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When Terminating for Cause, Measure Twice and Cut Once


When Terminating for Cause  Measure Twice and Cut OnceIt is a rare employer who is not aware of its employees’ entitlement to reasonable working notice of termination (or pay in lieu thereof).  At the same time, it also seems to be a rare employer which has a full grasp of the other costs which can arise upon termination.

That is perhaps because most employees who are terminated (on a without cause basis) are owed little more than some pay in lieu of notice at the time of termination.  A smaller category of employees has a range of other entitlements and these can be quite valuable.

The reason for these other entitlements arises out of the law of wrongful dismissal.  It requires an employer to provide reasonable working notice of termination and, during that notice period, to maintain all existing terms and conditions of employment.

If the employer decides to terminate abruptly (without working notice), its obligation is to put the employee in the position he or she would have been in had the working notice been given.  In many cases, that simply amounts to paying out wages equivalent to what the employee would have earned during the working notice period.

But employees who are provided with perquisites of employment such as benefits coverage, a company vehicle for personal use, unlimited use of a cellular telephone, etc. may also be entitled to be compensated for the loss of those items during the notional notice period.  When one of the perquisites enjoyed by the employee is ownership of shares in the company, or an option to purchase shares, the employee’s loss of that entitlement can become very expensive for the employer.

A recent Ontario Court of Appeal decision shows just how expensive the decision to dismiss such an employee can be.  It also demonstrates how important it is to accurately measure the likely costs arising from a dismissal.

Link was a founder of Venture Steel Inc., a steel processor and distributor located in Ontario.  As a founding employee, and Vice President of Sales, Link was also a shareholder and his 90,000 common shares amounted to 9% ownership of the company.

The shareholders agreement, to which he was a signatory, permitted Venture Steel to repurchase Link’s shares for $1 if his employment was ever terminated for cause.  If his employment was terminated without cause, he was entitled to the shares’ full value.

In 2005, Venture Steel purported to terminate Link’s employment for cause.  And soon thereafter Venture Steel was sold for over $43 million – which meant Link’s 9% was potentially worth over $3.2 million.

Link sued for wrongful dismissal and, among other things, claimed the full value of his shares.  The trial judge held that Venture Steel did not have cause to terminate Link’s employment, and awarded him 12 months’ pay in lieu of reasonable notice.

The trial judge also found that the actions purported to be taken to repurchase Link’s shares for $1 were of no legal effect.  As a result, Link still owned his common shares and, as a shareholder of Venture Steel, would have been entitled to participate in the sale of the company.

On appeal, the Ontario Court of Appeal stated that Link could not have been excluded from “the sale proceeds but for the wrongful actions of Venture.  Venture wrongfully terminated Link for causes that were held to be unfounded.”

Link was, in the result, entitled to be paid the $3.2 million for his shares.

The key to this decision, and the part of the potential costs which should have been measured accurately before Venture Steel terminated Link’s employment, was that the “for cause” termination provision required a lawful termination for cause.  That meant that (as proved to be the case) if a court determined the employer’s cause reasons fell short of the legal “just cause” standard, the employer could not rely on the $1 buyout clause.

Misjudging the validity of its just cause reasons was an error which cost Venture Steel well over $3.2 million.  As Bob the Builder would say, they should have “measured twice, cut once”.

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