but ultimately only called 2. It introduced a lengthy book of documents, many of which were never relied upon at trial. No evidence was even led on certain of the alleged grounds of cause – including the alleged poor performance and disbursement of company funds for his own personal benefit – which were then dropped after the trial completed.

As such, Mr. Ruston was awarded 19 months of salary, bonus and benefits ($480,000), plus punitive damages in the sum of $100,000, plus aggravated damages of $25,000. Subsequently, Mr. Gordon was also awarded legal costs on a substantial indemnity scale in the amount of $546,685.5 On appeal, the Ontario Court of Appeal upheld all aspects of the trial court decision and awarded a further $35,000 of legal costs be paid to Mr. Gordon in respect of that appeal. 6

So What Are the Takeaways for Employers?

  • Simply put, don't allege cause without a reasonable basis for doing so. It could very well cost you more in the long-run than providing the employee with his/her without cause termination entitlements. This is because, among other things:
    • Alleging cause will make it undoubtedly more difficult for the employee to obtain replacement employment – especially if the allegations becomes publicly known. This will, in turn, increase the likelihood that the employee will commence a legal action for wrongful dismissal and, if you are unsuccessful at trial, increase the wrongful dismissal damages for which you will be responsible.
    • Alleging cause, especially without a reasonable basis, will cause significant stress and financial hardship for the employee. You may find that you are ordered to pay an award of punitive and/or aggravated/moral damages, the amount of which may be significant depending upon the circumstances.
    • Alleging cause will also significantly increase the complexity, time and costs of the legal proceedings to everyone involved.
  • Cause is a high bar for most employers to establish. It is possible that, in the right circumstances, one serious incident or series of incidents could be cause; however, it would need to be so egregious in nature that it undermines the viability of an ongoing employment relationship (e.g. rehabilitation would not reasonably be possible). More often than not, before terminating for cause, the employer must have gone through a fair and well-documented progressive disciplinary process, which includes, among other things, making the employee aware of concerns as they arise, giving the time and resources necessary to support improvements and, most importantly, clearly warning the employee that their job is in jeopardy if sustained improvements do not occur. Even then, as frustrating as it may be, it is not uncommon for our courts to find that cause did not exist.
  • Do not wait to deal with performance, attendance, behavioural, etc. issues until you have had enough and want the employee gone NOW! At that point, it is generally too late to build a case for termination for cause.
  • Have an employment contract for each employee that includes a properly drafted, enforceable "without cause" termination provision, which limits entitlements to something less than full common law reasonable notice.7 Often employers go down the cause route, in part, because they are shocked by how much the employee may be owed under common law in a "without cause" termination. Employers who have good "without cause" termination provisions often instead elect to terminate without cause, rather than face the time, expense and other risks associated with the cause route.
  • Finally, if you have already alleged cause and then realize that you won't be able to prove it, work with your legal counsel to determine the best strategy for when – assuming it will be a "when", not an "if" – to drop the cause allegations.

Footnote

1 2015 ONSC 5663.

2 The court set punitive damages at this amount "because that sum of money notes the harsh treatment to [Mr. Gordon] over an extended period of time as a means of sanctioning Altus for its terrible conduct."

3 Gordon v. Altus, 2015 ONSC 6642. Note: Further legal costs of $23,576 were awarded to Mr. Gordon in 2017 following Altus' abandonment of a motion to introduce fresh evidence a part of its appeal: Gordon v. Altus, 2017 ONSC 3470.

4 2018 ONSC 2919.

5 Ruston v. Keddco, 2018 ONSC 5022.

6 Ruston v. Keddco, 2019 ONCA 125.

7 Note that such provisions would not be legally enforceable in Quebec. However, in all other Canadian provinces, such provisions can be used to effectively limit an employee's termination entitlements to only the minimums required under the applicable employment standards legislation in the employee's province of employment. Such minimums are generally far lower than common law reasonable notice. Even where the employer and employee agree on a termination provision that is greater than the applicable statutory minimums (e.g. 2 or 3 weeks per completed year of service, subject to a minimum of 1 month and a maximum of 12 months), the termination provision is still generally below what a court may award for common law reasonable notice.

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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