Wrongful dismissal cases often lead to debate over the legality of a severance formula set out in an employment contract. In most cases, the former employee argues the severance formula should be disregarded while the employer argues for keeping it.
In some instances, the law reveals that the severance formula can’t be enforced. For example, this happens when the formula provides for notice (or pay in lieu) at a level that does not meet the statutory minimums in the applicable employment standards legislation. It also happens when significant changes to the employment relationship have occurred since the contract was signed.
A third instance which can make an employment contract unenforceable is when the agreement itself can be said to be unconscionable. This happens when there has been an inequality of bargaining power. In other words, the stronger party has used its bargaining power to achieve an advantage over the other, so the resulting agreement which is substantially unfair to the weaker party.
But just because the terms of a contract may be onerous to one party or the other is not a basis for concluding the agreement is unconscionable. In fact, a recent B.C. Supreme Court decision tackled such a scenario.
John Finlan was hired by Ritchie Bros. Auctioneers as its Chief Information Officer in 1999. When they hired him, Ritchie Bros. provided Mr. Finlan with an employment contract containing a clause calling for notice of termination equivalent to that set out in BC’s Employment Standards Act.
Mr. Finlan was surprised by the requirement to sign a contract, but was given time to review the contract at home before signing it. Ultimately, he provided the signed contract to Ritchie Bros. before starting employment with them.
Roughly five years later, Ritchie Bros. terminated Mr. Finlan’s employment. He sued for wrongful dismissal, claiming pay in lieu of notice according to the common law of employment. The basis for his claim was his view that the severance clause in the employment contract was unconscionable and, therefore, unenforceable.
The Court then restated the elements which must be present in order to find that a contractual term is unconscionable:
- there must be an inequality of bargaining power between the parties
- the stronger party must have used its bargaining advantage; and
- the result must be an agreement which is substantially unfair to the weaker party.
It is crucial to remember that these three elements of unconscionable agreements are conjunctive – they must all exist for the agreement to be unconscionable.
The Court determined the agreement between Mr. Finlan and Ritchie Bros. was not unconscionable. It noted he was an experienced IT manager familiar with the industry, he was not in a vulnerable position when he accepted employment: any pressure he might have felt to sign the contract didn’t originate with Ritchie Bros., and they did not in any way coerce him to signing the contract.
Notably, the Court stated that it is not the employer’s obligation to point out the strengths and weaknesses of each contractual term in the contract of employment. It is sufficient if the employee has time to review the contract on his own, in the absence of any influence from the prospective employer, and has the opportunity to seek out advice about the implications of the contract.
The Court concluded that the terms of the contract were clear and unambiguous, Mr. Finlan signed the contract with full knowledge of what was being offered, and he did so without any form of pressure from Ritchie Bros. As a result, Mr. Finlan’s claim for damages under the common law was dismissed.
However, this case brings up an interesting side-note. Notwithstanding the clause in Mr. Finlan’s contract calling for only five weeks pay in lieu of notice, Ritchie Bros. actually offered (and paid) Mr. Finlan six months’ salary upon termination of his employment.
Even this gratuitous payment wasn’t enough to dissuade Mr. Finlan from suing (and claiming Ritchie Bros. had treated him with bad faith!). It just goes to show that, sometimes, even treating people with civility, courteousness and professionalism isn’t enough.
- Managing The Risk of Constructive Dismissal
- When is a Quit Not a Quit?
- Severance packages: What’s Fair?