When buying a business, keeping the former owner on as an employee or contractor seems like a great idea to effect a smooth transition. Among the many considerations will be the form and terms of agreement. While a fixed term contract is often used, purchasers should consult a lawyer and any lawyer should remember the pitfalls that arose in McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home).
The Facts and Decision
The plaintiff sold his funeral home to the defendant corporation and stayed on as an employee. The parties had formalized an employment agreement for a 10-year term, over which the plaintiff was to provide general management and transitional services such as training the purchaser in the operations of the home. The contract did not have a termination provision.
In Year 1, the parties’ relationship began to sour. The defendant took issue with how the plaintiff was spending his time, the personal use of the company vehicle, and the plaintiff’s entitlement to certain commissions. The defendant enlisted a subordinate of the plaintiff to track the plaintiff’s time, required the return of the company car and repayment of personal gas charges, and refused to pay commissions on any prepaid packages that weren’t sold by the plaintiff himself. The defendant also changed the locks without advising or consulting the plaintiff about suspicions that he had removed business files. Eventually the plaintiff went on medical leave until his work issues were resolved. During his leave, the plaintiff’s desk had been moved to the basement and his photo removed from the wall of the funeral home.
The plaintiff sued for constructive dismissal.
The parties had very different understandings of their agreement. In interpreting the contract, the court was aided by considering the relevant contextual circumstances, which included their respective experiences as funeral directors, and their respective purposes in entering into the sale and employment agreements.
While withdrawing the company car alone was not enough to constructively dismiss the plaintiff, the court found that the employer’s course of conduct amounted to constructive dismissal and was the reason why the plaintiff had failed to return to work.
Unfortunately for the employer, the contract did not provide a pre-determined notice period. Relying on the Ontario Court of Appeal decision in Howard v. Benson Group Inc., the court held that the defendant employer was obligated to pay the plaintiff to the end of his 10-year term, and that this obligation was not subject to mitigation, resulting in a judgment of $1.27 million.
One wonders why anyone would enter into a fixed term contract. The benefits include certainty and thus, peace of mind. In such contracts, the damages are fixed (by default, the wages and benefits for the unexpired term, unless a penalty is otherwise specified). These contracts are also not subject to mitigation, which is inherently uncertain and the subject of much litigation. If an employer seeks the certainty of a fixed term contract but desires to attenuate the risk of a large damages award, one might consider including a pre-determined notice period, or even a shorter term. Better yet, stave off disaster by being reasonable and by welcoming open communications with employees to prevent avoidable misunderstandings.
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