Tuesday, November 08, 2016

S.C.C.: Federally Regulated Employees – Termination For Just Cause Only

In an important decision the Supreme Court of Canada recently held that non-unionized employees cannot be terminated absent just cause and that adequate severance pay is not a sufficient substitute.(*1) The Court reversed a decision of the Federal Court of Appeal and found that the “unjust dismissal” provisions of the Canada Labour Code that apply to unionized employees also apply to non-unionized employees. Otherwise, employees who are not expressly hired for a fixed term are now entitled to job security for life unless the employer can meet a very high threshold test of “just cause” for their dismissal. The decision affects half a million non-unionized employees working in banks, telecommunications, marine shipping, interprovincial trucking companies, interprovincial railways, airlines and other federal businesses.


In labour and employment law, some general principles developed at common law are: (1) unionized employees cannot be terminated absent just cause and (2) non-unionized employees may be terminated at any time without any right to reasons for termination so long as the employer gives reasonable notice of termination or reasonable compensation in lieu of notice. Provincially regulated employers have for decades enjoyed the right to dismiss employees on a without-cause basis to efficiently manage their human resource compliment, which could include terminating employees who simply proved, for one reason or another, to no longer be a good fit. The only requirement under provincial employment standards legislation is that the employer must provide the terminated employee with reasonable notice of dismissal, or pay in lieu thereof, plus severance pay under certain circumstances.

Unionized employees who are terminated have the ability to seek reinstatement with back pay or other forms of compensation before independent labour arbitrators. This right has now been given to non-unionized federally regulated employees. Federally regulated employers will now have to expend significant time, money and resources in the hopes of building a case of just cause against the employee.

There are some exceptions that should be noted. The Canada Labour Code limits application of the unjust dismissal regime in the following manner:

1.         The affected employee must have at lease twelve months of service with the employer.
2.         The regime does not apply to managers; however this term is interpreted very narrowly.  Supervisors, for example, may not be considered managers.
3.         The regime does not apply to terminations for lack of work.
4.         The regime does not apply to terminations for discontinuance of a function.

The Decision

The Supreme Court of Canada decision involved the dismissal without cause of Joseph Wilson. Mr. Wilson was employed with a federally regulated employer, Atomic Energy of Canada Ltd. (AECL) for four and a half years. Mr. Wilson did not have a disciplinary record and there was no serious misconduct leading to his termination. AECL admitted that he was not terminated for cause, but it had provided Mr. Wilson with a generous dismissal package that included six months’ pay in lieu of notice. Mr. Wilson could have sued in court for wrongful dismissal. Instead, he availed himself of the Canada Labour Code regime and made a complaint to an inspector under the Code and the inspector’s mandate is to try to settle the matter within a reasonable time, failing which the employee can apply for an adjudicator. In this case a labour adjudicator was appointed. The employer sought a preliminary ruling on whether a dismissal without cause together with a sizeable severance package meant that the dismissal was a just one.  

The Adjudicator concluded that an employer could not resort to severance payments, however generous, to avoid a determination under the Code about whether the dismissal was unjust. Because the employer did not rely on any cause to fire him, Mr. Wilson’s complaint was allowed. The Application Judge found this decision to be unreasonable because, in his view, nothing in Part III of the Code precluded employers from dismissing nonunionized employees on a withoutcause basis. The Federal Court of Appeal agreed, but reviewed the issue on a standard of correctness. The Supreme Court of Canada reversed the Federal Court of Appeal and applied the standard of review as reasonableness not correctness. It emphasized that the decisions of labour adjudicators or arbitrators interpreting statutes or agreements within their expertise attracts a reasonableness standard. It found that the Adjudicator’s decision was reasonable. Three of the nine judges of the Supreme Court of Canada disagreed with the majority and separate cogent reasons were provided. Their view was that (*2):

In our view, this case exposes a serious concern for the rule of law posed by presumptively deferential review of a decision-maker’s interpretation of its home statute. In the specific context of this case, correctness review is justified. To conclude otherwise would abandon rule of law values in favour of indiscriminate deference to the administrative state.

The minority of the Court also relied on the interpretation of sections 230 and 235 of the Canada Labour Code. Those sections provide minimum notice and severance requirements to employees. The minority interpreted those sections as applying to all employees under Part III of the Code, stating:

Our interpretation is supported by the wording of ss. 230 and 235 of the Code. Because ss. 230 and 235 of the Code do not apply to dismissals for just cause (ss. 230(1) and 235(1)), they must necessarily apply to dismissals without cause. Otherwise they would be substantially redundant. By prescribing minimum notice periods and severance pay that are owed to employees who are terminated (including dismissed) without cause, Parliament clearly intended to permit federally regulated employers to dismiss non-unionized employees without cause. 

The decision means that Mr. Wilson can now proceed with the remedy portion of his hearing before the Adjudicator. The Adjudicator can order AECL to reinstate him, with back pay.

Consequences of the Decision and Take Aways

1.         The decision has wide application in the transportation field, in trucking, aviation and rail. Trucking companies that operate outside the borders of one province are subject to the Canada Labour Code and this decision.

In the trucking area the use of independent contractors is common. In fact the Workplace Safety & Insurance Board has indicated that “Hiring subcontractors and/or owner-operators is a common practice in the transportation industry.”(*3) However, if an owner-operator is in an exclusive, or quasi-exclusive relationship with the transport company,  a court may conclude that the owner-operator is a dependent contractor. Fernandes Hearn LLP has commented on the dangers of such a relationship in its November 2015 and February 2016 newsletters. Simply using the term “independent contractor” in an agreement may not be sufficient for the determination of the status of the individual.

This point was recently illustrated in the decision in the Ontario Superior Court in Keenan v. Canac Kitchens 2015 ONSC 1055, affirmed 2016 ONCA 79. In Canac Kitchens the claimants, a husband and wife, both worked for Canac for over twenty years. They began their relationship with Canac as employees. Lawrence Keenan worked for Canac from 1979 to 2009. Marilyn Keenan began working for Canac in 1983. In October 1987, both were summoned to a meeting with Canac management at which time they were told they would no longer be employees, but instead would carry out their work for Canac as independent contractors. They were also told that they should incorporate.

The Keenans were informed that, under the new arrangement, they would be responsible for paying installers. The installers would provide their own trucks and would pick up kitchen from Canac and deliver them to job sites for installation. Canac would set the rates to be paid to the installers and pay the Keenans, who, in turn, would pay the installers. The Keenans, as Delivery and Installation Leaders, would, as before, also be paid on a piecework basis for each box or unit installed; however, the amount paid would be increased to reflect the fact that the Delivery and Installation Leaders were being paid gross, without deductions for Unemployment Insurance, Canada Pension Plan, or Income Tax. Delivery and Installation Leaders would now be responsible for damage to cabinets while in transit, and were expected to obtain insurance to cover such liability.

The Keenans signed a contract with Canac, which described them as independent contractors. They never incorporated. They did register the business name “Keenan Cabinetry”. They obtained the insurance required by their agreement with Canac, and they registered with what was then known as The Workers’ Compensation Board. Although they were responsible for cutting cheques to the installers they supervised, the installers were not their employees. Keenan Cabinetry never registered as an employer with the Canada Revenue Agency for the purposes of withholding taxes and other source deductions.

As far as the plaintiffs were concerned, the 1987 agreement notwithstanding, they continued to consider themselves as loyal employees of Canac. They enjoyed employee discounts. They wore shirts with company logos. They had Canac business cards. Mr. Keenan received a signet ring for 20 years of loyal service. To the outside world, and in particular, to Canac’s customers, the plaintiffs were Canac’s representatives.

In March 2009, the plaintiffs were called to a meeting and were told that Canac was closing its operations and their services would no longer be required. The Canac work quickly dried up.
The Keenans sued for wrongful dismissal.

Justice Mew commented that the law in Ontario relating to dependent contractors is well established, stating (*4):

Employment relationships exist on a continuum; with the employer/employee relationship, at one end of the continuum, and independent contractors at the other end. Between those two points, lies a third intermediate category of relationship, now termed dependant contractors …Like employees, dependant [sic] contractors are owed reasonable notice on termination.

Justice Mew then reviewed the case law on the principles used to distinguish independent contractors from employees. He looked at a 2004 decision (*5) involving commissioned agents, setting out the principles:

1.      Whether or not the agent was limited exclusively to the service of the principal.
2.      Whether or not the agent is subject to the control of the principal not only as to the product sold, but also as to when, where, and how it is sold.
3.      Whether or not the agent as an investment or interest in what are characterized as the tools relating to his service.
4.      Whether or not the agent has undertaken any risks in the business sense, or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission.
5.      Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it?

Justice Mew concluded that the Keenans were entitled to 26 months of notice after they were found to be dependent, rather than independent, contractors of the employer.

If the Keenans had worked for an interprovincial trucking company, the Wilson v. AECL decision of the Supreme Court of Canada would apply and simply providing adequate notice would not be sufficient. The employer could be faced with reinstatement and back pay.

Trucking companies that operate outside the borders of one province should review and ensure that all their contracts with owner-operators establish a relationship that is truly independent. The consequences are now more severe if the contractor is found to be a dependent contractor. Trucking companies are also advised, where possible, to hire independent contractors that are corporations rather than individuals, with full authority to hire their own drivers, and the ability to haul loads for multiple carriers.

2. Federally regulated employers should conduct a performance review on each employee prior to the completion of his or her first 12 months of service, and not just after three or six months. If an employer has any concerns about the fit or regarding performance they should terminate the employee within that 12-month period.   Upon completion of a full 12 months of employment, a federally-regulated employee will acquire the added protection of the Code’s unjust dismissal regime.

3. Employees can be hired on a fixed term basis, however it is important that their contract not include an automatic renewal or “evergreen” clause, as this could bring into play the added protection of the Code’s unjust dismissal regime.

4. Employers should diligently document performance issues or issues of misconduct to establish just cause. It is extremely difficult to prove just cause without addressing issues in a timely way, and in documenting same. The onus is on the employer to show just cause.  Employers who terminate an employee for just cause must be able to prove that the employee’s conduct or behaviour was so serious in its nature or extent, that it broke the employment agreement. What is just cause? The following is from the Manitoba government guide:

What are some examples of possible just cause?
The circumstances and specific facts of each case must be considered to determine if there is just cause.  Just cause can vary depending on the employee’s conduct, the type of business, the employee’s position, and the employer’s policies or practices, among many other factors.   The following are some examples that may constitute just cause:
- Theft
- Dishonesty
- Violence
- Wilful misconduct
- Habitual neglect of duty
- Disobedience
- Conflict of interest

What do employers need to consider before deciding there is just cause?
Serious Circumstances
Each situation must be looked at on a case by case basis.  Very serious acts, such as those involving wilful misconduct or violence, might happen once and be sufficient to show just cause.   This type of behaviour can damage the employment relationship to the point it cannot reasonably continue.

Other Circumstances
Other behaviour, such as being late, missing work, and poor performance are not necessarily serious enough to terminate without notice.  For just cause to apply in these cases, the employer must be able to show appropriate steps were taken to correct the behaviour, including: 
- Making the employee aware of the expectation
- Providing the employee with reasonable time and resources (where appropriate) to achieve the necessary standard, and
- Warning the employee about the specific consequences for continuing the unacceptable behavior

In short, employees should not be surprised by a termination for just cause in these types of circumstances.

(*1) Wilson v. Atomic Energy of Canada Ltd., 2016 SCC 29
(*2) ibid, para. 79.
(*3)      So You’re Thinking of Using Independent Operators in Your Transportation Business – Brochure
(*4)      2015 ONSC 1055, para. 17

(*5)      Ibid, para. 18


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