A Whirlwind Review: Ontario Court Of Appeal Employment Cases 2018 - 2019

The Ontario Court of Appeal has a well-earned reputation of being an extremely hard-working and prolific court. The last 12 months have been no exception. This review highlights the decisions that have emphasized or even shifted key principles of employment law.

1. There is a difference between an individual's rights as a shareholder and as an employee:

   Mikelsteins v. Morrison Herschfield Limited, 2019 ONCA 515 ("Mikelsteins");

   Evans v. Paradigm Capital Inc., 2018 ONCA 952

   This year, the Court of Appeal had no issues distinguishing between an employee's rights as an employee and an employee's rights as an owner of shares. In both these cases, the individual employees also owned shares in corporations that were governed by the terms and conditions of a shareholders' agreement. Once an employee was terminated, the agreements stipulated that the employee was deemed to have issued a Transfer Notice and the former employee's shares were purchased back by the corporation (or by a designated buyer). This type of arrangement is standard.

   The Court of Appeal observed in Mikelsteins that:

   There is a very plain and obvious reason why a corporation, that is employee owned, and which has terminated an employee who also happens to be a shareholder, would wish to commence the process of repurchasing the employee's shares the moment that employee is told of his or her dismissal, rather than at the end of the notice period. Understandably the corporation would not wish an employee to be able to exercise all of the rights of a shareholder once their employment is terminated.1

   Interestingly, the Court of Appeal determined the general prohibition in section 60(1)(a) of the Employment Standards Act, 2000 against altering "any ... term or condition of employment" during the notice period was inapplicable to the individual's rights as a shareholder.2

   This is an important clarification for business lawyers. It will remain to be seen if this approach will also be used for quasi-equity arrangements, such as Phantom Stock Options.

2. Employer can change terms of employment, if the right to change is in the contract

   Manastersky v. Royal Bank of Canada, 2019 ONCA 609

   Variable compensation plans are often at issue in wrongful dismissal case. This case illustrates how important the actual language of variable compensation plans can be.

   Mr. Manastersky was employed by RBC Dominion Securities ("RBCDS"), an affiliate of Royal Bank of Canada ("RBC"), in its Capital Partners unit. Mr. Manastersky was a director of the funds. His responsibility was to find investment opportunities in companies with "positive cash flow". He was awarded participation or "points" in incentive plans that were based on the performance of specific funds or pools of investments, known as "mezzanine investments". He was awarded approximately 50% of the value of the incentive plan, which, in turn, represented approximately 15% of the profitability of the fund.

   In late 2013 or early 2014, a decision was made to pursue these types of investment opportunities directly through the commercial banking arm of the Royal Bank of Canada and not through RBCDS. RBC offered Mr. Manastersky an opportunity to join RBC as "Managing Director, Mezzanine Finance, National Client Group", which Mr. Manastersky declined. It appears that a major friction point was that RBC did not offer the type of participation-based incentive that he enjoyed at RBCDS.3 His earning potential would be significantly reduced.

   The trial judge found that the reasonable notice period was 18 months, which was not challenged on appeal.

   During the reasonable notice period, new mezzanine investments were funded through RBC and not RBCDS. Secondly, RBCDS started winding up its existing mezzanine investments, both by winding up its existing portfolios and ceasing to make new investments. Mr. Manastersky was paid for his allocated "points" in the existing funds, but there was a significant drop in the value of the compensation, as the funds were being wound up and no new mezzanine investments were being funded during the notice period.

   Mr. Manastersky argued that he should be compensated for his "points" during the notice period, even if RBCDS made the decision to wind up its mezzanine investment activities. The trial judge had allocated compensation based on the average incentive over the life of the various funds.

   The Court of Appeal started its analysis with the general principle established in Taggart v. Canada Life Assurance Company, 2006 CanLII 53345 (ONCA); Lin v. Ontario Teachers' Pension Plan Board, 2016 ONCA 619; Paquette v. TeraGo Networks Inc., 2016 ONCA 618:

   The analysis in each of the three decisions proceeded from the general principle that where an employer terminates an employee without cause, the employer is liable for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned during the reasonable notice period.4

   Nonetheless, the Court of Appeal carefully reviewed what Mr. Manastersky would actually have earned during the notice period. It carefully reviewed the terms and conditions surrounding the various mezzanine funds:

1. RBCDS was entitled to "terminate the Plan effective as of the end of any Investment Period with respect to future investment Periods";

2. Points were granted with respect to specific portfolios;

3. Points in specific portfolios or funds were specifically allocated in writing;

4. An employee's status as a participant did not give him "the express or implied right .... to any Points for any future Investment Period".5

   In short, RBCDS had the right to terminate the mezzanine fund (and concomitantly, the value of the participation points in the fund).

   The Court of Appeal distinguished Taggart, Paquette and Lin on the basis that the underlying basis of compensation (pension plan, bonus plan) in those other cases actually continued during the notice period. In those cases, the employer was trying to distinguish between the rights of a terminated employee and rights of an employee actively employed in a manner that the Court considered impermissible

   In the Manastersky case, the underlying investments were wound up and new investments were not being funded. The Court of Appeal found that RBCDS clearly established that it had the contractual right to make these decisions, which would necessarily reduce Mr. Manastersky's variable compensation during the notice period.

   In short, during the notice period, even if Mr. Manastersky had worked out the notice period, he would not have received additional points or compensation in lieu.

   The case points out two important factors:

   I. The Court will look carefully to whether a contractual term purports to treat a terminated employee differently from an employee who is actively at work; and,

   II. The Court will recognize an employer's rights to make business decisions that might impact on an employee's variable compensation, especially if there are clear contractual provisions that preserve this right.

3. Aggressive litigation tactics can backfire - employer side

   Ruston v. Keddco MFG. (2011) Ltd., 2019 ONCA 125

   As young lawyers, we were often warned that if a court views a lawyer's tactics as overly-aggressive, it could backfire. This case and the next illustrate this warning.

   In June 2015, Keddco MFG terminated Scott Ruston, its President...