A recent court decision has changed some conventional thinking on what an employer may and may not do when giving employees notice of termination. In Allen v. Ainsworth Lumber Co. Ltd., an employment contract that promised an employee 15 months’ notice of termination of employment, or pay in lieu of notice, was strictly interpreted. As a result, when the employer informed the employee he would be terminated in 15 months but relieved the employee of his duties immediately (while maintaining the employee on payroll and full benefits), the court said that the employee had really been immediately dismissed and ordered the company to pay him the full 15 months’ severance even though that employee had accepted the salary continuance payments for a full eight months before he accepted another job.
The facts of this case are as follows: Robert Allen was hired as Ainsworth Lumber’s CFO in 2003 and in May 2008, the parties amended Mr. Allen’s employment contract to include the above-noted termination provisions. In October 2009, Ainsworth informed Mr. Allen that his employment would terminate in 15 months, on January 13, 2011. The letter also instructed Mr. Allen that he was not to report for work and should instead focus on the search for new employment. Mr. Allen was also required to return all company property and his access to company telephone, email and voicemail was terminated. The following day, the company publicly announced that Mr. Allen had left the company and that a new CFO had been hired to start on November 2, 2009. Mr. Allen was ultimately able to secure a new position in June 2010, at which point Ainsworth terminated the salary and other benefits that Mr. Allen had been receiving up to that point.
At trial, Mr. Allen argued that by relieving him of his duties, Ainsworth terminated his employment on October 14, 2009. In defending the claim, Ainsworth argued that sending an employee home while on full salary and benefits (often called “garden leave”) properly fell within what was meant by working notice. Thus, given that it had offered Mr. Allen 15 months’ working notice and because Mr. Allen found a new position in June 2010, the company’s obligations to him came to an end at that time. Ainsworth further argued that, at most, the company’s decision to send Mr. Allen home amounted to constructive dismissal which meant that Mr. Allen had an obligation to mitigate any losses that might ensue by (1) accepting the salary and other benefits from Ainsworth while he was looking for new employment, and (2) accepting a new position at another company.
In concluding that Mr. Allen had been wrongfully terminated on October 14, 2009, the Court relied on the facts that Ainsworth had relieved Mr. Allen of his duties, terminated his access to the company’s communications networks, and had publicly announced that he had left the company. The court stated that “it seems abundantly clear that Mr. Allen no longer worked for Ainsworth at least in the ordinary sense of the concept.”
Other arguments made by Ainsworth that were rejected by the Court included:
- that Mr. Allen had accepted the change to the scope of services he was to provide the company by accepting salary and benefits after October 14, 2009 – the Court noted that there was no evidence to suggest that Mr. Allen had accepted the revocation of his duties and exclusion from involvement in the company;
- that the October 14, 2009 letter did not constitute notice of termination because it was not clear and unequivocal (i.e. the letter stated clearly that Mr. Allen’s employment would be terminated on January 13, 2011) – the Court held that the principles requiring a termination to be clear and unequivocal cannot be used as a defense by an employer who creates ambiguity through its own words and conduct; and
- that if Mr. Allen was constructively dismissed (because Ainsworth relieved him of his duties), he was obliged to mitigate his loss arising from the dismissal, which he did by accepting the payments from Ainsworth and finding alternate employment; as a result, Mr. Allen had not suffered any loss. In response to this, the court stated that, once it had decided that Mr. Allen had been actually terminated on October 14, 2009, the doctrine of constructive dismissal did not apply, plus the contractual promise of 15 months’ pay in lieu of notice did not require Mr. Allen to mitigate his loss.
As Mr. Allen had been wrongfully terminated, Ainsworth was required to pay Mr. Allen in lieu of the 15 months’ notice, in accordance with the contract terms. The Court then made the following findings.
- Mr. Allen was entitled to receive salary and benefits for the full 15-month “pay in lieu” period in accordance with the terms of his contract.
- In the absence of a contractual duty to mitigate, Mr. Allen was not required to take steps to reduce his losses and so Ainsworth Lumber was only entitled to deduct salary and other benefits that it had actually paid to Mr. Allen, and could not reduce the amount to be paid by the salary and other benefits that Mr. Allen received in his new position.
- Mr. Allen was entitled to receive bonuses in respect of the 15-month period. Even though the company’s bonus policy stated that bonuses were discretionary, Mr. Allen had received a bonus in each year of his employment other than one year when, due to the company’s financial position, no-one received a bonus. Since bonuses were a significant part of Mr. Allen’s compensation, they were a component of the 15 months’ “pay in lieu” promised under the employment agreement.
- Mr. Allen was not entitled to stock options as there was no evidence that such options were an integral part of his compensation package. Ainsworth started granting options in 2008 and had only given Mr. Allen stock options on one occasion in recognition of his extra service as the company’s interim CEO.
The Court also held that Mr. Allen was entitled to be compensated for the 65 vacation days that he had accumulated, but was unable to take, before his termination. Ainsworth had refused to compensate Mr. Allen for the lost vacation days, arguing that a company policy precluded such recovery. In February 2007, the company adopted a policy that provided that vacation days could not be carried over from year to year without company approval. In rejecting the company’s efforts to enforce the February 2007 policy to deny this aspect of Mr. Allen’s claim, the Court held that this policy reflected a significant change in the company’s position regarding vacation days and that this significant change had not been clearly communicated to the company’s employees, including Mr. Allen. The Court also noted that the company’s period of crisis and restructuring made it difficult for employees in the finance department, such as Mr. Allen, to take their vacation days.
However, Ainsworth was successful in defending one of Mr. Allen’s claims. Mr. Allen claimed he was entitled to an additional five weeks’ salary to represent the vacation time that he would have received had he been working over the 15-month period. The court confirmed earlier decisions that terminated employees are not entitled to damages for lost paid vacation time in addition to pay in lieu of notice. Had Mr. Allen continued working at Ainsworth during a 15-month working notice period, he would have been entitled to five weeks’ vacation during the 15-month work period. Thus, once the full 15 months’ salary was paid, Mr. Allen was not entitled to receive further amounts for vacation pay.
What lessons can employers learn from this decision?
- The decision to send an employee home on salary and benefit continuance during a termination notice period may result in a finding of immediate dismissal, entitling the employee to an immediate payment of damages. Thus, if an employer wishes to use “garden leave” as a form of working notice, it should specifically say so in its employment contracts.
- If an employment agreement says that the employee is entitled to “pay in lieu” for a prescribed period for a termination without cause, but imposes no duty on the employee to mitigate, the prescribed severance will not be reduced just because the terminated employee gets another job. As a result, employers should consider whether to include a “duty to mitigate” clause in the termination provisions of an employment contract.
- If bonuses have been a significant part of the employee’s compensation package, and the employment agreement does not expressly preclude the employee from receiving a bonus for the severance period, the employee will be entitled to bonus payments in respect of the severance period.
- A change in company policy regarding the accumulation of vacation days must be clearly communicated to employees. Employees who stand to lose accumulated vacation days should be warned of any pending loss resulting from a change in policy. In addition, an employer must provide the employee with a reasonable opportunity to take the accumulated vacation time before the time is lost.
Editor’s Note: The employer, Ainsworth Lumber Co., has appealed this decision to the BC Court of Appeal. The appeal is scheduled to be argued on February 23, 2013. We will report further on this case once the Court of Appeal releases its decision.