When Can an Employment Agreement be Voided for Duress?

The recent decision of the Ontario Superior Court in Riskie v. Sony of Canada Ltd. provides a useful reminder of the way in which the court will deal with an employment agreement where the employee later complains that he executed the agreement under duress.

In this case, Mr. Riskie was a management level employee of Sony of Canada Ltd. based in Toronto. He began working at Sony in 1989 without a written employment agreement. He lived and worked in Toronto.

In the spring of 2014, after having worked at Sony for about 25 years, he announced that his wife had obtained new employment and that he and his family were planning to move to Ottawa. He asked whether he could continue in his existing job from his home in Ottawa notwithstanding that there were a number of Toronto-based employees reporting to him.

While Mr. Riskie’s immediate superior was supportive, Sony’s President and CEO was opposed to the idea.

Mr. Riskie planned to move to Ottawa in mid-June 2014, even though he knew of senior management’s opposition to the idea of his continuing to work from there. Several days before the move, his immediate superior advised him that Sony would consider accommodating his request but would require that his position change from that of an indefinite employee to a contract employee with a fixed term, as a condition of approving the arrangement.

Mr. Riskie was given a proposed contract with a fixed term ending December 31, 2014, with no renewal rights. He was able to negotiate the end date to March 31, 2015. He asked for a right to renew the contract unless he failed to prove that the new arrangement could work, but that request was denied. Ultimately, he signed the contract after he had already moved to Ottawa. At no time was he ever told that he could not remain in Toronto and continue in the same capacity as before by, for example, commuting to Ottawa on weekends.

Mr. Riskie proceeded to carry on his previous duties remotely from Ottawa. Several months later, Sony announced internally that its North American operations were being reorganized. A number of people were let go in February 2015 and at that time, Mr. Riskie was told that his contract would not be renewed on its expiration date.

At that date, he was provided with all of the benefits called for under his fixed term employment agreement. Mr. Riskie responded by suing Sony for wrongful dismissal, saying that the employment agreement was void for a variety of reasons. One of his arguments was that he signed it under duress. Sony insisted that the agreement was valid and Mr. Riskie brought a motion for summary judgment.

At the motion, Mr. Riskie argued that he had been required to sign the contract “in order to continue the teleworking arrangement from Ottawa” even though he had already moved before actually signing the contract. On cross-examination, he admitted that had had the option of signing the contract and accepting its terms, resigning and looking for alternative employment, or returning to Toronto on a full-time basis. He admitted that he preferred to sign the contract and make every effort to demonstrate its value to Sony so as to convince Sony to extend it.

The court pointed out that there is a five-part list of criteria to determine whether or not an employment agreement was executed under duress.

Firstly, the court will consider whether the party protested at the time that the contract was entered into. In this case, the court found that while Mr. Riskie had protested numerous aspects of the proposed deal, he never protested that he was being placed under duress at the time that he actually signed it. He acknowledged that he had been given several weeks to think it over and the court concluded that this was not consistent with coercion or duress.

Secondly, the court will consider whether there is an effective alternative course open to the party alleging duress. In this case, Mr. Riskie certainly had the alternative of staying in Toronto and commuting frequently but he declined to select it.

Thirdly, the court will consider whether the party received independent legal advice. The court concluded that as a highly paid senior executive, Mr. Riskie could have sought such advice if he had chosen to do so. There was no time pressure applied to him to preclude him from seeking advice and he had the means, the time and the opportunity to do so.

Fourthly, the court will consider whether, after entering into the contract, the party took any steps to get out of it. In this case, no such steps were taken and there was no suggestion that Mr. Riskie did anything other than to perform his duties to the best of his ability.

Finally, the court will consider whether the party was placed under any illegitimate pressure. In this case, the court found that Mr. Riskie could have simply resumed his duties full time in Toronto had he chosen to do so. While his reasons could be readily understood, not having a preferred option available is not a test for duress. There must be an illegitimate application of coercive pressure in order to void a contract for duress. In this case, Sony had no obligation to accommodate the move to Ottawa and every right to propose terms on which it might do so. There was nothing wrong in Sony attaching conditions to its willingness to accommodate Mr. Riskie’s request.

As a result, there was no basis for concluding that the employment agreement was entered into under duress.

After disposing of Mr. Riskie’s other arguments, the motion for summary judgment was dismissed.

With increasing frequency, companies with employees of indefinite duration are turning to written employment contracts with those employees and asking them to execute them during the course of their employment. There a number of rules that have been established by the jurisprudence that must be followed for those contracts to be enforceable. This case provides useful clarification as to the circumstances under which such an agreement may be set aside for duress.

Advertisements

When Can A Former Employee Compete?

In the recent case of Optilinx Systems Inc. v. Fiberco Solutions Inc., the Superior Court of Ontario provided a useful reminder as to the circumstances in which a former employee is entitled to compete with his former employer.

In this case, Mr. Foresta had been employed by Optilinx as the project manager of its fiber optic division. He was not an owner, officer or director of the company and he was not bound by any non-competition or non-solicitation agreement. He was not involved in management at a senior level. However, he was regarded by the company as a key employee and, in fact, he was its highest paid staff employee when he resigned in August 2014 after 12 years of employment.

The company’s customers were major Canadian telecommunications companies such as Bell Canada and Rogers. It did not have exclusive contracts with its customers and it competed for their business against other fiber optic cable companies. Mr. Foresta was the company’s main but not its exclusive salesperson with its customers, reporting directly to the company’s owner.

In the months before his departure, he indicated to other employees in confidence that he was planning to leave and start his own business that would compete with the company. He suggested to them that they would be welcome to join him in the new business and that they should seriously consider doing so because his departure would imperil the company’s business success.

In the summer of 2014, he incorporated his own company and obtained $300,000 in financing. He then resigned. Shortly afterwards, four other company employees resigned to join him.

After his departure, he re-entered the fiber optic cable business through his new company.

Optilinx’s case against Mr. Foresta was that he was no ordinary employee, but rather a key employee owing fiduciary duties to his employer. The company sought an injunction to stop Mr. Foresta from doing business with several of the company’s largest customers.

To the court, however, while Mr. Foresta may have been a very important and productive employee, and even the lynchpin to the company’s success, he was not an owner, director, shareholder or a member of management. His importance as an employee did not mean that he was a fiduciary. In this case, the company was unable to establish a sufficiently strong case that Mr. Foresta occupied the position of a fiduciary.

As the court noted, there is nothing to prevent an ordinary employee from terminating his employment, at which point that employee is free to compete with his former employer unless there exists a contract preventing him to do so. On the other hand, a fiduciary occupies a position of loyalty and trust and is not permitted to allow his own self-interest to conflict with those duties. However, even a fiduciary who terminates his employment is entitled to accept business from former clients, although a fiduciary may not directly solicit business from former clients. In this case, even if Mr. Foresta did have fiduciary responsibilities, there was no evidence that he had actively solicited business from the company’s customers.

The situation would have been different had there been evidence that Mr. Foresta had taken confidential information such as customer lists, or stolen trade secrets, from his employer. That type of conduct is unlawful and the court will step in, in those circumstances. However, as this case reminds us, where the departing employee is not a fiduciary, the rules are very different.

Wrongful Dismissal and Mitigation: Can a Fired Worker Start His Own Business?

The recent case of Leeming v. IBM Canada Ltd. includes a useful review of the law relating to mitigation of damages in the context of wrongful dismissal. It provides some particularly useful insights into the issue that arises when the fired employee, unable to find comparable employment, starts his or her own business.

In this case, the plaintiff was wrongfully dismissed from IBM from her position as a Senior Managing Consultant. In that position, she had been responsible for various project management duties including project scheduling, tracking budgets and interfacing with clients to ensure deliverables were met.

After eight years of employment at IBM, IBM decided to eliminate her position and terminated her employment. At that time, she was 60 years old.

In the following four months, she applied for 20 positions in various industries and job types. She searched job search websites and spoke to recruiters. She tried to find jobs through outplacement counselling, by networking with friends and business contacts and through any leads that those people provided to her. She created a LinkedIn profile through which she was approached about potential job opportunities.

She had two job interviews but she received no offers.

When her efforts to find a new position failed, she decided to start her own business specializing in digital marketing solutions for small and medium-sized companies. Marketing was not an area in which she had either experience or training. She obtained a franchise with a franchisor in that industry but by the time her lawsuit reached trial over one year later, her business had not yet become profitable.

IBM took the position at trial that she had failed to mitigate and was therefore disentitled to damages for wrongful dismissal.

The court was satisfied that the plaintiff did not fail to mitigate. The judge found that she had made reasonable efforts to find a new job and ultimately that her decision to become her own employer by training herself for a new career as a franchisee, was reasonable. The judge pointed out that it was easy enough for IBM to say that she should have stayed in the labour market longer but in the judge’s opinion, she tested the market long enough to make a reasonable decision to retrain for a new career.

The judge referred to a previous Court of Appeal decision in which case the court had said that the fact that the early years of a worker’s self-employment did not live up to his monetary expectations does not mean that this was an unreasonable attempt to mitigate. A fired worker is entitled to consider his own long term interests when seeking another way to make a living. His attempts at mitigation cannot be considered unreasonable just because he fails to focus exclusively on his short term obligation to mitigate damages for the sake of his former employer.

The idea of starting one’s own business always raises difficult questions in the context of a former employer’s mitigation arguments. In this case, the plaintiff spent what the court considered to be a reasonable amount of time and made reasonable efforts without success. Presumably, her age had something to do with her inability to find another job. Nevertheless, the question of when it is safe for a fired worker to give up the job search and retrain for a new career will always be a tricky one, since the odds that the new career will pay dividends during the notice period are usually quite low.

The Latest on Termination of Employment for Insubordination

The recent case of Smith v. Diversity Technologies Corporation provides some interesting insights into several employment law issues and principally that of termination for insubordination.

Mr. Smith was a sales manager for the defendant Diversity Technologies Corporation (“Diversity”). He had a record of being an exemplary employee. He had been employed by a company called Drillwell for 16 years before it was sold to Diversity and he worked at Diversity another four years until he was fired on October 14, 2011.

Diversity alleged that Smith had been terminated for just cause for insubordination. Smith had been the primary contact for a particular client which, by September 2011, owed Diversity about $100,000. At that point, Smith’s immediate superior instructed him to make sales to that customer in future only if they were paid for immediately by cash or credit card. Subsequently, his superior told him that no sales should be made to that customer at all because Diversity was going to be suing the customer to recover the debt.

Nevertheless, Mr. Smith did take an order from the customer of just over $1,000 without telling his superior. He accepted a cheque from the customer to pay for the order.

When this behavior was discovered by Diversity, Smith was fired.

Smith had entered into an employment contract providing for termination by the employer upon payment of one year’s salary which in this case was $100,000. In fact, Smith obtained comparable employment within a matter of weeks and the Court found that he had suffered no loss.

Not surprisingly, Smith put forward a different version of events relating to his instructions concerning that customer. He denied that he had willfully disobeyed his employer or that he had been insubordinate in any way.

Smith made a claim for the $100,000 severance payment and moved for summary judgment. Diversity insisted that Smith had been fired for cause and at worst, it was entitled to a trial to decide the case.

The motions judge had no difficulty dealing with the matter without requiring a trial. The judge considered that even though the versions of the story told by both sides were different, he was in an excellent position to rule on the matter even accepting Diversity’s version of the events, given the law relating to termination for insubordination.

On the facts of cases in which insubordination was held to constitute just cause for immediate termination, the Court noted that employers have the right to determine how business is to be conducted and employees are obliged to follow those instructions. Where an employee fails to follow lawful orders of his employer, he will be found to have disregarded an essential condition of his employment and this constitutes cause for immediate termination.

However, as this case demonstrates, the issue is not necessarily quite so clear cut. In this case, the Court considered that prior to the incident in question, Smith’s conduct as an employee had been beyond reproach. The amount in issue was trifling, particularly in comparison to the amount of the customer’s outstanding account. Because it was paid for immediately, the additional order did not increase the debt. Given Smith’s length of service and impeccable record, Diversity should have met with Smith, pointed out that his actions were in violation of the new company policy relating to this customer, and provided him with a properly-documented written warning. In proper context, his actions could not be considered as amounting to willful disobedience or insubordination.

The Court concluded by indicating that even if Smith’s conduct could be described as insubordinate, “it was not of a magnitude sufficient to justify termination.” Had Smith continued this behavior, Diversity would have had grounds for termination but in this case, its actions in terminating Smith’s employment were not justified.

On the question of damages, it was clear that Smith had mitigated his damages completely. However, given the terms of his employment agreement, Diversity was ordered to pay Smith $100,000 representing the amount payable under the employment contract.

This case demonstrates that before an employer terminates an employee without notice for insubordination, the employer must consider the context of the insubordinate act. An employer cannot simply seize on one instance of an act which might be considered insubordinate in some technical way to justify terminating the employment of an employee of long standing who has an otherwise unblemished record.