Can an employee extinguish his statutory right to severance pay by way of a full and final release signed in the context of a share sale?
According to a 2018 decision of the Court of Appeal for Ontario, Kerzner v. American Iron & Metal Company Inc., 2018 ONCA 989 (CanLII), the answer to that question is a resounding “no.”
The case has real implications for those who practice employment law in the context of the sale of a business.
Facts
This wrongful dismissal action arose in the context of the sale of Bakermet Inc. (“Bakermet”) in 2008 to ArcelorMittal Montréal Inc. (“ArcelorMittal”). The plaintiff/appellant, Steven Kerzner, was a co-owner and employee of Bakermet at the time of the sale.
Kerzner had been hired in 1980 by Bakermet, a buyer and seller of various types of metals and steel products. He went on to become a one-third owner of Bakermet and president of the company.
In 2008, ArcelorMittal Montréal Inc. (“ArcelorMittal”) purchased Bakermet for $45 million. Kerzner received $17,162,637 in consideration for the sale of his one-third share of the company.
The 2008 Share Purchase Agreement (“the SPA”) provided that no “Key Employee” – a term defined to include Kerzner – had given notice of “an intention to cease being employed with the [c]orporation” and that “the [c]orporation does not currently intend to terminate the employment of any officer, Key Employee or group of Key Employees.”
A release in favour of Bakermet and its successors (“the Release”) was executed concurrently with the SPA. It provided that Kerzner released Bakermet and its successors in accordance with the terms of the Release. “Released Claims” was defined as meaning:
[a]ny and all Claims which any of the undersigned has now, or may have in the future, against any Released Person, for any fact, act or omission up to and including the date hereof, including without limitation by reason of, or in connection with, any Released Person’s position as a shareholder, director, officer, employee or creditor of Bakermet Inc….at any time up to and including the date hereof….
The 2008 Executive Employment Agreement
In 2008 Kerzner signed an executive employment agreement “the 2008 Agreement”. The 2008 Agreement recognized in its recitals that Kerzner’s employment would continue following the share sale.
The following were the key features of the 2008 agreement:
- Kerzner was to be employed as General Manager at a base salary of $250,000 per year with annual bonuses of $200,000 in the first three years;
- Kerzner agreed to work for Bakermet for a minimum period of three years;
- the agreement was for an indeterminate period of time unless terminated;
- Bakermet could terminate Kerzner’s employment at any time, without cause, on written notice;
- if Kerzner was terminated without cause on written notice, he was entitled to 12 months of annual base salary, inclusive of ESA entitlements, as well as defined “basic payments” and continued protection under group insurance benefits for 12 months;
- the agreement included non-competition and non-solicitation clauses; and
- the terms of the agreement replaced and superseded all the terms in previous arrangements and agreements and Kerzner released any and all “claims” relating to same.
Two subsequent employment agreements were made between Kerzner and ArcelorMittal Ottawa, the validity of which agreements was not challenged.
The 2011 Agreement
The 2011 Executive Employment Agreement (“the 2011 Agreement”) was virtually identical to the previous 2008 Agreement, except that it purported to create a fixed-term contract and reduced Kerzner’s compensation (base salary and bonuses). The 2011 Agreement took effect on August 6, 2011 and would terminate on August 6, 2014 unless earlier terminated. It also included a clause requiring ArcelorMittal Ottawa to advise Kerzner in writing at least six months before August 6, 2014 if it intended not to renew the agreement. The 2011 Agreement continued to permit termination without cause, provided that notice was given to Kerzner. It reduced the amount payable following termination without cause to an amount equal to six months of annual base salary inclusive of ESA entitlements, along with basic payments and continued protection under group insurance benefits for six months.
The 2014 Agreement
The key change from the 2011 Agreement was that the 2014 Agreement established a two-year fixed term subject to early termination. The 2014 Agreement also reduced the appellant’s annual base salary to $185,000 and reduced his annual bonus to $46,250. The 2014 Agreement continued to require ArcelorMittal Ottawa to advise the appellant in writing of its intent not to renew the agreement at the end of the term, but the length of required notice was reduced to three months. Early termination on a without-cause basis continued to be permitted and in such a case the appellant remained entitled to an amount equal to six months of annual base salary inclusive of ESA entitlements, along with basic payments and continued protection under group insurance benefits for six months.
Termination
In 2015, ArcelorMittal Ottawa was acquired by American Iron & Metal Company Inc. (“AIM”) in an asset sale. Kerzner’s employment contract was assigned to AIM. Six months later, on September 11, 2015, AIM terminated his employment with one week’s working notice. In accordance with the 2014 Agreement, Kerzner was offered six months’ salary ($92,500) and continuation of benefits for six months, amounts that AIM asserted were “inclusive of [his] entitlements under the Employment Standards Act”. He was, at that time, 58 years old.
Kerzner sued for wrongful dismissal, seeking 24 to 30 months’ pay in lieu of notice, based on 35 years of continuous employment with AIM and its predecessors. AIM argued that Kerzner’s entitlement to compensation was limited by the terms of the 2014 Agreement.
Decision of the Ontario Superior Court
The matter was heard by way of summary judgment. For reasons given in July of 2017, and subsequently reported as Kerzner v American Iron & Metal Company Inc., 2017 ONSC 4352 (CanLII), the motion judge, the Honourable Justice Mew, concluded that the sale agreement and its accompanying release had the effect of releasing AIM from all claims relating to the appellant’s employment prior to the sale in 2008.
Further, he interpreted the employment agreements following the sale – between the appellant and AIM’s predecessor, ArcelorMittal Ottawa Inc. (“ArcelorMittal Ottawa”) – as a series of fixed-term contracts rather than a period of continuous service. Thus, he held that the appellant’s right to termination and severance pay under the Employment Standards Act, 2000 S.O. 2000, c. 41 (“ESA”), was to be calculated only from 2008 forward. The motion judge found that the termination clause provided for notice that exceeded the minimum notice requirements under the ESA and was enforceable.
Issues on Appeal
Mr. Kerzner, who was awarded six months’ pay in lieu of notice pursuant to the termination clause in his 2014 Executive Employment Agreement with AIM argued that he was entitled to additional damages.
Decision of the Court of Appeal for Ontario
Writing on behalf of the court, Justice Grant Huscroft held that:
[8] I have concluded that although the motion judge properly found that the appellant waived his entitlement to common law notice for service prior to 2008, he erred in concluding that the appellant released his pre-2008 employment for the purposes of determining his ESA entitlements. The motion judge erred, further, in concluding that the termination clause was enforceable. In addition, the motion judge erred in concluding that the appellant entered into fixed-term employment in 2011 and 2014.
The court then went on to make three findings:
- The appellant’s ESA entitlements could not be waived
- The termination clause was invalid and unenforceable
- The appellant was employed on an indefinite basis
The court’s reason for such decisions was as follows:
The appellant’s ESA entitlements could not be waived
[30] The appellant argues that s. 9 of the ESA provides for continuity of accrued service in the event that an employer sells a business and the purchaser of the business employs an employee of the seller. Accordingly, the appellant’s employment continued without interruption following the sale of Bakermet in 2008 and AIM was required to include his pre-2008 years of service when computing his ESA entitlements. He also argues that s. 5(1) of the ESA invalidates any provision purporting to contract out of ESA entitlements, and that the exception in s. 5(2) does not apply. Further, s. 65 of the ESA prohibits setoff of an employee’s statutory entitlement to be paid severance pay, except in limited circumstances, none of which is applicable here. In any event, there was no evidence that the 2008 Release was ever intended to effect a waiver. The evidence proffered demonstrated that the Release related to the sale of the appellant’s shares rather than to any pending termination of his employment, and the 2008 Agreement contemplated his employment continuing indefinitely.
[31] AIM argues that the appellant waived his pre-2008 common law and statutory termination entitlements by signing the Release in exchange for substantial consideration as part of the SPA. It describes the Release as an all-encompassing settlement agreement – a “package deal” the parties were free to enter into in the context of a share sale, citing this court’s decisions in Biancaniello v. DMCT LLP, 2017 ONCA 386 (CanLII), 138 O.R. (3d) 210 and Cosentino v. Sherwood Dash Inc., 2014 ONCA 843 (CanLII). …
[32] The respondent’s position as it relates to the ESA must be rejected.
…
[34] Regardless of whether the Release is a stand-alone agreement or part of a “package deal”, it must comply with the ESA. The relevant provisions of the ESA are neither ambiguous nor vague. Section 9(1) is mandatory: employment is deemed not to have been terminated or severed by the sale of the employer’s business in whole or in part, and employment with the seller is deemed to be employment with the purchaser for the purpose of calculating the employee’s length or period of employment. Moreover, s. 5(1) prohibits contracting out of or waiving any statutory obligations and voids any agreement purporting to do so.
[35] In short, the ESA is designed to preclude the very thing that AIM argues occurred in this case. There could be no valid waiver of the appellant’s ESA entitlements.
[36] This court’s decision in Biancaniello is of no assistance to AIM. It speaks to the scope of a release that was otherwise permissible. Nor is this court’s decision in Cosentino applicable. That case was concerned primarily with whether the appellant had resigned his employment. It is not authority for the proposition that ESA obligations may be waived in the context of a larger settlement agreement. At para. 9 of its decision, this court specifically stated that its reasons were “not to be considered an endorsement of the motion judge’s comments with respect to the Employment Standards Act.”
[37] In summary, the appellant’s pre-2008 service could not be waived or released for the purposes of calculating his ESA entitlements. AIM, as successor to ArcelorMittal Ottawa, was required to count the appellant’s pre-2008 service in calculating his ESA entitlements upon termination.
[38] However, this conclusion does not deprive the Release of all effect. Although the Release did not address the appellant’s ESA entitlements and should not have been read as purporting to do something it could not lawfully have done, it specifically addressed the release of all of the appellant’s claims in connection with his position as an employee. Given the context in which the Release was executed and the wording of the Release, it was open to the motion judge to find that the appellant had waived his claim to common law notice based on his pre-2008 employment. His finding is entitled to deference. [All emphasis added.]
The termination clause was invalid and unenforceable
[39] The motion judge held that the termination provision of the 2014 Agreement would violate the ESA only if the appellant had not released his pre-August 2008 service. Because the appellant could not waive his pre-August 2008 service for ESA purposes, it follows that the termination provision, which limits the appellant to six months’ notice on termination, violates the ESA because it provides a lesser benefit than the 34 weeks’ termination and severance pay to which he is entitled under the ESA. Accordingly, the termination provision in the 2014 Agreement, which purports to limit the appellant’s entitlements to six months’ salary and benefits, is void.
The appellant was employed on an indefinite basis
[40] In light of these conclusions, it is necessary to determine whether the appellant was employed on an indefinite or a fixed-term contract basis.
…
[42] In my view, the motion judge erred in law by failing to consider all of the relevant factors in concluding that the appellant was employed for a fixed term rather than on an indefinite basis. There was significant evidence indicating that, despite fixed-term language in the 2011 and 2014 Agreements, the appellant was employed on an indefinite basis.
[43] Plainly, the 2008 Agreement contemplated indefinite employment. But so too did the 2011 and 2014 Agreements: despite their fixed terms, both agreements specifically required the employer to provide written notice if it intended not to renew or continue the agreements. The 2011 Agreement included recitals specifically recognizing the appellant’s continued employment, and in particular stated that the parties desired to enter into the agreement “for the continuation of the employment of the [appellant]”. The 2014 Agreement recognized the appellant’s current employment.
[44] Although the motion judge acknowledged the renewal notice provision, he failed to analyze its effect and it did not factor into his analysis. Nor did the motion judge advert to the recitals.
[45] As this court explained in Ceccol, at para. 26:
Employers should not be able to evade the traditional protections of the ESA and the common law by resorting to the label of ‘fixed term contract’ when the underlying reality of the employment relationship is something quite different, namely, continuous service by the employee for many years coupled with verbal representations and conduct on the part of the employer that clearly signal an indefinite term relationship.[46] That is in essence what we have in this case. Although the motion judge found that the appellant had waived his right to any claims arising from his pre-2008 employment, his prior employment remained a fact and formed part of the context for the subsequent agreements governing his continued employment. At the time of his termination in 2015, the appellant had been employed continuously since 1980, and was employed pursuant to an ostensibly fixed-term agreement that required the employer to provide written notice if it intended not to renew or continue the agreement. Although the motion judge acknowledged that unequivocal and explicit language is required to establish a fixed-term contract and that any ambiguities will be strictly construed against the employer (citing Ceccol, at paras. 25 and 27), his focus on the transactions involving the purchase and sale of the business resulted in a failure to recognize the indefinite nature of the appellant’s employment.
[47] I conclude that the appellant was employed for an indefinite term from 2008 onwards and, as a result, was entitled to common law notice for the period of August 2008 to September 2015.
The court then went on to conclude that the reasonable notice period was seven months, but because Mr. Kerzner’s ESA entitlements (34 weeks) exceeded such amount, he was only entitled to such statutory amount.
Commentary
90% of the court’s decision makes sense to me. And, given that Mr. Kerzner successfully mitigated his damages only two months following the termination of his employment, perhaps the outcome of the case makes sense too. Also, one cannot overlook the fact that Mr. Kerzner made $17,162,637 on the share sale. To that end, I am going to avoid those parts of the decision not addressed in my summary above. (Especially including the court’s analysis at paragraphs 51 and 52.)
What is important to note is that ArcelorMittal could not have wiped the slate clean when it came to statutory entitlements. The ESA is exceptionally clear on this point and Ontario’s top court has now said as much as well. Indeed, the same aligns with what I have been saying on this subject for years, see e.g. Continuity of Employment Following the Sale of a Business.
However, what is interesting to note is that ArcelorMittal likely could have “wiped the slate clean”, at least when it came to Mr. Kerzner’s statutory severance entitlement, had it simply said so.
Subsection 65(8) of the ESA, cited by the court in paragraph 29 of its reasons for decision, provides as follows:
65(8) Only the following set-offs and deductions may be made in calculating severance pay under this section:
1. [Omitted]
2. An amount paid to an employee for loss of employment under a provision of the employment contract if it is based upon length of employment, length of service or seniority.
3. Severance pay that was previously paid to the employee under this Act, a predecessor of this Act or a contractual provision described in paragraph 2.
Had part of that $17,162,637 simply been characterized as statutory severance, perhaps with express reference to subsection 65(8) of the ESA, then it would have at least been arguable that Mr. Kezner had not “released” his claim to statutory severance, but rather already received that to which he was entitled. An exercise in semantics and nuance to be sure, but one that surely mattered.
Takeaways for Employees with Labour Pains
As with all termination provisions and other documents, it pays to obtain experienced legal advice before signing any document or agreeing to any settlement. Even if you have an experienced business lawyer, it may be prudent to ensure that you are also working with an employment lawyer as part of your team. In this case, the plaintiff was able to obtain more than his ostensible contractual entitlement by demonstrating that his employer had failed to comply with the provisions of the Employment Standards Act.
Takeaways for Employers with Labour Pains
The takeaway for employers is similar to that of employees, ensure that part of your transaction team includes an experienced employment lawyer. There are ways to address the implications of section 9 of the ESA. For example, purchasers may wish to consider insisting on an indemnity provision from the vendor, to mitigate the amount of exposure they may have following closing.
--As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.
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