3 Real-Life Lessons in How Not to Hire – or Fire – An Employee
Published:
April 3, 2023
Author(s):
On February 15, 2023, an adjudicator ordered an employer to pay what could be the “largest employment compensation” ever awarded in New Brunswick history after it abruptly fired the CEO of a health authority: about $2M, including $200K in aggravated (aka “Wallace”) damages. The hiring and the termination processes are equally important – and equally mine-filled – stages of the employment relationship for employers. The widely publicized decision in Dornan v. New Brunswick (Health) is a real-life case study in how not to hire – or to fire – an employee. Here’s a look at what the employer in Dornan did wrong, how it cost the employer, and three lessons you can learn from the employer’s mistakes.
1. Timing (of the Contract) Can Be Everything
The employer’s first – and biggest – mistake is a common one: it introduced a written employment contract with an important new term, after it already had an employment contract with the employee and after he had already started the job.
What Happened. The employer and the employee, Dr. Dornan, negotiated the terms of Dr. Dornan’s contract verbally and over text messages. They eventually reached agreement on the essential terms. No mention was ever made of a without cause “termination clause” that would limit the compensation the employer would pay Dr. Dornan if it terminated his employment without cause before the employment term ended. A short time after Dr. Dornan had started working, the employer presented him with a written employment contract. The written contract had terms the employer and Dr. Dornan had never discussed – including a without cause termination clause. The employer didn’t encourage Dr. Dornan to seek independent legal advice, nor did he. The employer also failed to draw Dr. Dornan’s attention to the new termination clause. The adjudicator said Dr. Dornan “was not a sophisticated employee”; while he might have understood the effect of the termination clause, he thought he had to sign the contract. The adjudicator also considered Dr. Dornan to be “vulnerable” because he had already quit his job and his prior position had been filled; he felt he had no other option but to sign. So, he signed the written contract. When Dr. Dornan sued the employer for wrongful dismissal, the employer tried to rely on the termination clause to limit the compensation it had to pay Dr. Dornan. It failed. The adjudicator decided the termination clause wasn’t enforceable because the employer and Dr. Dornan had already agreed to the contract terms verbally, and the employer didn’t offer Dr. Dornan any “consideration” (something of new value), an essential requirement for any valid contract, in exchange for the new contractual term. The employer argued its payment of Dr. Dornan’s physicians licensing fees was consideration for the termination clause. The adjudicator rejected this argument because the offer to pay the fees happened after the employer presented Dr. Dornan with the written employment contract and the payment was “in no way directly or indirectly linked to the added termination clause”.
The Lesson. Employers have a contract with every employee whether it’s in writing or not. However, it’s often difficult to determine the scope and terms of a verbal contract, with disputes often resolving on the basis of the employer’s word against the employee’s. A well-drafted written employment contract, including a without cause termination clause is crucial in protecting the employer’s interests, helping to avoid and resolve disputes, and ultimately saving the employer time and money. But timing matters: when the employee signs a written contract is just as important as its terms.
- Conditional Offer. You can verbally negotiate the terms of employment – but don’t lead the employee to believe it’s a done deal. Be clear that the job offer is conditional on the candidate signing a written employment contract in a form that’s acceptable to you and that it will include a termination clause. Then make sure the candidate signs the written employment contract before they start work, even if it means pushing back the start date.
- Independent Legal Advice. Suggest, in writing, the employee get independent legal advice on the written contract and give them a reasonable time to get it. The adjudicator might still have found the termination clause unenforceable in Dr. Dornan’s circumstances, but it can be a factor in saving an employment contract from being found unenforceable. And regardless, it’s good practice for employers, especially when it comes to senior roles with large compensation packages.
- Attention & Consideration. If you must introduce a written contract after concluding a verbal contract with the employee or after the employee has started working, make sure you bring any terms that weren’t discussed previously to the employee’s attention and you give them something of new value, for example a signing bonus or additional vacation, in exchange for the new terms. Ensure you expressly link the new benefit to the employee signing the written contract. Finally, be aware that courts have clearly decided that abstaining from firing an employee (or continuing to employ them) isn’t sufficient value for accepting a new term.
2. Fixed-Term Contracts Can Mean Big Payouts
The employer’s second mistake was not appreciating it could be on the hook for the entire value of the contract if the employment relationship went south.
What Happened. Since the termination clause was unenforceable, the adjudicator had to determine the compensation to which Dr. Dornan was entitled. An employee dismissed without cause from indefinite term employment is entitled to “reasonable notice” of the termination unless there’s an enforceable contractual termination clause. The employee is also under a duty to mitigate their damages: to take all reasonable steps to reduce their lost wages (essentially to try to get another job). If an employee doesn’t fulfill this duty, a court can reduce the amount to which the employee is entitled. However, the contract between the employer and Dr. Dornan was for a fixed five-year term – a finite length of time – not an indefinite term. He was only four months into it when his employer dismissed him. The adjudicator confirmed that when there’s a fixed-term contract without an enforceable termination clause or any other term to the contrary, the employee is entitled to compensation for the entire balance of the term of the contract – and that payment isn’t subject to the employee’s normal duty to mitigate their damages (though the employer didn’t enter any evidence that Dr. Dornan failed to mitigate in any event).
The Lesson. An employer’s liability exposure for the termination of a fixed-term contract before the end of the term can be big – a lot bigger than the reasonable notice for the termination of an indefinite term contract. So, avoid them when you can. This doesn’t mean you should never use a fixed-term contract; there are a limited number of circumstances where it makes sense. But think hard about whether an indefinite term or a fixed-term employment contract is the best tool for the job. And either way, be sure that there’s a written, properly implemented contract that includes a well and carefully crafted without cause termination clause. An enforceable termination clause is technical to draft and challenging to enforce: courts interpret them very strictly, and in employees’ favour. Despite these challenges, an enforceable termination clause gives both the employer and the employee greater certainty about the notice period if there’s a “without cause” termination of either a fixed term or an indefinite term employment contract. And while provinces and territories deal differently with the duty to mitigate damages in the case of a fixed-term employment contract, where the duty to mitigate does apply, the employer must still prove the employee failed to meet that duty. This isn’t always an easy task.
3. Callous Conduct Will Cost You
The employer’s third mistake was the insensitive way it chose to end the employee’s employment – and it was costly.
What Happened. The employer asked Dr. Dornan to attend a news conference scheduled for the following day. While he was on his way to the conference, the Premier called and told him his immediate superior had been replaced. The new superior joined the call and told Dr. Dornan “you are no longer employed.” At the news conference, the Premier made comments the adjudicator found could reasonably lead the public to believe he had concluded Dr. Dornan was responsible for an unfortunate hospital emergency room death. The adjudicator was also critical that the employer didn’t meet with Dr. Dornan in private to discuss the termination decision. The adjudicator decided the employer dismissed Dr. Dornan in a “public, disingenuous, callous manner” that diminished his “otherwise stellar reputation”. (The adjudicator also criticized the employer’s failure to provide Dr. Dornan with the “opportunity to address the concerns of the employer”, even though the termination was without cause so there was no requirement for the employer to do so.) The arbitrator awarded Dr. Dornan an additional $200,000 in aggravated damages because of the way the employer carried out the termination (so-called “Wallace” damages).
The Lesson. The end of an employment relationship is often a highly emotional situation for both the employer and the employee. But courts have been crystal clear: employees are particularly vulnerable at the time of termination, and employers have a legal duty not to treat employees unfairly, dishonestly or insensitively in the way they terminate their employment. No matter the reason for or the circumstances of the employment termination, be respectful and professional throughout – or the cost could be high.
Please contact your McInnes Cooper lawyer or any member of our Labour & Employment Law Team @ McInnes Cooper to discuss how we can help you avoid making the mistakes the employer made in Dornan v. New Brunswick (Health).
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