Employment contracts can keep disputes out of court

People who work in businesses in which big risks can bring big rewards can lose much more than a salary when they lose their jobs. Terminated employees looking to recoup those losses through litigation may find that the courts can be unpredictable when it comes to their rights.

While some employment lawyers suggest that courts typically look for ways to compensate people who’ve been fired, often because of their vulnerable positions, that’s not always the case. (See story, above.)

A recent decision from the On-tario courts underlines this point. Kenneth Mathieson was dismissed from his job as an investment banker at Scotia Capital Inc. in 2007 after three decades of employment. The termination followed a dispute about his bonus: he had earned a bonus of $1.1 million in 2005, but only $360,000 in 2006. While Mathieson had insisted he was entitled to more, the bank disagreed, eventually showing him the door. Mathieson sued for wrongful dismissal, claiming pay in lieu of notice equivalent to 32 to 36 months’ pay.

The court concluded that 24 months was appropriate. But the main issue at trial was how to value Mathieson’s bonus entitlement for the notice period.

The court reviewed several evaluation measures, including: Mathieson’s bonuses for the past seven years; the size of all bonuses awarded in his group in the three years prior to termination; and a three-year running average of bonuses in 2004, 2005 and 2006. After concluding that the 2006 bonus was not out of line with the bank’s policies, the court awarded Mathieson a $460,000 bonus for each year of the notice period.

Janice Rubin, a partner at employment law firm Rubin Thomlinson LLP in Toronto, notes that some cases dealing with the bonus issue use historical averages: “The challenge now is that you are looking at bonuses at a time when we are coming out of very rough markets. For people in this industry, with compensation that is not fixed, the evaluation of it remains a tricky issue.”

That is one reason why it’s prudent to enter into an employment contract at the beginning of the relationship, even though, like a prenuptial agreement, it may seem uncomfortable. Employees and employers can be reluctant to enter such contracts, Rubin notes, especially if the employee is being wooed.

“It’s great to enjoy the courtship. But don’t forget that some relationships end in divorce,” she cautions. “You should plan for the divorce at the beginning of the marriage. And that means dealing with variable parts of your compensation in a very mindful way.”

Especially large losses can occur on termination, when the employee has equity in the employer company. A recent case from the Ontario Court of Appeal dealt with an employee, William Link, who had helped establish a company, Venture Steel Inc., in the mid-1990s. Link, who worked in marketing, was vice president of sales in 2005. In 2004, the executives of the company had entered into a shareholders’ agreement that gave Link about 9% equity in the company.

The agreement stated that if a shareholder was terminated for cause, his shares would be valued at a total of $1 and purchased by another shareholder. If there was no just cause, the shares would be assessed at their net book value.

Link was fired for cause in 2005, with allegations of misconduct ranging from excessive drinking to theft. A year later, the company was sold for $43.5 million.

Link sued — for the most part, successfully — collecting more than $4 million. Just cause, which is generally difficult to prove, was not shown. Link received 12 months pay, $550,000, in lieu of notice. But the court also held that decisions made after the improper decision to fire for cause were invalid. As a result, Link collected an additional $3.2 million for his shares and $530,000 for interest on the value of other shares under an option agreement.

While it’s difficult to anticipate how these kinds of relationships unravel so quickly and so completely, Brian Smeenk, a partner with Fasken Martineau Dumoulin LLP in Toronto, suggests that including more detail in employee contracts can be helpful. “Rather than relying on the court to say what is just cause,” he says, “you can contractually define what ‘just cause’ will be. You can set out in great detail as to what circumstances will amount to cause that would disentitle the employee to the rich severance package.”

Ultimately however, an employee who believes that he or she has been unjustly accused, as Link did, will have to resort to a court or, perhaps, an arbitrator.

Just cause is almost always difficult to prove, Smeenk adds: “It’s important that [employers] have solid evidence. If you are going to allege just cause, you have to make sure that you have done your homework. You have to be able to prove the allegation, and that the conduct alleged is serious in nature. Often, [employers] fail on one of those two.”