There’s a common notion that employers can’t unilaterally and without consideration change the fundamental terms of an employment contract. But in March 2008, the Ontario Court of Appeal will hear arguments in Wronko v. Western Inventory Service Ltd., a case that could turn the principle on its head.
The appeal is from the October 2006 judgment of Superior Court Justice John Jennings, who ruled that employers can indeed change the fundamental terms of an employment contract without consideration - so long as they do so on reasonable notice.
“The reason people can’t get their heads around Wronko is their failure to appreciate that an employment contract is also a commercial contract, but a fluid one that goes on for an indefinite period,” says Christopher Lloyd of Aird & Berlis LLP, who represented Western Inventory.
Darrell Wronko had 16 years’ service with Western when he left the company in 2004. At that point, he had risen to the position of vice president.
His original contracts had provided for two years’ severance pay in the event he was terminated without cause. But in September 2002, after several months of discussions, Western sent him a letter that gave him two years’ notice that the severance clause in his contract would be capped at 30 weeks.
In September 2004, after the two years’ notice expired, the company advised Wronko in writing that it “would not have a job for you” if he failed to accept the change to the severance provision. Wronko replied, stating that he took the letter as a termination of employment.
When he heard no further from the company, Wronko e-mailed an inquiry the next day as to whether he should come to the office “to assist in an orderly transition.”
The company’s answer was that the existing employment agreement remained in place “with the amended termination provisions.”
Wronko treated the company’s action as a termination and sued for wrongful dismissal, seeking two years’ pay in lieu of notice.
But Jennings didn’t see it Wronko’s way.
“The real issue, I believe, is whether the defendant had a right to vary the termination clause in the contract upon reasonable notice to the plaintiff,” Jennings wrote.
“If the defendant had the right to vary and if the notice given was reasonable, then the defendant had the right to accept the plaintiff’s refusal to report to work on Sept. 17, 2004 as the defendant requested as being evidence of [the plaintiff’s] resignation.”
In Jennings’ view, Western had the right to vary the severance terms on reasonable notice.
“Accordingly, I hold that in declining to continue to work for the defendant under the terms of the revised contract, the plaintiff effectively ended the employment relationship,” he wrote.
Christine O’Donohue of Miller Thomson LLP’s Toronto office, who represented Wronko, relied on the Ontario Court of Appeal’s 1994 decision in Francis v. Canadian Imperial Bank of Commerce for the proposition that, “The law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relationship as the consideration for the new terms.”
O’Donohue also relied on two decisions, Hobbs v. TDI Canada Ltd. and Belton v. Liberty Insurance Company of Canada, in which the Court of Appeal noted its earlier decision in Francis with approval.
But in Francis, the employer had presented the plaintiff with a written contract several weeks after his employment began. Although Francis signed that contract, the court ruled that the employer could not rely on its provisions to justify his termination, as there had been no consideration given for it.
“Implicit in Wronko is that if the employer had provided Francis with reasonable notice of the imposition of the new contract, the lack of consideration would not have been material,” says Jeff Goodman of Heenan Blaikie LLP’s Toronto office.
Still, Goodman maintains that the judgment reflects Jennings’ unhappiness with the way Western treated Wronko when giving him notice of the change.
“However, Jennings probably believed he had no power to punish Western for the manner in which it imposed the change, since he had already decided that the notice was reasonable and that Wronko had resigned,” Goodman says. “But query whether Wallace damages were appropriate had Western in fact terminated Wronko at the end of the notice period - despite the sufficiency of the notice.”
Wallace damages flow from the Supreme Court of Canada’s 1997 decision in Wallace v. United Grain Growers. The court ruled that employers who demonstrated bad faith, ill intent, malice, or blatant disregard for employees when firing them could be liable for extended damages.
Goodman also warns that employers could abuse Wronko.
“One can foresee an employer giving in to an employee’s notice demands because of the employee’s strong negotiating power in the pre-employment scenario, and then providing the employee with written notice of a change once the employee has joined the company and no longer has the same negotiating power,” Goodman explains.
But the lawyer adds that employees who can prove that the change was in the cards from the outset may have a claim of negligent misrepresentation against the employer.
For his part, Lloyd says that change on reasonable notice may be preferable to termination.
“If the Court of Appeal doesn’t uphold the judgment, a lot more people are going to get fired,” he says.
Lloyd adds that employees can also use Wronko to their advantage.
“If employers can change terms on reasonable notice, so can employees, which means that someone could say that they will leave their employment after a reasonable period of notice unless something changes,” he says.
Still, Goodman believes that Wronko played his cards wrong, and that the situation should never have developed as it did. As the lawyer sees it, Wronko should have used the two-year period to look for work regardless of his interpretation of his rights.
“It should have been clear to Wronko that his career at that company was effectively at an end,” he says. “Even if he had been successful in his case, he would have spent two years of his life and significant legal fees to achieve an award that would have been subject to reduction for failing to mitigate.
“And even if the court did not count the two years as an actual notice period, there was a strong argument that it counts as advance notice of termination, which also would have reduced any award,” he says.