'An employer can't require an employee to do more upon termination than they agree to'
“It's really important for employers to be fair in the way that they treat employees, including upon termination, and one of the things that’s fundamental in treating an employee fairly is to adhere to the terms of the contract that you have with them.”
So says Natalia Tzemis, an employment lawyer at Harris and Company in Vancouver, after a British Columbia court ordered an employer pay a fired worker nearly $500,000 for 18 months’ pay in lieu of notice and $25,000 in punitive damages.
“[The employment contract] is there for the benefit of both the employee and the employer, and it's not going to be viewed well by a court if the employer takes steps to unilaterally depart from the terms of its employment agreement,” says Tzemis.
Pentax Canada is a medical imaging equipment company based in Mississauga, Ont. The worker started providing services to Pentax as an independent contractor in 2001. In 2007, Pentax hired him as a full-time employee in the position of territory manager responsible for developing sales of medical equipment in BC.
Shortly before starting his new position, the worker signed an employment agreement dated Nov. 29, 2006, setting out his compensation as 100 per cent commission, subject to statutory minimums, plus benefits. It also contained a termination clause that allowed Pentax to terminate his employment without cause by providing working notice or payment in lieu of notice, plus severance pay if applicable, equal to the greater of his minimum entitlements under the BC Employment Standards Act (ESA) or “four weeks per completed year of service prior to the signing of this agreement, plus four weeks under this agreement as an employee of Pentax Canada Inc. to a maximum of 18 months.”
Termination clause
The without-cause termination provision also stated that the worker’s compensation during the notice period would be made in “equal regular payroll instalments, or provide to you the equivalent pay in lieu of notice as a ‘salary continuation’ and subject to your duty to mitigate.” Compensation was defined as “the average of commission payments paid or payable to you in the two fiscal years completed (or part fiscal years) immediately before the date that your employment is terminated.”
In February 2014, Pentax advised the worker that, effective Sept. 1, his compensation would change from full commission to a base salary of $100,000 plus new commission rates. The worker signed an acknowledgement and Pentax paid him a “signing bonus” of $1,000.
On April 4, 2022, Pentax terminated the worker’s employment without cause. The termination letter included a “full and final release agreement” that asserted all money owed “have or will have been paid” and requiring him to report mitigation efforts on a monthly basis with details of all job offers received, within seven days in order to receive his termination pay. This was followed by an email warning that a failure to comply with the mitigation reporting requirements could result in his payments stopping.
After the worker’s termination, Pentax paid the salary portion of the worker’s compensation for three months until July 8, when it stopped payments altogether because the worker didn’t report his mitigation efforts.
The worker sued for wrongful dismissal and repudiation of the employment contract. He argued that Pentax repudiated the contract by failing to pay his commissions during the notice period and then stopping the payments completely. He also claimed punitive damages for bad-faith conduct on the part of Pentax in the manner of his dismissal.
“There was a term explaining how the employer would pay out the employee upon termination without cause, but when the employer was making payments between April and July 2022, they were only paying based on salary rather than also including pay for the commission - and that was a fundamental breach of the employment agreement because that termination provision clearly set out that that pay is going to at least include commission payments as well,” says Tzemis.
Repudiation of contract
The court found that Pentax didn’t provide a satisfactory explanation as to why it didn’t pay the worker commissions during the notice period as was required by the employment contract. Even if the company disagreed about the amount it owed in commissions, it should have at least paid what it believed to be the proper amount, the court said.
The court also found that Pentax further repudiated the contract by stopping the payments completely in July 2022. Although the worker had a duty to mitigate his damages from the dismissal, the reporting requirement was not part of the contract, said the court in determining that the worker was entitled to damages for common law reasonable notice from the company’s repudiation.
Pentax purported to stop payments because the employee didn’t report his mitigation efforts, but the company didn't actually take issue with the employee’s mitigation efforts, says Tzemis.
“The termination provision in the employment contract had a term that said the employee will get termination pay subject to his duty to mitigate, and that's a legitimate term to include so long as it meets the minimums under the ESA,” she says. “But in the court’s view, it didn't go so far as to require the employee to engage in what could be seen as rather onerous efforts to provide updated mitigation information to the employer on an ongoing basis.
“When [Pentax] terminated the employee, the company was the one to insert that more onerous provision upon termination when it wasn't part of the employment contract that the employee signed.”
18 months’ pay in lieu of notice
The worker and Pentax agreed that the worker was entitled to 18 months’ reasonable notice given the nature and length of the worker’s employment. However, they disagreed on how the worker’s average compensation should be calculated.
Pentax argued that the employment contract stipulated that pay in lieu of notice was to be calculated with an average of compensation over the two fiscal years immediately before the date of termination. The worker argued that his earnings in 2020 and 2021 significantly declined due to an issue with the lens blurring on a colonoscopes that made hospitals reluctant to purchase the equipment and 2019 was much higher.
The court found that, given the company’s repudiation of the employment contract, it wasn’t held to the requirement to use the previous two fiscal years to calculate the worker’s average compensation. However, the evidence showing the worker’s employment income from 2010 to 2021 showed that the previous two years were fairly typical. In addition, there was no indication that the issue with the colonoscope lenses was resolved following his dismissal and would have significantly affected his earnings over the following 18 months, the court said.
Based on the worker’s average income in 2020 and 2021 being $312,777.41, the worker’s 18-month entitlement to pay in lieu of notice was $469,166.12. In addition, the worker was entitled to $7,000 for a trip he was awarded and never received, minus just over $150,000 in mitigation income he earned during the notice period, the court determined.
The court also found that, despite the fact that Pentax had a vacation policy limiting accrued vacation that can be carried over to only five days, the worker was entitled to payment for 78 days of accrued vacation. The vacation policy stated that managers were responsible to ensure that employees have no more than five unused vacation days at the end of the year, but there was no evidence that the company or its managers ensured that the worker took vacation, the court said.
As for punitive damages, the court found that some of Pentax’s behaviour failed to meet its duty of good faith and honest performance. The termination letter implied that the worker’s entitlements under the contract were contingent on his signing the release, which was “oppressive” and “designed to leverage the uncertainty an employee would feel in the circumstances in an attempt to extract concessions,” said the court. In addition, Pentax’s failure to compensate the worker “according to even its own understanding of the terms of the contact” warranted punitive damages of $25,000, the court said.
“An employer can’t require an employee to do more upon termination than they agree to unless it’s going to provide further consideration,” says Tzemis. “In this case, the employer adhered to what the contract entitled the employee to, but it required a release to be signed in exchange for receiving it, and that's not permissible in law because the employee already had those entitlements and is not required to sign a release in order in order to get them.”
“Ultimately, the judge found that was reprehensible conduct, especially when the employee was in a vulnerable position upon just being terminated,” she adds.
Pentax was ordered to pay the worker $326,095.78 plus the value of 78 vacation days as damages for wrongful dismissal and repudiation of the contract, plus $25,000 in punitive damages.
See Klyn v. Pentax Canada Inc., 2024 BCSC 372.
