Author: Chris Drinovz, Partner, KSW Lawyers Employment & Labour Group ([email protected])

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An important wrongful dismissal decision was just released on October 5, 2021 by the BC Supreme Court that covers many of the pandemic issues we have been speculating on over the last 18 months: effect of layoffs and terminations when the pandemic hit (specifically in the travel industry), frustration of contract due to the pandemic and lack of business for the employer, increased notice periods for shorter term managerial employees, and deductibility of CERB payments.

In this article we summarize the key points from the decision. In Verigen v. Ensemble Travel Ltd, 2021 BCSC 1934, the BC Supreme Court found a business development director for a travel company was entitled to damages reflecting a 5 month notice period without deduction after 18 months of employment.

Layoffs

The employee had consented to a temporary layoff before being expressly terminated (5 month layoff); the Court found that the date of termination was the date of the express termination and not the date the temporary layoff began – this was distinguishable from the previous decision in Hogan where the court found that the employee had not consented to the temporary layoff and there was a constructive dismissal, effective the date of the first layoff.

Termination Clause Not Enforceable

The court rejected the employer’s argument that the termination clause contained in an employment manual that was signed well after the employee started was binding. The court found there was a lack of consideration and the original offer letter (without restrictions) applies:  

[36]         I am not persuaded that anything said in Rosas undermines the authority of Holland and Nowak in this particular context, however. On the contrary, I am satisfied that the governing law continues to be as stated in those earlier cases, for the reasons provided, more recently still, by Verhoeven J. in Matijczak v. Homewood Health Inc., 2021 BCSC 1658, as follows:

[30]      While the law relating to the requirement for consideration in order to support amendments to an agreement may be in a state of flux, it appears that the law in BC continues to require consideration where an employer seeks to impose an amended employment agreement with significant modifications, detrimental to the employee: Singh v. Empire Life Insurance Co., 2002 BCCA 452 at para. 12. In Quach v. Mitrux Services Ltd. 2020 BCCA 25 at paras. 12-13, the Court of Appeal declined to interfere with the trial judge’s reliance on Singh, in the context of an employment case, notwithstanding the court’s decision in Rosas v. Toca, 2018 BCCA 191. In Ontario, see also Braiden v. La-Z-Boy Canada Ltd., 2008 ONCA 464 at para. 57.

Frustration of Contract Due to the Covid Pandemic

The court rejected the employer’s argument that the defence of frustration should relieve its liability for terminating the plaintiff despite the fact that the employer’s travel business was devastated by the pandemic:

[58] I agree with ETL that it is the common law test for frustration (rather than the statutory test under s. 65(1)(d) of the ESA) that applies in this context. The leading authorities setting out that test were conveniently summarised by Warren J. in Wilkie v. Jeong, 2017 BCSC 2131, as follows:

[15]      The purpose of the doctrine of frustration is to relieve a contracting party from its bargain by bringing the contract to an end. The doctrine applies "when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes 'a thing radically different from that which was undertaken by the contract'":  Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 at para. 53, quoting Peter Kiewit Sons' Co. v. Eakins Construction Ltd., [1960] S.C.R. 361, per Judson J., at 368, in turn quoting Davis Contractors Ltd. v. Fareham Urban District Council, [1956] A.C. 696 H.L. (Eng.), at 729.

[16]      In KBK No. 138 Ventures Ltd. v. Canada Safeway Limited, 2000 BCCA 295 at para. 13, Justice Braidwood for the Court referred to the test for frustration as the "radical change in the obligation" test articulated by the House of Lords in Davis Contractors where Lord Radcliffe stated at 728–29:

So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without the fault of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

There is, however, no uncertainty as to the materials upon which the court must proceed. "The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred" … In the nature of things there is often no room for any elaborate inquiry. The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.

[17]      In KBK, at para. 14, Braidwood J.A. also expressly approved of Justice Sigurdson's summary of the test for frustration in Folia v. Trelinski (1997), 14 R.P.R. (3d) 5 (B.C.S.C.) at para. 18:

In order to find that the contract at issue has been frustrated the following criteria would have to be satisfied. The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience. The disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.

[59]         The issue in Wilkie was whether the imposition of additional purchase tax on a prospective purchaser of real property frustrated the contract of purchase and sale. In answering that question in the negative, Warren J. canvassed various authorities holding that a purchaser’s inability to perform due to a lack of adequate funds will not generally justify a finding of frustration. She summarised the relevant principles as follows:

[38]      That a lack of money to perform does not, generally, give rise to frustration is not surprising because, as noted, frustration arises from a supervening event that results in performance becoming a thing radically different from that which was undertaken. While a lack of money affects a party's ability to perform an obligation, it does not normally alter the nature or purpose of the obligation itself.

[60]         So too here, the collapse in the travel market goes to ETL’s “ability to perform”, rather than “the nature of the obligation itself.” This case is unlike the CRT decisions relied upon by ETL, where the very subject matter of the contract had been lost due to discrete, pandemic-related events. Although much of the consumer demand driving the business on which ETL and its members depend has abated, at least for the time being, not all of it has, and then not permanently. Moreover, although ETL chose to terminate a large part of its work force in the summer of 2020, at least some positions have been preserved and a recently-opened vacancy has been filled. ETL chose to relinquish Ms. Verigen’s branch of the business with a view to cutting operating costs so that it could better weather an ongoing storm. The fact that the pandemic had admittedly not brought about a frustration of the contract as of July 2020 makes it implausible for ETL to maintain that the contract had become frustrated only a few weeks later.

[61]         For those reasons, I have concluded that Ms. Verigen’s employment contract was not frustrated by the pandemic and that she is therefore entitled to damages for wrongful dismissal.

Notice Period

The court assessed notice at 5 months – the employee had 18 months total service; this was in between the defence range (2-3 months) and the employee’s request for 9 months.

Duty of Good Faith and Layoffs

The plaintiff argued breach of the duty of good faith given a series of successive temporary layoffs which prevented her from looking for work; the court found the employer’s intention was genuine and there was nothing nefarious about this – however if the employer had intended for the layoff to be permanent but misled the plaintiff about returning, it may be a different story.

Reduction of Damages to Match Reduced Salaries

The employer argued that damages should be reduced by 20% because other employees who were kept on had their salaries reduced – the court rejected this argument because it could not be said that the same would have occurred with the plaintiff.

[79] For that proposition, Ms. Verigen relies on Hogan at para. 94, where Gerow J. held that “if the Plaintiff had been given regular working notice, he would have been entitled to his regular salary and benefits.” But in the following paragraph, Gerow J. refused to use the plaintiff’s previous year’s (2019) income for that purpose because it included a bonus and the evidence was that the defendant paid no bonuses in 2020 as a result of the economic conditions caused by the pandemic (at para. 95). This suggests that it is appropriate for the Court to engage in at least some prospective analysis in assessing what Ms. Verigen would actually have earned had she continued working through the notice period.

[80] Ms. Verigen also relies on Hunsley v. Canadian Energy Services LP, 2020 ABQB 724, which I have found to be more helpful. In that case, the defendant, Canadian Energy Services LP (“CES”) sought, like ETL, to reduce the damages payable to the plaintiff so as to reflect reductions in salary later imposed on the remaining employees during the notice period. The Court refused to do so, for the following reasons:

[41] CES’s evidence is that as of April 21, 2020 its employees “accepted” a salary reduction, which for Ms. Hunsley’s pay grade would have been 12.5 percent; and as of April 1, 2020, the RRSP contribution program was discontinued. CES argues, therefore, that Ms. Hunsley’s compensation package would have been reduced if she had continued working and her damages must reflect the same adjustment.

[42] In my view, Ms. Hunsley’s damages must be based on the compensation she would have received without taking into account these deductions. The salary rollback and elimination of RRSP contributions occurred in the same month and together amounted to 18.5 percent of Ms. Hunsley’s base salary. A unilateral change of that magnitude without notice would likely amount to a fundamental breach constituting constructive dismissal.

[43] It is understandable that employees whose employment was continuing might “accept” such a change, to use CES’s euphemistic language. It is much less likely that someone working out a notice period would take the same view. It would be wrong in principle for me to assume an employer could reduce its damages by unilateral post-dismissal changes in the compensation package.

[44] Therefore, Ms. Hunsley’s damages will be based on the base salary and RRSP employee contributions at the levels existing when her employment was terminated.

[81] I find that reasoning persuasive. In this case, however, the full 20% reduction had already come into effect by the time Ms. Verigen was terminated, so it was not a “post-dismissal change in the compensation package” in the same sense. Nevertheless, Ms. Verigen was terminated on August 24, 2020 after having been laid off for the preceding five months. The salary reduction was imposed in that year only on active employees, not those like Ms. Verigen who had been laid off and were now being terminated. Whatever the rationale for reducing the salary of ETL’s remaining active employees may have been, it cannot have applied to someone like Ms. Verigen, who was, like Ms. Hunsley, merely deemed to be serving out a notional notice period.

[82] I am therefore not persuaded that it would be appropriate to reduce Ms. Verigen’s damages on that ground and I refuse to do so.

CERB Deductibility

CERB was not deductible because the plaintiff had only received $10,000 in CERB during the temporary layoff period and not after the actual termination (shows the importance of the actual termination date).

Our Employment & Labour Group has been working with businesses to educate, develop and draft the right policies and contracts for their workplace and are here to help! Get in touch today.

Note to Readers: This is not legal advice. If you are looking for legal advice in relation to a particular matter or drafting of workplace policy, please contact Chris Drinovz at [email protected].

Chris Drinovz is an experienced employment and labour lawyer in Abbotsford, Langley, Surrey & South Surrey, a Partner at KSW and Head of the Employment & Labour Group at KSW Lawyers (Kane Shannon Weiler LLP). Chris has been assisting local businesses with workplace issues since 2010. His expertise covers all facets of the workplace including wrongful dismissal, employment contracts, workplace policies, and WorkSafeBC matters, including occupational health & safety. Chris is on the Executive of the Employment Law Section of the Canadian Bar Association BC, the Vice President of Greater Langley Chamber of Commerce and a Director for Surrey Cares.

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