HAMILTON EMPLOYMENT & DISABILITY LAWYERS

Executives and Termination for Just Cause

By Matt Lalande in Executive Terminations on December 18, 2020

At common law, employers can terminate executives for just cause following serious misconduct or neglect by the executive that fundamentally undermines the employment relationship.  Just cause for termination arises when the employee’s misconduct gives rise to a breakdown of the employment relationship. There is no fixed rule as to the degree of misconduct required to justify a dismissal for just cause. Everything is fact based.

The degree of misconduct required varies with the facts and the particular employment circumstances. Misconduct arising in one employment context might justify termination, while it will not in a different employment context. Normally, an employer will be entitled to justify termination for cause if the employee violates an essential condition of the employment contract, breaches the trust/faith that is inherent in the working relationship or is fundamentally or directly inconsistent with the employee’s obligations to the employer.

Executives and Termination for Cause

Executive employment contracts often expand on the common law grounds for just cause. While these additional grounds may still amount to just cause at common law if they are not included in the employment contract, employers may include them for additional certainty and to identify issues that are key to carrying out the particular executive role.  Common grounds of “alleged” cause in executive employment contracts include:

• Willful failure to follow lawful instructions from a board of directors. (the contract may provide for a requirement that the executive is notified of this failure and is provided an opportunity to correct it);
• Theft;
• Fraud;
• Dishonesty;
• Gross incompetence;
• Harassment;
• Breach of warranties and covenants made in the executive employment agreement;
• Breach of a fiduciary duty owed to the company;
• Conviction of a criminal or other statutory offence (with exceptions for minor offences like traffic violations);
• Violation of securities legislation or stock exchange rules;
• Loss of a defined certification or immigration status. For example, inability to enter Canada for the purposes of performing contractual duties;
• Inability to perform duties due to a legal restriction, such as an injunction ordered against the executive;
• Failure to complete a defined action. For example, failure to relocate to a defined work location within a specified period;
• Racism or demeaning language;
• Publicly demeaning the company’s good will (for example, on a news report or interview).

Good and Bad Leaver Scenarios

We often classify executive termination as either good leaver or bad leaver scenarios.

In many executive employment contracts, the potential circumstances of the executive’s departure are heavily negotiated. Executives may be entitled to significant termination entitlements, but their contracts typically limit the types of termination that will trigger compensation.

These arrangements are sometimes referred to as “good leaver” and “bad leaver” provisions, though those terms are typically not used directly in the written agreement. Instead, agreements elaborate on a variety of circumstances in which employment might end and describe the executive’s termination entitlements in those events.

Good-leaver provisions generally provide for greater termination entitlements where the executive departs through no fault of their own, including through:

• the executive’s death or permanent disability;
• termination by the employer without cause; or
• termination by the executive for “good reason” in response to an employer-initiated fundamental change to employment conditions or compensation.

Just cause is a simple bad leaver scenario. Aside from compensation already earned at the date of termination, if terminated for cause, the executive is typically is not owed further compensation unless the parties have contracted otherwise. The executive will typically not be owed common law reasonable, and typically will not be owed minimum statutory notice or severance pay. Executives usually forfeit unvested entitlements to bonuses and equity compensation. Just cause can be difficult to prove, and a strong case is needed before alleging it.

Who has the onus of proving cause?

The onus of proving just cause is on your employer – and – is not always an easy thing to do. Where the employer seeks to rely on the defensive just cause, the onus then shifts to the employer to prove just cause for termination. Evidence is assessed on a simple burden of proof (i.e. the balance of probabilities).

The consequences of the failure to prove just cause can be disastrous for an employer. It’s important that the employer seriously consider whether it has credible and sufficient evidence to allege just cause in its defence of a wrongful dismissal action. Also, using just cause as a negotiating ploy, or pleading just cause without factual foundation will open up the door to substantial liability in the form of moral damages or punitive damages. In short, your employer cannot pretend to rely on just cause as a ploy to terminate you and if it does, it can expose itself to substantial extra contractual damages.

 Can an executive be terminated for a single incident of misconduct?

Normally no, but sometimes yes. Depending on the severity of the misconduct, a single incident may justify the termination of your employment. However, normally a pattern of misconduct is required to justify termination for cause. The single incident must be so severe that it causes an error parable breakdown of the employment relationship.

Single incident terminations for cause are often difficult to appreciate for both plaintiff and defence counsel. Employers may jump the gun and seek to rely on a single incident to justify termination for cause if that employer was already “looking” for reason to terminate that executive.  In other circumstances, the severity and nature of the misconduct can breach the trust or faith that is inherent in the employment relationship or that is fundamentally inconsistent with the employee’s obligations to the company.

There have been many cases where Court have upheld terminations for cause based on a single incident, for example,

• when that employer jeopardized the safety of other employees;
• accessed very sensitive company or employee information without permission;
• the executive were being sneaky and soliciting business for a competitor;
• securities violations and insider trading;
• serious sexual advances;
• lying about their qualifications;
• using racially demeaning language and;
• failing to follow direct instructions from the Company’s Board of Directors.

Are you an executive in Ontario who’s been terminated for cause?

Employers are often misguided and engage in conduct harmful to its interests by terminating executives for cause. Terminating an executive for cause will deprive that senior executive with his or her minimum standards entitlements, common-law entitlements, contractual entitlements, salary, bonuses, equity compensation, health benefits, fringe benefits and any other compensation provided by contract which the executive would be entitled to if he or she were terminated without cause.

Remember, the termination of an executive for cause must be proven on a balance of probabilities. If your company is unable to prove your termination for cause it may lead to increased liability risk. Terminations conducted in a manner that is misleading, insensitive or takes advantage of the executive’s vulnerable position may lead to a claim for moral or punitive damages. Also, terminating an executive based on any type of characteristic protected by the human rights legislation can lead to that executive claiming for reinstatement or damages under the human rights code.

Also, termination aimed at punishing executives for asserting workplace rights (called reprisals) are prohibited. If you have been terminated for raising health and safety issues, raising harassment or human rights issues, or reporting illegal practices under whistleblower rules, the onus will then be on your employer to prove that your termination was conducted in good faith and not for a prohibited reason which could be extremely difficult to do.

If you are an executive who is been terminated, call us today. We would be happy to review your situation and determine if we can help.

To learn more about how we can help you, call Lalande Employment Lawyers today, local in the GTA in Hamilton area at 905-333-8888, or send us an email through our online contact form.