A recent decision from the British Columbia Supreme Court (“BCSC”) in Klyn v Pentax Canada Inc[Klyn], emphasizes the crucial role of employer conduct throughout the termination process. Klyn demonstrates how improper actions can invalidate otherwise enforceable termination clauses.

Background

The employee first began his employment with the employer as an independent contractor in 2001, before becoming an employee in 2007 and signing an employment agreement. His compensation was entirely commission-based, and the agreement included a generous termination clause entitling him to the greater of the minimum entitlements under the British Columbia Employment Standards Act [ESA] or four weeks per completed year of service prior to signing the agreement, plus four weeks per year of service as an employee, up to a maximum of 18 months. His compensation was defined as the average of commission payments paid in the last two fiscal years prior to termination.

In 2014, the employer changed the employee’s compensation structure to a salary of $100,000 with new commission rates. His employment was terminated without cause in April 2022, with a termination letter that included a full and final release imposing several conditions, including a monthly duty to report mitigation efforts and a requirement to sign a release within seven days in order to receive the termination entitlements. Following the termination, the employer failed to pay the employee commissions and only provided payments for his base salary between April and July. In July, the employer ceased paying the employee altogether, presumably due to the employee’s failure to report on his mitigation efforts, although the employer raised no issues with the employee’s mitigation efforts.

Decision

The BCSC found that employer repudiated the employment contract through its conduct post-termination. It was evident that the employee was entitled to commission payments as part of his termination pay and the employer failed to explain why the employee was not paid any commission during the notice period.

The employer’s failure to continue payments required under the termination clause was also found to constitute conduct that clearly breached and repudiated the employment contract. Repudiation refers to situations where a party’s breach of a substantial term of the contract gives rise to the other party’s right to terminate the contract and pursue available remedies.

In this circumstance, the BCSC found the employee was entitled to common law notice as a result of the employer’s repudiation. The BCSC awarded the employee $469,166.12, which represented a considerable increase from the defined method of averaging his last two years of earnings that was set out in his employment agreement. In calculating the award, the BCSC determined that his income was not reflective of what he would have earned, as one of the products he sold faced performance issues and multiplied the employee’s average earnings in the past two years by 1.5 to determine his common law notice. 

Additionally, the BCSC ordered the employer to pay $25,000 in punitive damages for their cumulative conduct collectively warranting the damages award.

The most concerning aspect of the employer’s conduct was requiring the employee to sign a full and final release within seven days in order to receive his termination entitlements. The BCSC found this language implied that any entitlements under the employment agreement were conditional on signing the release, even if the employer continued payments after the employee failed to sign. The language was designed to exploit the employee’s uncertainty during termination to extract concessions solely benefiting the employer. Besides the language in the release, the employer stopping notice of termination payments added to the collective conduct that warranted punitive damages. The employer also failed to provide the employee with timely access to his deferred profit-sharing plan.

Takeaways for Employers

Employer Conduct can Invalidate Termination Clauses

Klyn underscores the importance of employers acting in good faith throughout the termination process. Failing to do so can lead to a court finding that the employer has repudiated the employment contract and entitle the employee to common law notice even in circumstances where there may otherwise be an enforceable termination clause. In this case, the court found that the employer’s actions—including the failure to pay out the employee’s termination entitlements and implying the termination entitlements were contingent on signing a full release —demonstrated a repudiation of the employment contract, rendering the termination clause unenforceable.

Proper Drafting of Termination Letters

Employers should be aware of the importance of meticulously drafting termination letters to ensure an employee’s statutory entitlements are not affected. Termination letters must clearly state that statutory termination entitlements will be paid out and must not be or appear to be contingent on any requirements. Any language suggesting that an employee might not receive their termination entitlements can be interpreted as bad faith behaviour by the courts.

Consequences of Bad Faith Actions

The case illustrates the severe consequences of bad faith actions by employers. In addition to substantial damages for common law notice, punitive damages can also be awarded. Employers should take heed of this decision to avoid similar pitfalls by ensuring fairness and transparency in all employment practices, particularly during termination.

The Klyn decision serves as yet another reminder for employers about the importance of acting in good faith, especially throughout the termination process and the potential repercussions for failing to do so. By adhering to these principles, employers can avoid potential situations where they cannot rely on otherwise enforceable termination clauses because of their conduct.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.