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Relying on a without cause termination clause after asserting just cause

It is not uncommon for employers to be in a situation in which they are weighing the benefits and risks of asserting just cause for the termination of an employee who has engaged in misconduct.

An employer may want to terminate on a “just cause” basis to provide an employee who has engaged in misconduct with no or minimal notice of termination or pay in lieu thereof. However, pursuing a just cause termination includes the risk that, if challenged in a wrongful dismissal claim, a Court may find that there was no “just cause” for the termination. In such a situation, and if there was an applicable employment agreement, the question then becomes whether the company would be able to rely on a without cause termination provision to limit the employee’s damages in the wrongful dismissal claim.

The Court’s decision in Singh v Clark Builders, 2024 ABKB 3 (“Singh”), provides guidance as to the circumstances in which an employer may or may not be permitted to rely on a without cause termination provision subsequent to asserting just cause.

Background

The employee, Jamey Singh, joined the company in 2013 after several months of negotiations. The company provided Singh with a formal employment contract, to which Singh requested several amendments that the company acquiesced to. Singh was initially hired as the vice-president of corporate operations, reporting to the chief operating officer (“COO”), with the expectation he would eventually move into the COO role. He was promoted to COO in 2015.

In early 2019, the president of the company became aware of financial reporting discrepancies, a number of which were connected to projects under Singh’s purview or were discrepancies Singh had noticed previously but had not brought to the attention of the board of directors. These discrepancies ultimately resulted in a profit write-down for the company of over $10 million. Singh was presented with a termination offer in August 2019, in which the company noted that the offer was made despite it having grounds for a “just cause” termination. It was agreed that Singh’s last day of employment would be Sept. 30, 2019.

Singh subsequently brought a wrongful dismissal action against the company. The company initially defended the claim by alleging it had just cause to terminate Singh’s employment in connection to Singh’s partial responsibility for the profit write-down. However, the company later amended its statement of defence to remove allegations pertaining to just cause for dismissal.

Singh took the position that the company asserted just cause in bad faith, which repudiated the employment agreement, and therefore the company could not rely on the without cause termination provision to limit his entitlement to damages.

The Court’s decision

The Court confirmed that the termination provision in the contract was enforceable and further confirmed that an assertion of just cause does not automatically preclude an employer from subsequently relying on an enforceable without cause termination provision for the purposes of limiting the employee’s damages.

Specifically, the Court noted that where an allegation of just cause is made in good faith, both at the time of termination and during litigation, an employer who subsequently is unable to prove just cause or decides to no longer pursue such allegation is still permitted to rely on an enforceable without cause termination provision. The Court noted that for a claim of just cause to be brought in good faith, it must not be brought for an improper, dishonest, or fraudulent purpose.

The Court found that the company had a reasonable basis to allege just cause given Singh’s responsibilities as COO and his actions (or lack thereof) regarding the financial discrepancies. The company was therefore not acting in bad faith when it alleged just cause. Accordingly, the Court determined that the company had not repudiated the employment agreement and could still rely on the without cause termination provision.

The Court subsequently held that Singh was entitled to his entitlements under the without cause provision, which in this case, was 90 days’ pay in lieu of notice.

Lessons for employers

While Singh is an Alberta case and courts of other jurisdictions are not bound to follow the decision, it is still informative and offers employers some reassurance and assistance in assessing whether to assert just cause for termination or to simply terminate on a without cause basis.

A key component that cannot be overlooked is that there was an enforceable termination provision in Singh. If there is no termination provision, or if it is unenforceable, a Court would not have a basis to limit an employee’s damages.

Regardless, Singh can provide employers with some assurance that, where there is an enforceable termination provision and where just cause for termination has been asserted in good faith, the employer is not automatically precluded from subsequently relying on a without cause termination provision to limit an employee’s damages.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.