Dear all
Welcome to the Summer edition of the newsletter. Many thanks as always to those who contributed an article for inclusion in this edition. We have our first article on Malaysia, together with articles on Saudia Arabia, the Netherlands, Ireland and Canada - so the newsletter is becoming increasingly international!
Helen Colquhoun
Withers
Saturday, June 11, 2016
Canada - Balancing Uncertainty and Good Faith when Terminating Employment Contracts
By Theodore Goloff, Robinson Sheppard Shapiro LLP
Introduction – “Ripleys’ Believe it or Not”
Canadians really are different from our American neighbours – not only because of our peculiar way of spelling “labour”!
“At-will employment”, as known in many states of the U.S.A., simply doesn’t exist north of the 48th parallel that defines the international frontier between Quebec, New Brunswick and the border states. All Canadian jurisdictions of which there are at least 11, at the least, require that when terminating employment of indeterminate term otherwise than for “just cause”, employers provide the employee with both “statutory notice”, as provided by governing employment standards legislation and common law notice, or corresponding pay in lieu thereof. Some jurisdictions require the payment of “statutory severance”, in addition. Thus, while in most Canadian jurisdictions an employer is free to terminate such employment at any time even without alleging cause, doing so may give rise to substantial costs. Termination for redundancy is nowhere considered “cause”, and ever since Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, spurious allegations of “cause”, advanced and/or unreasonably pursued will give rise to additional damages, either in the form of substantially increased “notice”, (appropriately termed “Wallace Damages”), as in Canada’s common law provinces, or “moral” damages in Quebec. When the manner in which termination is effected is particularly egregious, that may also attract punitive damages.
Decidedly, the purpose of common law notice, or its equivalent in Quebec, “reasonable notice” pursuant to articles 2091-2092 of the Civil Code of Quebec, is to provide employees with a cushion of expected income while seeking to transition to alternative employment. It allows the perceived weaker party to acclimatize to changed circumstances while safeguarding the right of the employer to determine the size and composition of his work place. Ostensibly, it is to balance and temper competing rights.
Unless contractually otherwise defined, the measure of notice that is due must be individually assessed at the time of termination depending on varying factors whose relative importance may vary from case to case according to context.
While “working notice” is generally an option, employers terminating employees in Canada and deciding to give immediate effect to the termination and “monetize” notice, must ensure that the employee receives the full value of what he/she would have received had “working notice” been provided.
When an employer chooses to provide pay in lieu of working notice, the question then arises what must be taken account of in making the employee whole?
The rule requiring that payment in lieu of notice must include all rights and benefits which the employee would have received had he/she worked the notice period, easy in concept, is difficult in application. When the employment contract or its ancillary agreements provide that a specific benefit, e.g. incentive bonus, share options or warrants, etc. as yet unvested, requires active employment as a condition of vesting, can a termination that is otherwise lawful in some way be viewed as “frustrating” the contract making it open to challenge or allowing recovery of damages? When the specific language of the contract or its ancillary documents restrictively defines the full and final parameters of the notice payment — excluding such benefits — what happens when there is a discrepancy between the two amounts? Can the condition depriving the employee of the benefit, at least for what would have accrued during the notice period be struck or annulled, and, if so, on what basis? Can provisions that cancel unvested rights as at the date of termination be attacked as being in the nature of “adhesion provisions” that are inherently “abusive”, or in breach of good faith/fair dealing and therefore unenforceable? In circumstances where termination without cause involves forfeiture of contingent unvested rights, can such termination be viewed as arbitrary, unreasonable and therefore suspect and/or actionable? Is there a difference between contingent rights which vest during or after the notice period? In one way or another, these questions involve the tension between certainty of contractual outcomes and different perceptions of good faith/fair dealing.
As the reader will see below, the primacy of provincial rather than federal competence in matters of employment and labour relations complicates a “one size fits all” response to these questions.
Good Faith from the Civil Law/Common Law Perspective
The Civil Law of Quebec
Canada enjoys both a bilingual and bijural legal tradition — the common law in nine of its provinces and three territories, and the civil law tradition in Quebec. Contradictory results sometimes obtain regarding similar contractual issues and may result from (i) where the litigation originates, or (ii) is adjudicated, and (iii) under what legal regime. With its judges representing both legal traditions, the Canada Supreme Court adroitly seeks providing harmony between systems by reducing inconsistencies between systems, where possible without jeopardizing each tradition’s individuality.
Adherents of the civil law tradition in Quebec sometimes boast that its methodology of identifying the appropriate “codal” principles and applying them contextually provides decisions made “by authority of reason” and not, as in common law, “by reason of authority”. Codification such as the Civil Code of Quebec, the jus commune in that province “purports to be comprehensive…not in details but in the principles (calling) for a liberal interpretation in order that it may serves the basis of decision for new situations”.
Of interest, regarding the questions raised above are inter alia articles 6, 7, 1375, 1379 and 1437 of the Civil Code of Quebec which provide:
6. Every person is bound to exercise his civil rights in good faith.
7. No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith.
1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.
1379. A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties, on his behalf or upon his instructions, and were not negotiable. […]
1437. An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.
An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith; in particular, a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause.
The Quebec Court of Appeal has canvassed these provisions to reach what seem well anchored positions with respect some of the questions raised above providing needed direction to the employment bar on these issues.
In IBM Canada Ltée c. D.C., 2014 QCCA 1320, the terminated executive benefited from IBM’s Long-Term Incentive Award Program. The Restricted Stock Units [RSUs] pursuant to the program granted to him contained provisos to the effect that in the event of his ceasing to be an employee (other than because of death or disability) all as yet unvested RSUs would self-cancel and that options that were not exercisable as at the date of termination were forfeit. Had the executive worked the notice period, a number, but not all of those RSUs would have become vested. Plaintiff argued that the clause(s) whereby be forfeited unvested RSUs and/or options were “adhesion clauses”, inherently abusive, unreasonable and offensive to the principle that he was required to be made whole in respect of all benefits he would have enjoyed during the “notice period” had he worked. As he would have then become vested with at least some of those RSUs and options, he was short-changed and claimed judgment in his favour on the basis of “quod erat demonstrandum".
Plaintiff succeeded in Trial Court but saw the judgment reversed in appeal. In particular, Mme Justice St-Pierre, with whom her colleagues on this point agreed, specified:
[102] I am ready to agree that these clauses represent a contract of adhesion. It is however with respect to the claimed abusive character of the provisions that restrict the rights of Mr. C to require or monetize the advantages set out in these agreements where my opinion differs.
[103] IBM and Mr. C concluded an employment contract of indeterminate duration having multiple facets. Many provisions that benefit Mr. C were agreed to firmly and their exigibility was not dependent on anything other than the execution by the latter of the obligations which were his counterpart.
[104] That is not the case with respect to the programs dealing with incentive measures which relate to unilateral decisions of IBM and with respect to which it has reserved discretionary powers. The purpose served is clear. IBM wished to advantage in a very special way certain key employees in order to encourage them to remain with the enterprise. As mentioned earlier, its seems to me a legitimate purpose in context.
[105] Taking into consideration the totality of Mr. C’s working conditions, I cannot see how the reserve by IBM of the discretionary faculty of granting him, from time to time, additional advantages beyond those firmly consented to could be considered abusive. I therefore believe ill-founded Mr. C’s argument drawn from the text of Article 1437 C.C.Q.
[…]
[108] I accept the proposition according to which agreements regarding incentive measures form part of Mr. C’s working conditions. Nevertheless, to the extent that they are not abusive, and that is the conclusion to which I have already arrived, they must be applied according to their tenure.
[109] Here, the grant of incentive advantages depends upon the unilateral wish of IBM to encourage or not its employee to remain in its service. In May 2007, even assuming that IBM would have given Mr. C a notice period of two years, it is evident that IBM would have ceased to offer him these types of advantages that are destined to keep him in his position.
While parts of the very substantial judgment that Plaintiff was awarded at trial were upheld, his submissions on the issue of the “abusive” nature of the implicit “forfeiture” provisions were decisively dismissed.
Plaintiff also benefited from IBM’s Supplemental Executive Retention Plan [SERP]. As the Court noted:
[74] … IBM ended the Plan on December 12, 2008, without cancelling the acquired rights of those who had jointed the Plan and who were still in its employ.” (Translation our own)
Plaintiff had ceased to be an employee of IBM in June 2007. Plaintiff’s claims pursuant to the SERP were dismissed by the appellate court, Mme Justice St-Pierre writing:
[75] I note that the Plan was not based upon written accounting documents. During the period of membership in the Plan, neither IBM nor the employee were required to disburse, so that the regime in question was purely virtual (“notional”).
[…]
[82] IBM was entitled to end the employment relationship without cause, under reserve, certainly, of its obligation to provide reasonable notice. The argument that the clause was abusive is without merit to the extent that the Plan pursued a legitimate purpose, known and accepted by everyone, that is, to retain executives by incentivizing them to pursue their career with IBM up to the age of 55. I will have occasion to come back to the particular chapter of contractual relations between Mr. C and IBM.
[83] This said, Mr. C might have legitimately been entitled to be indemnified if he had established that his dismissal sought notably to deprive him of the sums virtually accumulated in the SERP. That was not the case. [Translations our own]
The Court in effect noted that actori incumbit probatio — he who alleges must prove — and that the rule entails the inference that the absence of fact duly established is not evidence.
In both instances, the Court recognized that the litigants were adults and vaccinated when they contracted together, understood that some “benefits” were inherently “precarious” and opted for respect of certainty and purpose in the absence of proof of bad faith.
In Premier Tech ltée c. Dollo, 2015 QCCA 1159, the ex-employee was both an executive and a shareholder. The Share Option Purchase Plan contained provisions (Section 8.01.2) similar to those in the IBM case providing the loss/forfeiture of unvested and/or unexercised warrants or options in the event of cessation of employment, but with an exception: “… unless the Board of directors, in its sole discretion decides otherwise”.
As the Court of Appeal noted, Plaintiff had foregone an opportunity to exercise the options that he had accumulated during an earlier period of corporate reorganization, on the express representations of Defendants’ Board that he would be able to exercise them notwithstanding Section 8.01.2 in the event of a future termination of employment. While the Court recognized the “adhesion” character of that provision, it refused to view the clause as being inherently abusive or unreasonable. On the contrary, it was only because of the promises made to Plaintiff to the effect that his forbearance would not be prejudicial to him in the future that the refusal of the Board of Directors to exercise its reserved discretion became unconscionable. From this author’s perspective, it is the evidence of the Board’s bad faith through its failure to honour previously given specific assurances that marks this case as one based on a form of promissory estoppel — or as its partial complement is known in Quebec — “fin de non-recevoir”.
In this case, certainty of outcome and good faith favoured the executive because no one, as the Court noted, should be allowed to profit from their own misrepresentation. On the other hand, pursuant to the Civil Code, good faith is always presumed in the absence of evidence to the contrary. In the Premier Tech case, the objective evidence of misrepresentation was made crystal clear for the Court and did not require adverse inference.
It is of some note that leave to appeal to the Supreme Court of Canada was recently denied, making this judgment final.
Good Faith And Fair Dealing – An Organizing Principle in the Common Law of Canada
As I wrote elsewhere, (See 49 ABA/SJL YIR (N.S.) 463 (2015) pp. 471-474) in Bhasin v. Hrynew [2014] 3 S.C.R. 494) :
The Supreme Court recognized a duty of good faith, as “a general organizing principle of the common law” requiring that parties perform their contractual duties honestly and reasonably and not capriciously or arbitrarily, bringing Canada’s common law in line with commercial expectations elsewhere in North America, while producing a subtle shift towards a “civilian” approach to legal analysis.
The court left undisturbed the trial judge’s finding that in the period preceding termination of Mr. Bhasin’s “commercial dealership agreement”, the respondents were neither candid nor forthright, indeed misleading him on critical details, all of which led, at the expiry of the contract term, to his losing “the value in his business in his assembled workforce.”
The case turned on whether Canadian common law required the respondents to perform their contractual obligations “honestly” and with due regard for Mr. Bhasin’s legitimate interests. The court wrote that
Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations. It will also bring a measure of justice to the appellant, Mr. Bhasin, who was misled and lost the value of his business as a result.
“Determining Canadian common law to be: (i) uncertain, (ii) incoherent, and (iii) “out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law in Canada – Quebec and the United States”, the Court felt obliged to develop the common law in step with societal/commercial expectations, but in an incremental fashion. Good faith as an “organising principle” would not reverse pre-existing rules, but created an over-arching standard of conduct that “states in general terms a requirement of justice from which more specific legal doctrines may be derived [that] may be given different weight in different situations. Applying it to particular situations would allow a coherent way forward “where the development may occur incrementally in a way that is consistent with the structure of the common law of contract [with] due weight [given] to the importance of private ordering and certainty in commercial affairs.”
In Bhasin, the record relied upon disclosed to the Court’s satisfaction absence of candor, a dollop of double-dealing and a healthy serving of material misrepresentation. The originality of the case from our perspective is dual: It borrowed from civilian methodology in putting forward honesty, candor and the obligation to recognize and take account of the effects that one’s behaviour can have on the “other’s” well founded expectations, both in performing and ending contractual relations as an “organizing principle” of the common law as a principle, to be modulated in situ from case to case based on the evidence that the record disclosed.
Respectfully, however elastic these principles, they ought not be divorced from the factual underpinnings that gave rise thereto. Certainly, in Bhasin, there was an expectation based on real and objective misrepresentations by Defendant that led Plaintiff to believe that he would not be prejudiced. Indeed, it was because of such deceptive practices, as the Court saw them, that Plaintiff lost the value of his business. It was such deception and unfair dealing that the organizing principle was affirmed.
Enter Stage Right, Styles v. Alberta Investment Management Corporation, 2015 ABQB 621
As a Trial Court judgment that is presently in appeal, this judgment might have passed under this writer’s radar, save for the fact that it seems to have expanded on the Bhasin principles in a manner that is far more typical of the civil law tradition than that of the common law. Whether it overshot the mark, I leave for higher Courts to decide.
The Supreme Court in Bhasin drew upon Quebec’s civil law tradition to prescribe an “organizing principle” of the common law, which would allow it to find application organically, and be interpreted and/or modulated by new situations as they arose. From this writer’s perspective, the Styles case seems to apply the Bhasin principles questionably to a factual situation where proof of actual misrepresentations and/or bad faith is absent in the record. It nevertheless is important to consider this case carefully when an employer terminates employment on a without cause basis, but subject to the payment of a specified and contractually agreed amount that excludes unvested and as yet unmatured entitlements to incentive payments. Does this judgment also directly or indirectly properly oblige an employer who terminates the employment of a hitherto exemplary employee on a without cause basis to explain the rationale of the termination so as to negate any possible of inference of unreasonable or arbitrary conduct? Does the right to terminate “without cause” equate with “even for no reason at all” or does such right, at its limit, mean the right to terminate for only some intelligible and palpable reason, that is always reviewable or challengeable on the basis of its alleged arbitrariness or capriciousness? To protect against possible adverse inference, must a prudent employer advance some credible explanation of why the termination, so as to negative an inference that what was done was simply to elude payment of what would otherwise become due, all other things being equal, in the fullness of time? Does that mean that any termination must have some internal and credible logic to it that must in the event of litigation be alleged and proven? In forcing the employer for its self-preservation to “go public” on the rationale, does that always serve the interests of justice, and those of the employee in particular?
Is certainty of outcome of contractually foreseen events a value that has somehow been lost in an eagerness to protect a perceived disadvantaged and weaker party? In Quebec, the employer’s interest in advantaging or incentivizing those whom it decided “in its discretion” to keep in its employ was comparable to the inherently reasonable rationale justifying the forfeiture of such “precarious” unvested” and as yet “unmatured” rights. Is that a position that should be followed elsewhere?
Important questions all they are that are raised here for consideration by the reader, rather than for response.
The Facts and The Judgment in The Styles Case
Plaintiff was hired in 2010 into a senior executive position pursuant to an employment contract which essentially provided:
i. the possibility of termination without cause upon three months’ notice or payment in lieu thereof, such payment being contractually limited to a calculation that takes account only base salary. All contingent unmatured and unvested rights were therefore not to be taken account of;
ii. the possibility, subject to acceptance and signature of Participation Agreements, of being granted Long Term Incentive Plans (LTIPs) which would mature, vest and payout four years after grant, according to a formula whereby they could appreciate up to a maximum of three times the grant or depreciate to zero-based on a number of factors, only some of which the employee himself could influence, if at all;
iii. as active employment as of the date of maturity was a condition of payout, all unvested grants were subject to forfeiture without additional compensation as of the last day of employment;
iv. at its discretion, the Employer could modify, amend or terminate the Plan provided that in the event of “termination of the Plan” a Participant would, subject to the terms of the Plan, continue to be entitled to grants previously awarded.
Plaintiff had been awarded grants on January 1, 2011, again in 2012 and in 2013 with “maturity” or “vesting” dates of December 31, 2014, December 31, 2016 and December 31, 2017, i.e. 48 months following the grant. Plaintiff’s employment was terminated with payment of three months of base salary pursuant to the termination clause of the Employment Contract in June 2013 on a without cause basis. The reader should note that the Plan in question was not terminated. Only Plaintiff’s employment was.
Notwithstanding the provisions regarding the exclusion of anything but base salary, and notwithstanding the forfeiture clause of unvested LTIP grants, the Trial Judge determined that: (i) Plaintiff had exceeded every performance targeted imposed by the employer; (ii) there was no indication that he was not committed to carrying out his employment in the most diligent and professional manner; and as the case came up for decision on summary judgment, (iii) notwithstanding an affidavit from one of the employer’s executives, Defendant provided no evidence to explain how the termination came about or the reasons therefor.
From this writer’s perspective however, how can the absence of evidence imply bad faith? Does it necessarily lead to a conclusion that the basis of the termination was or is somehow suspect? If good faith is presumed or to be presumed in the absence of proof to the contrary, can the absence of evidence explaining the termination allow an adverse inference as to its reasonability or legitimacy? Isn’t the whole idea of termination based on the absence of any necessity to provide justification?
In Styles, the Alberta Court of Queen’s Bench wrote:
[65] In affirming this common law duty of reasonable exercise of discretionary contractual powers, I have recognized the fact that “[t] the duty of good faith performance of contractual obligations recently affirmed by the Supreme Court of Canada in Bhasin [is not a license] to invent obligations out of whole cloth divorced from the actual terms of the contract between the parties” : […]
[66] This duty of reasonable exercise of discretionary contractual power is not a limitation on “the right of an employer to determine the composition of its workforce”; Bhasin at paras 53-54. It is designed to deal with both the unfair manner of termination and the consequence that flow from unduly insensitive conduct of an employer when dismissing an employee. In some situations, where the termination deprives an employee of the right to receive earned performance bonuses, grants, or awards, then the exercise of the discretion to terminate without cause becomes arbitrary or capricious when the employer creates circumstances under which the employee would be unable to receive the bonuses or other benefits and provides no reasonable or meaningful explanation for such deprivation.
Given the exemplary conduct and singular contributions that Plaintiff Styles apparently made, coupled with the absence of any explanation as to why termination arose, the Court noted:
“[121] In my opinion, the right to terminate without cause, whether in general or pursuant to a term in a contract, is a clear indicator of the power imbalance between employer and employee. As such, I believe that the historical recognition by the Supreme Court of Canada of the unique nature of employer/employee relationship and its recognition of an implied term of good faith governing the manner of termination, informs the application of the Bhasin principles to the employment contract generally.
[122] In this context, I note that the LTIP document states, inter alia:
Unless otherwise stipulated, participants must be actively employed by AIMCo, without regard to whether the Participant is receiving, or will receive, any compensatory payments or salary in lieu of notice or termination on the date of payout, in order to be eligible to receive any payment.
[123] When an employment contract includes a condition for the receipt by an employee of a benefit under the contract and the employer has the discretion, pursuant to the terms of the contract, to frustrate the satisfaction of that condition, it becomes even more important for that discretion to be exercised fairly, reasonably and not arbitrarily. When one focuses on the unique nature of the relationship here, and the reality that there has accrued to the Plaintiff some earned entitlements from the subject LTIP, then the unfair or arbitrary exercise of discretion in a manner that takes away those earned entitlements is more serious.
The Court ended by stating
[133] Given my conclusion that there is a common law duty that discretionary contractual powers granted under a contract must not be exercised in a manner that is unreasonable, unfair, “capricious” or “arbitrary” – conceived as a general doctrine of contract law imposing, as a contractual duty, a minimum standard of reasonable exercise of discretionary contractual power – I conclude that the entire agreement clause in Clause 4 (o) of AIMCo’s Long Term Incentive Plan Participation Agreement does not assist the Defendant AIMCo in the circumstances of this matter: see, Bhasin at para 74.
[134] I find that the Defendant AIMCo breached the employment contract and the incorporated LTIP Agreement when it failed to exercise its contractual discretionary powers reasonably in dismissing the Plaintiff while at the same time refusing to pay the Plaintiff any of his earned, awarded and approved LTIP grants. I also find that the Plaintiff suffered damages as a result of that breach.
It is one thing to find that particular conduct or representations preclude an employer from relying upon the express provisions of the contract. On the other hand, when both parties to a contract are sophisticated business folks who, one would imagine, would have read and re-read their contractual rights and responsibilities many times, it is a stretch, however, to apply the Bhasin principles where no active and objective misrepresentation can be attributed to Defendant.
Indeed, the Court recognized that in writing as it did:
[135] It may be possible to debate whether the unreasonable exercise of discretionary contractual powers would constitute a breach of the duty of honest performance in the context of the Supreme Court’s prescription in Bhasin. However, it is not necessary for me to debate this issue because the exercise of contractual discretionary powers in this case clearly constitutes a breach of a common law duty that requires discretionary powers granted under a contract to be exercised fairly and reasonably and not in a manner that is “capricious” or “arbitrary”.
Lessons to be Learned
It remains to be seen whether the Trial Court judgment will be maintained, varied or quashed in appeal. Indeed, given that it runs to the heart of what are the parameters of an employer’s right to terminate “with notice but without cause”, it may be viewed, possibly, as material for eventual review by the Supreme Court of Canada. Whatever the case, an employer, at least in the common law provinces of Canada should always consider whether there is some value to providing a rationale for the termination, not for the purpose of establishing performance based or disciplinary cause, but so as to negative any inference of bad faith, and thereby secure some degree of certainty of contractual outcome. The flip side to that, of course, is that such allegations become just one more item that may become litigious. Great for lawyers – perhaps not so great for clients! Where the balance lies between the two, I leave to others to determine.
Introduction – “Ripleys’ Believe it or Not”
Canadians really are different from our American neighbours – not only because of our peculiar way of spelling “labour”!
“At-will employment”, as known in many states of the U.S.A., simply doesn’t exist north of the 48th parallel that defines the international frontier between Quebec, New Brunswick and the border states. All Canadian jurisdictions of which there are at least 11, at the least, require that when terminating employment of indeterminate term otherwise than for “just cause”, employers provide the employee with both “statutory notice”, as provided by governing employment standards legislation and common law notice, or corresponding pay in lieu thereof. Some jurisdictions require the payment of “statutory severance”, in addition. Thus, while in most Canadian jurisdictions an employer is free to terminate such employment at any time even without alleging cause, doing so may give rise to substantial costs. Termination for redundancy is nowhere considered “cause”, and ever since Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, spurious allegations of “cause”, advanced and/or unreasonably pursued will give rise to additional damages, either in the form of substantially increased “notice”, (appropriately termed “Wallace Damages”), as in Canada’s common law provinces, or “moral” damages in Quebec. When the manner in which termination is effected is particularly egregious, that may also attract punitive damages.
Decidedly, the purpose of common law notice, or its equivalent in Quebec, “reasonable notice” pursuant to articles 2091-2092 of the Civil Code of Quebec, is to provide employees with a cushion of expected income while seeking to transition to alternative employment. It allows the perceived weaker party to acclimatize to changed circumstances while safeguarding the right of the employer to determine the size and composition of his work place. Ostensibly, it is to balance and temper competing rights.
Unless contractually otherwise defined, the measure of notice that is due must be individually assessed at the time of termination depending on varying factors whose relative importance may vary from case to case according to context.
While “working notice” is generally an option, employers terminating employees in Canada and deciding to give immediate effect to the termination and “monetize” notice, must ensure that the employee receives the full value of what he/she would have received had “working notice” been provided.
When an employer chooses to provide pay in lieu of working notice, the question then arises what must be taken account of in making the employee whole?
The rule requiring that payment in lieu of notice must include all rights and benefits which the employee would have received had he/she worked the notice period, easy in concept, is difficult in application. When the employment contract or its ancillary agreements provide that a specific benefit, e.g. incentive bonus, share options or warrants, etc. as yet unvested, requires active employment as a condition of vesting, can a termination that is otherwise lawful in some way be viewed as “frustrating” the contract making it open to challenge or allowing recovery of damages? When the specific language of the contract or its ancillary documents restrictively defines the full and final parameters of the notice payment — excluding such benefits — what happens when there is a discrepancy between the two amounts? Can the condition depriving the employee of the benefit, at least for what would have accrued during the notice period be struck or annulled, and, if so, on what basis? Can provisions that cancel unvested rights as at the date of termination be attacked as being in the nature of “adhesion provisions” that are inherently “abusive”, or in breach of good faith/fair dealing and therefore unenforceable? In circumstances where termination without cause involves forfeiture of contingent unvested rights, can such termination be viewed as arbitrary, unreasonable and therefore suspect and/or actionable? Is there a difference between contingent rights which vest during or after the notice period? In one way or another, these questions involve the tension between certainty of contractual outcomes and different perceptions of good faith/fair dealing.
As the reader will see below, the primacy of provincial rather than federal competence in matters of employment and labour relations complicates a “one size fits all” response to these questions.
Good Faith from the Civil Law/Common Law Perspective
The Civil Law of Quebec
Canada enjoys both a bilingual and bijural legal tradition — the common law in nine of its provinces and three territories, and the civil law tradition in Quebec. Contradictory results sometimes obtain regarding similar contractual issues and may result from (i) where the litigation originates, or (ii) is adjudicated, and (iii) under what legal regime. With its judges representing both legal traditions, the Canada Supreme Court adroitly seeks providing harmony between systems by reducing inconsistencies between systems, where possible without jeopardizing each tradition’s individuality.
Adherents of the civil law tradition in Quebec sometimes boast that its methodology of identifying the appropriate “codal” principles and applying them contextually provides decisions made “by authority of reason” and not, as in common law, “by reason of authority”. Codification such as the Civil Code of Quebec, the jus commune in that province “purports to be comprehensive…not in details but in the principles (calling) for a liberal interpretation in order that it may serves the basis of decision for new situations”.
Of interest, regarding the questions raised above are inter alia articles 6, 7, 1375, 1379 and 1437 of the Civil Code of Quebec which provide:
6. Every person is bound to exercise his civil rights in good faith.
7. No right may be exercised with the intent of injuring another or in an excessive and unreasonable manner, and therefore contrary to the requirements of good faith.
1375. The parties shall conduct themselves in good faith both at the time the obligation arises and at the time it is performed or extinguished.
1379. A contract of adhesion is a contract in which the essential stipulations were imposed or drawn up by one of the parties, on his behalf or upon his instructions, and were not negotiable. […]
1437. An abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.
An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith; in particular, a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause.
The Quebec Court of Appeal has canvassed these provisions to reach what seem well anchored positions with respect some of the questions raised above providing needed direction to the employment bar on these issues.
In IBM Canada Ltée c. D.C., 2014 QCCA 1320, the terminated executive benefited from IBM’s Long-Term Incentive Award Program. The Restricted Stock Units [RSUs] pursuant to the program granted to him contained provisos to the effect that in the event of his ceasing to be an employee (other than because of death or disability) all as yet unvested RSUs would self-cancel and that options that were not exercisable as at the date of termination were forfeit. Had the executive worked the notice period, a number, but not all of those RSUs would have become vested. Plaintiff argued that the clause(s) whereby be forfeited unvested RSUs and/or options were “adhesion clauses”, inherently abusive, unreasonable and offensive to the principle that he was required to be made whole in respect of all benefits he would have enjoyed during the “notice period” had he worked. As he would have then become vested with at least some of those RSUs and options, he was short-changed and claimed judgment in his favour on the basis of “quod erat demonstrandum".
Plaintiff succeeded in Trial Court but saw the judgment reversed in appeal. In particular, Mme Justice St-Pierre, with whom her colleagues on this point agreed, specified:
[102] I am ready to agree that these clauses represent a contract of adhesion. It is however with respect to the claimed abusive character of the provisions that restrict the rights of Mr. C to require or monetize the advantages set out in these agreements where my opinion differs.
[103] IBM and Mr. C concluded an employment contract of indeterminate duration having multiple facets. Many provisions that benefit Mr. C were agreed to firmly and their exigibility was not dependent on anything other than the execution by the latter of the obligations which were his counterpart.
[104] That is not the case with respect to the programs dealing with incentive measures which relate to unilateral decisions of IBM and with respect to which it has reserved discretionary powers. The purpose served is clear. IBM wished to advantage in a very special way certain key employees in order to encourage them to remain with the enterprise. As mentioned earlier, its seems to me a legitimate purpose in context.
[105] Taking into consideration the totality of Mr. C’s working conditions, I cannot see how the reserve by IBM of the discretionary faculty of granting him, from time to time, additional advantages beyond those firmly consented to could be considered abusive. I therefore believe ill-founded Mr. C’s argument drawn from the text of Article 1437 C.C.Q.
[…]
[108] I accept the proposition according to which agreements regarding incentive measures form part of Mr. C’s working conditions. Nevertheless, to the extent that they are not abusive, and that is the conclusion to which I have already arrived, they must be applied according to their tenure.
[109] Here, the grant of incentive advantages depends upon the unilateral wish of IBM to encourage or not its employee to remain in its service. In May 2007, even assuming that IBM would have given Mr. C a notice period of two years, it is evident that IBM would have ceased to offer him these types of advantages that are destined to keep him in his position.
While parts of the very substantial judgment that Plaintiff was awarded at trial were upheld, his submissions on the issue of the “abusive” nature of the implicit “forfeiture” provisions were decisively dismissed.
Plaintiff also benefited from IBM’s Supplemental Executive Retention Plan [SERP]. As the Court noted:
[74] … IBM ended the Plan on December 12, 2008, without cancelling the acquired rights of those who had jointed the Plan and who were still in its employ.” (Translation our own)
Plaintiff had ceased to be an employee of IBM in June 2007. Plaintiff’s claims pursuant to the SERP were dismissed by the appellate court, Mme Justice St-Pierre writing:
[75] I note that the Plan was not based upon written accounting documents. During the period of membership in the Plan, neither IBM nor the employee were required to disburse, so that the regime in question was purely virtual (“notional”).
[…]
[82] IBM was entitled to end the employment relationship without cause, under reserve, certainly, of its obligation to provide reasonable notice. The argument that the clause was abusive is without merit to the extent that the Plan pursued a legitimate purpose, known and accepted by everyone, that is, to retain executives by incentivizing them to pursue their career with IBM up to the age of 55. I will have occasion to come back to the particular chapter of contractual relations between Mr. C and IBM.
[83] This said, Mr. C might have legitimately been entitled to be indemnified if he had established that his dismissal sought notably to deprive him of the sums virtually accumulated in the SERP. That was not the case. [Translations our own]
The Court in effect noted that actori incumbit probatio — he who alleges must prove — and that the rule entails the inference that the absence of fact duly established is not evidence.
In both instances, the Court recognized that the litigants were adults and vaccinated when they contracted together, understood that some “benefits” were inherently “precarious” and opted for respect of certainty and purpose in the absence of proof of bad faith.
In Premier Tech ltée c. Dollo, 2015 QCCA 1159, the ex-employee was both an executive and a shareholder. The Share Option Purchase Plan contained provisions (Section 8.01.2) similar to those in the IBM case providing the loss/forfeiture of unvested and/or unexercised warrants or options in the event of cessation of employment, but with an exception: “… unless the Board of directors, in its sole discretion decides otherwise”.
As the Court of Appeal noted, Plaintiff had foregone an opportunity to exercise the options that he had accumulated during an earlier period of corporate reorganization, on the express representations of Defendants’ Board that he would be able to exercise them notwithstanding Section 8.01.2 in the event of a future termination of employment. While the Court recognized the “adhesion” character of that provision, it refused to view the clause as being inherently abusive or unreasonable. On the contrary, it was only because of the promises made to Plaintiff to the effect that his forbearance would not be prejudicial to him in the future that the refusal of the Board of Directors to exercise its reserved discretion became unconscionable. From this author’s perspective, it is the evidence of the Board’s bad faith through its failure to honour previously given specific assurances that marks this case as one based on a form of promissory estoppel — or as its partial complement is known in Quebec — “fin de non-recevoir”.
In this case, certainty of outcome and good faith favoured the executive because no one, as the Court noted, should be allowed to profit from their own misrepresentation. On the other hand, pursuant to the Civil Code, good faith is always presumed in the absence of evidence to the contrary. In the Premier Tech case, the objective evidence of misrepresentation was made crystal clear for the Court and did not require adverse inference.
It is of some note that leave to appeal to the Supreme Court of Canada was recently denied, making this judgment final.
Good Faith And Fair Dealing – An Organizing Principle in the Common Law of Canada
As I wrote elsewhere, (See 49 ABA/SJL YIR (N.S.) 463 (2015) pp. 471-474) in Bhasin v. Hrynew [2014] 3 S.C.R. 494) :
The Supreme Court recognized a duty of good faith, as “a general organizing principle of the common law” requiring that parties perform their contractual duties honestly and reasonably and not capriciously or arbitrarily, bringing Canada’s common law in line with commercial expectations elsewhere in North America, while producing a subtle shift towards a “civilian” approach to legal analysis.
The court left undisturbed the trial judge’s finding that in the period preceding termination of Mr. Bhasin’s “commercial dealership agreement”, the respondents were neither candid nor forthright, indeed misleading him on critical details, all of which led, at the expiry of the contract term, to his losing “the value in his business in his assembled workforce.”
The case turned on whether Canadian common law required the respondents to perform their contractual obligations “honestly” and with due regard for Mr. Bhasin’s legitimate interests. The court wrote that
Finding that there is a duty to perform contracts honestly will make the law more certain, more just and more in tune with reasonable commercial expectations. It will also bring a measure of justice to the appellant, Mr. Bhasin, who was misled and lost the value of his business as a result.
“Determining Canadian common law to be: (i) uncertain, (ii) incoherent, and (iii) “out of step with the reasonable expectations of commercial parties, particularly those of at least two major trading partners of common law in Canada – Quebec and the United States”, the Court felt obliged to develop the common law in step with societal/commercial expectations, but in an incremental fashion. Good faith as an “organising principle” would not reverse pre-existing rules, but created an over-arching standard of conduct that “states in general terms a requirement of justice from which more specific legal doctrines may be derived [that] may be given different weight in different situations. Applying it to particular situations would allow a coherent way forward “where the development may occur incrementally in a way that is consistent with the structure of the common law of contract [with] due weight [given] to the importance of private ordering and certainty in commercial affairs.”
In Bhasin, the record relied upon disclosed to the Court’s satisfaction absence of candor, a dollop of double-dealing and a healthy serving of material misrepresentation. The originality of the case from our perspective is dual: It borrowed from civilian methodology in putting forward honesty, candor and the obligation to recognize and take account of the effects that one’s behaviour can have on the “other’s” well founded expectations, both in performing and ending contractual relations as an “organizing principle” of the common law as a principle, to be modulated in situ from case to case based on the evidence that the record disclosed.
Respectfully, however elastic these principles, they ought not be divorced from the factual underpinnings that gave rise thereto. Certainly, in Bhasin, there was an expectation based on real and objective misrepresentations by Defendant that led Plaintiff to believe that he would not be prejudiced. Indeed, it was because of such deceptive practices, as the Court saw them, that Plaintiff lost the value of his business. It was such deception and unfair dealing that the organizing principle was affirmed.
Enter Stage Right, Styles v. Alberta Investment Management Corporation, 2015 ABQB 621
As a Trial Court judgment that is presently in appeal, this judgment might have passed under this writer’s radar, save for the fact that it seems to have expanded on the Bhasin principles in a manner that is far more typical of the civil law tradition than that of the common law. Whether it overshot the mark, I leave for higher Courts to decide.
The Supreme Court in Bhasin drew upon Quebec’s civil law tradition to prescribe an “organizing principle” of the common law, which would allow it to find application organically, and be interpreted and/or modulated by new situations as they arose. From this writer’s perspective, the Styles case seems to apply the Bhasin principles questionably to a factual situation where proof of actual misrepresentations and/or bad faith is absent in the record. It nevertheless is important to consider this case carefully when an employer terminates employment on a without cause basis, but subject to the payment of a specified and contractually agreed amount that excludes unvested and as yet unmatured entitlements to incentive payments. Does this judgment also directly or indirectly properly oblige an employer who terminates the employment of a hitherto exemplary employee on a without cause basis to explain the rationale of the termination so as to negate any possible of inference of unreasonable or arbitrary conduct? Does the right to terminate “without cause” equate with “even for no reason at all” or does such right, at its limit, mean the right to terminate for only some intelligible and palpable reason, that is always reviewable or challengeable on the basis of its alleged arbitrariness or capriciousness? To protect against possible adverse inference, must a prudent employer advance some credible explanation of why the termination, so as to negative an inference that what was done was simply to elude payment of what would otherwise become due, all other things being equal, in the fullness of time? Does that mean that any termination must have some internal and credible logic to it that must in the event of litigation be alleged and proven? In forcing the employer for its self-preservation to “go public” on the rationale, does that always serve the interests of justice, and those of the employee in particular?
Is certainty of outcome of contractually foreseen events a value that has somehow been lost in an eagerness to protect a perceived disadvantaged and weaker party? In Quebec, the employer’s interest in advantaging or incentivizing those whom it decided “in its discretion” to keep in its employ was comparable to the inherently reasonable rationale justifying the forfeiture of such “precarious” unvested” and as yet “unmatured” rights. Is that a position that should be followed elsewhere?
Important questions all they are that are raised here for consideration by the reader, rather than for response.
The Facts and The Judgment in The Styles Case
Plaintiff was hired in 2010 into a senior executive position pursuant to an employment contract which essentially provided:
i. the possibility of termination without cause upon three months’ notice or payment in lieu thereof, such payment being contractually limited to a calculation that takes account only base salary. All contingent unmatured and unvested rights were therefore not to be taken account of;
ii. the possibility, subject to acceptance and signature of Participation Agreements, of being granted Long Term Incentive Plans (LTIPs) which would mature, vest and payout four years after grant, according to a formula whereby they could appreciate up to a maximum of three times the grant or depreciate to zero-based on a number of factors, only some of which the employee himself could influence, if at all;
iii. as active employment as of the date of maturity was a condition of payout, all unvested grants were subject to forfeiture without additional compensation as of the last day of employment;
iv. at its discretion, the Employer could modify, amend or terminate the Plan provided that in the event of “termination of the Plan” a Participant would, subject to the terms of the Plan, continue to be entitled to grants previously awarded.
Plaintiff had been awarded grants on January 1, 2011, again in 2012 and in 2013 with “maturity” or “vesting” dates of December 31, 2014, December 31, 2016 and December 31, 2017, i.e. 48 months following the grant. Plaintiff’s employment was terminated with payment of three months of base salary pursuant to the termination clause of the Employment Contract in June 2013 on a without cause basis. The reader should note that the Plan in question was not terminated. Only Plaintiff’s employment was.
Notwithstanding the provisions regarding the exclusion of anything but base salary, and notwithstanding the forfeiture clause of unvested LTIP grants, the Trial Judge determined that: (i) Plaintiff had exceeded every performance targeted imposed by the employer; (ii) there was no indication that he was not committed to carrying out his employment in the most diligent and professional manner; and as the case came up for decision on summary judgment, (iii) notwithstanding an affidavit from one of the employer’s executives, Defendant provided no evidence to explain how the termination came about or the reasons therefor.
From this writer’s perspective however, how can the absence of evidence imply bad faith? Does it necessarily lead to a conclusion that the basis of the termination was or is somehow suspect? If good faith is presumed or to be presumed in the absence of proof to the contrary, can the absence of evidence explaining the termination allow an adverse inference as to its reasonability or legitimacy? Isn’t the whole idea of termination based on the absence of any necessity to provide justification?
In Styles, the Alberta Court of Queen’s Bench wrote:
[65] In affirming this common law duty of reasonable exercise of discretionary contractual powers, I have recognized the fact that “[t] the duty of good faith performance of contractual obligations recently affirmed by the Supreme Court of Canada in Bhasin [is not a license] to invent obligations out of whole cloth divorced from the actual terms of the contract between the parties” : […]
[66] This duty of reasonable exercise of discretionary contractual power is not a limitation on “the right of an employer to determine the composition of its workforce”; Bhasin at paras 53-54. It is designed to deal with both the unfair manner of termination and the consequence that flow from unduly insensitive conduct of an employer when dismissing an employee. In some situations, where the termination deprives an employee of the right to receive earned performance bonuses, grants, or awards, then the exercise of the discretion to terminate without cause becomes arbitrary or capricious when the employer creates circumstances under which the employee would be unable to receive the bonuses or other benefits and provides no reasonable or meaningful explanation for such deprivation.
Given the exemplary conduct and singular contributions that Plaintiff Styles apparently made, coupled with the absence of any explanation as to why termination arose, the Court noted:
“[121] In my opinion, the right to terminate without cause, whether in general or pursuant to a term in a contract, is a clear indicator of the power imbalance between employer and employee. As such, I believe that the historical recognition by the Supreme Court of Canada of the unique nature of employer/employee relationship and its recognition of an implied term of good faith governing the manner of termination, informs the application of the Bhasin principles to the employment contract generally.
[122] In this context, I note that the LTIP document states, inter alia:
Unless otherwise stipulated, participants must be actively employed by AIMCo, without regard to whether the Participant is receiving, or will receive, any compensatory payments or salary in lieu of notice or termination on the date of payout, in order to be eligible to receive any payment.
[123] When an employment contract includes a condition for the receipt by an employee of a benefit under the contract and the employer has the discretion, pursuant to the terms of the contract, to frustrate the satisfaction of that condition, it becomes even more important for that discretion to be exercised fairly, reasonably and not arbitrarily. When one focuses on the unique nature of the relationship here, and the reality that there has accrued to the Plaintiff some earned entitlements from the subject LTIP, then the unfair or arbitrary exercise of discretion in a manner that takes away those earned entitlements is more serious.
The Court ended by stating
[133] Given my conclusion that there is a common law duty that discretionary contractual powers granted under a contract must not be exercised in a manner that is unreasonable, unfair, “capricious” or “arbitrary” – conceived as a general doctrine of contract law imposing, as a contractual duty, a minimum standard of reasonable exercise of discretionary contractual power – I conclude that the entire agreement clause in Clause 4 (o) of AIMCo’s Long Term Incentive Plan Participation Agreement does not assist the Defendant AIMCo in the circumstances of this matter: see, Bhasin at para 74.
[134] I find that the Defendant AIMCo breached the employment contract and the incorporated LTIP Agreement when it failed to exercise its contractual discretionary powers reasonably in dismissing the Plaintiff while at the same time refusing to pay the Plaintiff any of his earned, awarded and approved LTIP grants. I also find that the Plaintiff suffered damages as a result of that breach.
It is one thing to find that particular conduct or representations preclude an employer from relying upon the express provisions of the contract. On the other hand, when both parties to a contract are sophisticated business folks who, one would imagine, would have read and re-read their contractual rights and responsibilities many times, it is a stretch, however, to apply the Bhasin principles where no active and objective misrepresentation can be attributed to Defendant.
Indeed, the Court recognized that in writing as it did:
[135] It may be possible to debate whether the unreasonable exercise of discretionary contractual powers would constitute a breach of the duty of honest performance in the context of the Supreme Court’s prescription in Bhasin. However, it is not necessary for me to debate this issue because the exercise of contractual discretionary powers in this case clearly constitutes a breach of a common law duty that requires discretionary powers granted under a contract to be exercised fairly and reasonably and not in a manner that is “capricious” or “arbitrary”.
Lessons to be Learned
It remains to be seen whether the Trial Court judgment will be maintained, varied or quashed in appeal. Indeed, given that it runs to the heart of what are the parameters of an employer’s right to terminate “with notice but without cause”, it may be viewed, possibly, as material for eventual review by the Supreme Court of Canada. Whatever the case, an employer, at least in the common law provinces of Canada should always consider whether there is some value to providing a rationale for the termination, not for the purpose of establishing performance based or disciplinary cause, but so as to negative any inference of bad faith, and thereby secure some degree of certainty of contractual outcome. The flip side to that, of course, is that such allegations become just one more item that may become litigious. Great for lawyers – perhaps not so great for clients! Where the balance lies between the two, I leave to others to determine.
France - Update on the Bill for 'New Freedoms and Safeguards for Companies and Workers'
By Roselyn Sands and Nicolas Etcheparre, EY Société d’Avocats, Paris, France
In early March the French government reviewed a draft billed entitled “New Freedoms and Safeguards for Companies and Workers”, that impacts numerous aspects of labor and employment law in France.
This draft bill (the “El Khomri” bill based on the name of the Minister for Labor who submitted it) contained provisions which aimed at clarifying the general principles of French employment law, strengthening collective bargaining in France, increasing flexibility by modifying rules on working time, and rendering damages for wrongful termination more predictable.
The philosophical changes
The new bill has created quite a bit of uproar in France. The underlying reason for this is a philosophical change in the construction of employment laws, most notably, under the new proposed law, company-wide collective bargaining can result in less protection for employees than the Labor Code or industry-wide collective bargaining agreements, on matters such as working time. This is a considerable shift in French labor and employment law, where the principle has been that company-wide collective agreements can only be more favorable to employees than existing law or industry wide agreements.
Indeed, article 2 of the bill provides that under certain conditions established by law, company-wide collective agreements passed with unions can provide for rules which are less favorable to employees within limits set by law.
Indeed, this article sets forth a new structure of French law and distinguishes employee rights on three levels:
i) The rules that must be enforced as they stand, regardless of the contents of the applicable company-wide bargaining agreement
ii) The rules that may be modified by a company-wide bargaining agreement if agreed to by at least 50% of the representative unions, or 30% of the representative unions and 50% of the employees
iii) The limit to which the rules in ii) can be modified
For example, as to overtime:
i) Overtime work must necessarily be paid at a higher rate to employees, in principle 25% more for the first 8 hours of overtime work
ii) A company-wide bargaining agreement can provide that overtime be paid less or more than 25%
iii) But a company-wide bargaining agreement cannot provide that overtime be paid less than 10% more
The other key changes
The bill provides for new rules regarding collective redundancies, clarifying some of the reasons that can be used to justify a collective redundancies caused by economic difficulties. Indeed, the bill provides that in addition to the already existing reasons (i.e. the company’s closure, or the safeguard of the company’s competitiveness, or considerable technological changes) two new reasons could be used: a drop in the company’s turnover for a period of time depending on the size of the company (e.g. 4 consecutive quarters for companies with more than 300 employees).
The bill also contain measures aimed at reducing unemployment among young employees who have little if no professional experience or training by providing for State paid training, as well as measures allowing companies to modify employees’ remuneration or working-time when faced with job-threatening difficulties through collective bargaining.
The parliamentary process
The draft bill was submitted before the Assemblée Nationale for discussion on March 24, 2016. More than 5,000 amendments were submitted by both the right-wing opposition and the pro-governmental left-wing parliament members. The opposition felt that the concessions made were too important and had considerably altered the law’s efficiency, whereas the pro-governmental parliament members felt that the bill threatened employee rights.
Faced with this considerable amount of amendments and divergence of opinions, Prime Minister Manuel Valls made use of article 49-3 of the French Constitution, which allows him to bypass the Assemblée Nationale and submit the vote directly to the Senate unless a no-confidence motion is passed by the parliamentary members. The no-confidence motion failed on May 12, 2016 and the Senate is currently examining the bill. The Assemblée Nationale will proceed with a final review of the bill from June 13 to June 24.
Strikes and demonstrations: the heart of the issue
The unions that had not agreed to the earlier compromise challenged the use of article 49-3 of the French Constitution, and called its members, in particular those working in strategic sectors such as oil refinery, public transports and trains, to go on strike and to demonstrate.
Even if part of the unions demand that the government drop the bill, most of the unions request that article 2 be removed from the bill. The government has however explicitly stated that it will not back down and that the bill will be passed with its article 2 in its current state.
Even if most strikes in oil refineries have ended, strikes in the public transports sectors are still ongoing. The situation is however very complex, as the heart of the issue is that strikes and demonstrations are also often tied to claims specific to sectors. For instance, train conductors are currently renegotiating their working time agreement with their governmental employer and are taking advantage of the situation to increase their bargaining power on that specific issue.
Conclusion
The bill itself provides for new interesting tools that aim to render French labor and employment laws more flexible. However, the country’s political situation makes it difficult to know whether or not the bill will pass. The government seems bound to pass the bill as dropping it would too dangerous politically, and the unions seem bound to pursue their strikes as giving up without obtain anything in exchange would threaten their legitimacy as partners in the future and disappoint their members.
Even if the bill has been significantly modified since it was first introduced in February of 2016, it still contains interesting and groundbreaking provisions that should increase flexibility for employers working in France, and increase the attractive position in France for foreign investment.
In early March the French government reviewed a draft billed entitled “New Freedoms and Safeguards for Companies and Workers”, that impacts numerous aspects of labor and employment law in France.
This draft bill (the “El Khomri” bill based on the name of the Minister for Labor who submitted it) contained provisions which aimed at clarifying the general principles of French employment law, strengthening collective bargaining in France, increasing flexibility by modifying rules on working time, and rendering damages for wrongful termination more predictable.
The philosophical changes
The new bill has created quite a bit of uproar in France. The underlying reason for this is a philosophical change in the construction of employment laws, most notably, under the new proposed law, company-wide collective bargaining can result in less protection for employees than the Labor Code or industry-wide collective bargaining agreements, on matters such as working time. This is a considerable shift in French labor and employment law, where the principle has been that company-wide collective agreements can only be more favorable to employees than existing law or industry wide agreements.
Indeed, article 2 of the bill provides that under certain conditions established by law, company-wide collective agreements passed with unions can provide for rules which are less favorable to employees within limits set by law.
Indeed, this article sets forth a new structure of French law and distinguishes employee rights on three levels:
i) The rules that must be enforced as they stand, regardless of the contents of the applicable company-wide bargaining agreement
ii) The rules that may be modified by a company-wide bargaining agreement if agreed to by at least 50% of the representative unions, or 30% of the representative unions and 50% of the employees
iii) The limit to which the rules in ii) can be modified
For example, as to overtime:
i) Overtime work must necessarily be paid at a higher rate to employees, in principle 25% more for the first 8 hours of overtime work
ii) A company-wide bargaining agreement can provide that overtime be paid less or more than 25%
iii) But a company-wide bargaining agreement cannot provide that overtime be paid less than 10% more
The other key changes
The bill provides for new rules regarding collective redundancies, clarifying some of the reasons that can be used to justify a collective redundancies caused by economic difficulties. Indeed, the bill provides that in addition to the already existing reasons (i.e. the company’s closure, or the safeguard of the company’s competitiveness, or considerable technological changes) two new reasons could be used: a drop in the company’s turnover for a period of time depending on the size of the company (e.g. 4 consecutive quarters for companies with more than 300 employees).
The bill also contain measures aimed at reducing unemployment among young employees who have little if no professional experience or training by providing for State paid training, as well as measures allowing companies to modify employees’ remuneration or working-time when faced with job-threatening difficulties through collective bargaining.
The parliamentary process
The draft bill was submitted before the Assemblée Nationale for discussion on March 24, 2016. More than 5,000 amendments were submitted by both the right-wing opposition and the pro-governmental left-wing parliament members. The opposition felt that the concessions made were too important and had considerably altered the law’s efficiency, whereas the pro-governmental parliament members felt that the bill threatened employee rights.
Faced with this considerable amount of amendments and divergence of opinions, Prime Minister Manuel Valls made use of article 49-3 of the French Constitution, which allows him to bypass the Assemblée Nationale and submit the vote directly to the Senate unless a no-confidence motion is passed by the parliamentary members. The no-confidence motion failed on May 12, 2016 and the Senate is currently examining the bill. The Assemblée Nationale will proceed with a final review of the bill from June 13 to June 24.
Strikes and demonstrations: the heart of the issue
The unions that had not agreed to the earlier compromise challenged the use of article 49-3 of the French Constitution, and called its members, in particular those working in strategic sectors such as oil refinery, public transports and trains, to go on strike and to demonstrate.
Even if part of the unions demand that the government drop the bill, most of the unions request that article 2 be removed from the bill. The government has however explicitly stated that it will not back down and that the bill will be passed with its article 2 in its current state.
Even if most strikes in oil refineries have ended, strikes in the public transports sectors are still ongoing. The situation is however very complex, as the heart of the issue is that strikes and demonstrations are also often tied to claims specific to sectors. For instance, train conductors are currently renegotiating their working time agreement with their governmental employer and are taking advantage of the situation to increase their bargaining power on that specific issue.
Conclusion
The bill itself provides for new interesting tools that aim to render French labor and employment laws more flexible. However, the country’s political situation makes it difficult to know whether or not the bill will pass. The government seems bound to pass the bill as dropping it would too dangerous politically, and the unions seem bound to pursue their strikes as giving up without obtain anything in exchange would threaten their legitimacy as partners in the future and disappoint their members.
Even if the bill has been significantly modified since it was first introduced in February of 2016, it still contains interesting and groundbreaking provisions that should increase flexibility for employers working in France, and increase the attractive position in France for foreign investment.
Ireland - the Distinction Between Information Gathering and Fact Finding
By Deirdre Lynch, Byrnewallace Solicitors, Dublin
In the context of investigations of potential disciplinary issues, it is ever important for employers to bear in mind the distinction between pure information gathering, on the one hand, and fact finding, on the other. In the former case, there is no right to fair procedures; in the latter, there is. The following recent case illustrates the potentially serious consequences for an employer of not affording an employee her right to fair procedures where findings of fact were made in respect of that employee’s behaviour.
In Mary Joyce v Board of Management of Coláiste Iognáid, the plaintiff was the principal of the defendant school. The Board of Management requested the Chairperson to prepare a report regarding certain “major” issues at the school. This report contained a number of negative references to the plaintiff and was presented to the Board of Management. The plaintiff was requested not to attend the Board meeting at which the report was presented. The minutes of the Board meeting indicated that the report was discussed in detail. The Board resolved to request the Chairperson to prepare a further report outlining the issues of concern in relation to the plaintiff. The school's disciplinary procedure was then distributed to attendees and the Chairperson indicated that he would be "inviting the Board in time to consider if a report might be presented to the principal in the context of the [disciplinary] procedure".
A further report was prepared by the Chairperson. This was presented at a meeting of the Board of Management on 14 May 2015. The Chairperson reminded the Board that the report set out a series of matters of concern relating to the plaintiff which, it was indicated, could not be discussed in detail as they needed to be put to the plaintiff. No decision was made by the Board regarding how to proceed. A further meeting was held in June during which the allegations were discussed. No attempts were made by the Chairperson to interview the plaintiff. The Chairperson finalised his report in July 2015 and sent it to the plaintiff. The Board concluded that disciplinary proceedings, regarding mismanagement issues highlighted in the report, should be initiated.
The plaintiff sought an injunction to restrain further disciplinary proceedings pending a full trial of the action. The plaintiff submitted that the report was more than a mere evidence gathering exercise and, that it made findings and drew conclusions which were deeply prejudicial to her. In view of these findings, the plaintiff asserted that she should have been afforded an opportunity, in accordance with the principles of natural justice and fair procedures, to make representations. This did not happen.
The defendant submitted should that the report was merely a pre-investigation and therefore that the principles of natural justice should not apply. It alleged that no findings had been made against the plaintiff.
However, the High Court found in favour of the plaintiff on the following bases;
1. That the Chairperson and the Board did not distribute copies of their initial report to the plaintiff and the Board proceeded to discuss the matter at two further meetings prior to involving the plaintiff, to her likely detriment. This contravened the procedures set out in a relevant circular.
2. That the report which issued in July contained not just statements of facts but also findings and conclusions which had been made without giving the plaintiff an opportunity to respond, thereby depriving her of natural justice and fair procedures.
Given the adverse conclusions drawn in the report, the High Court considered that there was a strong likelihood of the plaintiff succeeding at trial and therefore granted an injunction restraining any disciplinary action against her until a plenary trial.
What lessons may be learned from this case?
(a) It is essential to be cognisant of the important distinction between fact finding and pure information gathering.
(b) An employee is entitled to fair procedures where findings of fact are made/conclusions drawn. A failure to afford such rights can have costly consequences for employers in Ireland.
In the context of investigations of potential disciplinary issues, it is ever important for employers to bear in mind the distinction between pure information gathering, on the one hand, and fact finding, on the other. In the former case, there is no right to fair procedures; in the latter, there is. The following recent case illustrates the potentially serious consequences for an employer of not affording an employee her right to fair procedures where findings of fact were made in respect of that employee’s behaviour.
In Mary Joyce v Board of Management of Coláiste Iognáid, the plaintiff was the principal of the defendant school. The Board of Management requested the Chairperson to prepare a report regarding certain “major” issues at the school. This report contained a number of negative references to the plaintiff and was presented to the Board of Management. The plaintiff was requested not to attend the Board meeting at which the report was presented. The minutes of the Board meeting indicated that the report was discussed in detail. The Board resolved to request the Chairperson to prepare a further report outlining the issues of concern in relation to the plaintiff. The school's disciplinary procedure was then distributed to attendees and the Chairperson indicated that he would be "inviting the Board in time to consider if a report might be presented to the principal in the context of the [disciplinary] procedure".
A further report was prepared by the Chairperson. This was presented at a meeting of the Board of Management on 14 May 2015. The Chairperson reminded the Board that the report set out a series of matters of concern relating to the plaintiff which, it was indicated, could not be discussed in detail as they needed to be put to the plaintiff. No decision was made by the Board regarding how to proceed. A further meeting was held in June during which the allegations were discussed. No attempts were made by the Chairperson to interview the plaintiff. The Chairperson finalised his report in July 2015 and sent it to the plaintiff. The Board concluded that disciplinary proceedings, regarding mismanagement issues highlighted in the report, should be initiated.
The plaintiff sought an injunction to restrain further disciplinary proceedings pending a full trial of the action. The plaintiff submitted that the report was more than a mere evidence gathering exercise and, that it made findings and drew conclusions which were deeply prejudicial to her. In view of these findings, the plaintiff asserted that she should have been afforded an opportunity, in accordance with the principles of natural justice and fair procedures, to make representations. This did not happen.
The defendant submitted should that the report was merely a pre-investigation and therefore that the principles of natural justice should not apply. It alleged that no findings had been made against the plaintiff.
However, the High Court found in favour of the plaintiff on the following bases;
1. That the Chairperson and the Board did not distribute copies of their initial report to the plaintiff and the Board proceeded to discuss the matter at two further meetings prior to involving the plaintiff, to her likely detriment. This contravened the procedures set out in a relevant circular.
2. That the report which issued in July contained not just statements of facts but also findings and conclusions which had been made without giving the plaintiff an opportunity to respond, thereby depriving her of natural justice and fair procedures.
Given the adverse conclusions drawn in the report, the High Court considered that there was a strong likelihood of the plaintiff succeeding at trial and therefore granted an injunction restraining any disciplinary action against her until a plenary trial.
What lessons may be learned from this case?
(a) It is essential to be cognisant of the important distinction between fact finding and pure information gathering.
(b) An employee is entitled to fair procedures where findings of fact are made/conclusions drawn. A failure to afford such rights can have costly consequences for employers in Ireland.
Malaysia - Navigating the Complex Laws Governing Employee Termination in Malaysia
By Yap Yeong Hui, Skrine
It is common to see a clause in employment contracts in Malaysia stating that “either party may give to the other two months’ written notice to terminate the employment contract”. The clause has led many employers in Malaysia to assume that by giving due notice pursuant to such a clause, it is safe from any form of action by the dismissed employee. However, this is not the case in Malaysia.
An employment agreement is not the final word on the parties’ respective rights and liabilities. The rights and liabilities of the employer and the employee are subject to and governed by the prevailing employment laws, in addition to and despite the contents of the written contract.
The Industrial Relations Act 1967
The Malaysian Industrial Relations Act 1967 creates a procedure which effectively protects an employee from being dismissed save with just cause or excuse. An employee who believes that he was dismissed without just cause or excuse may submit a representation to the Director General of Industrial Relations. An Industrial Relations Officer would then make attempts to reconcile the parties through mediation. If the matter is not settled, the Director General of Industrial Relations will notify the Minister of Human Resources who will then make a decision whether to refer the representation to the Industrial Court for adjudication. It has been held that the Minister should refer all representations to the Industrial Court unless it is frivolous or vexatious.
Termination by due notice but without just cause or excuse is a dismissal in respect of which the Industrial Court can make an order of:
(a) reinstatement and up to 24 months back wages from the date of dismissal to date of reinstatement; or
(b) up to 24 months last drawn salary as back wages and one month’s salary for each year of service in lieu of reinstatement (less payments already made to the employee, if any).
Employee Enjoys Security of Tenure
An employee in Malaysia therefore enjoys security of tenure. The employer may not terminate the contract of service as it pleases. The rationale for this protection can be found in the judgment of the Malaysian Federal Court in the case of Dr A Dutt V Assunta Hospital [1981] 1 MLJ 304. The Court in that case held referred to the following paragraph in the judgment of the Indian court in Gajendragadkar J. in RB Diwan Badri Dass & Ors v Industrial Tribunal Punjab Patiala & Ors AIR 1963 SC 630:
“The doctrine of the absolute freedom of contract has thus to yield to the higher claims for social justice. … Industrial adjudication does not recognise the employer's right to employ labour on terms below the terms of minimum basic wage. This, no doubt, is an interference with the employer's right to hire labour; but social justice requires that the right should be controlled. Similarly the right to dismiss an employee is also controlled subject to well-recognised limits in order to guarantee security of tenure to (industrial) employees. …”
Therefore despite clear words in an employment contract expressly providing that the employer may terminate the contract with notice, such termination by an employer with notice may still amount to be unjust dismissal, if the employer does not prove that it had just cause or excuse to dismiss the employee.
This by no means mean that employees enjoy absolute security of tenure and employers can never in any circumstance exercise their contractual right to terminate an employment contract. In certain instances, the law recognises the right of the employer to terminate the contract of employment in accordance with its terms, such as upon expiry of a genuine fixed term contract and upon retirement.
As for what amounts to just cause or excuse validating the dismissal of an employee, it depends on the grounds for the dismissal. There are two common reasons for dismissing an employee: due to poor performance or misconduct.
Poor Performance
A poor performing employee generally refers to an employee who is performing below the standard of performance expected of him by his employer. The Malaysian courts recognises the employer’s right to take disciplinary action for poor performance including and up to dismissal. This does not mean however that the employer has a carte blanche to terminate any time and any how whenever he becomes dissatisfied with the performance of his employee. Industrial jurisprudence as developed by the Courts points unequivocally to the requirement of a fair process which an employer ought generally to follow before it can come to a considered decision that due to an employee's poor or unsatisfactory performance the latter's services can no longer be retained.
Generally speaking, an employer should warn the employee before action is taken for the employee’s poor performance. In the case of I.E. Project Sdn. Bhd. v. Tan Lee Seng [1987] 1 ILR 165, the Court held that “[a]n employer should be very slow to dismiss upon the ground that the employee is found to be unsatisfactory in his performance or incapable of performing the work which he is employed to do without first just telling the employee of the respects in which he is failing to do his job adequately, warning him of the possibility or likelihood of dismissal on this ground and giving an opportunity of improving his performance. It is for the employer to find out from the employee why he is performing unsatisfactorily to warn him that if he persists in doing so he may have to go.”
The requirement is not so stringent in the case of an employee who occupies a senior management position on the basis that senior personnel should by reason of his seniority be aware of what is expected of him in discharging his functions and whether he is meeting the expectations of management.
Additionally, the employee must be given sufficient opportunity to improve. In this regard, the employer is expected to set standards or criteria of improvement for the employee.
The standards or criteria of improvement in the employee’s performance set by the employer must be fair and attainable. This is especially relevant in cases where the employees are required to meet a certain target or quota. In assessing whether the target is reasonable, the Industrial Court is entitled to consider targets met by other personnel who occupy the same or similar position at the same time, before or even after the employee’s tenure of employment. Similarly, if the employee alleges that the targets were not reasonable, he must be shown to have requested the employer to lower the target or make some changes to the target or sales system.
Misconduct
The term “misconduct” is not defined in any statute in Malaysia but attempts have been made to define this term by the Courts. Misconduct is defined by the Malaysian High Court in Syarikat Kenderaan Melayu Kelantan Sdn. Bhd. v Transport Workers Union [1990] 1 MLJ 5, as “… conduct so seriously in breach of the accepted practice that, by standards of fairness and justice, the employer should not be bound to continue the employment”.
Some accepted examples of types of misconduct are insubordination, wilfully disobeying lawful and reasonable orders or procedures, unprofessional conduct and breach of company policy, absence without leave, habitual lateness, breach of duty of trust and confidence, theft and using violence or abusive language at the workplace.
Burden and Standard of Proof – Employer Bears the Burden
In the Industrial Court, in a dismissal case, the burden of proof lies on the employer. It must prove the employee was guilty of a misconduct or performed poorly, and it is not the employee who must prove himself not guilty or that his work performance was satisfactory.
For this reason, unlike in a usual court action where it is the claimant who must start the case, the employer has to start the case, calling its witnesses and adducing evidence, whether oral or documentary, to prove the facts and circumstances which it contends constituted just cause or excuse for dismissing an employee.
The employer is under an obligation to produce convincing evidence to prove on a balance of probabilities that the employee committed the misconduct complained of or performed poorly.
Disciplinary Process – Should You Hold a Domestic Inquiry
When an employee is suspected of having committed misconduct, an employer must conduct an investigation. This will involve collecting and studying all relevant documents and taking statements from relevant persons. Once the investigation is complete, the employer must determine if misconduct has in fact been committed, if there sufficient evidence that the employee has in fact committed the misconduct and whether the misconduct justifies further action being taken.
The normal disciplinary process after completion of investigation will entail the employer issuing a letter to the employee setting out the allegations against the employee and asking the employee for an explanation or to produce evidence in his defence. If the employer is not satisfied with the explanation or the evidence provided, employers can commence a domestic inquiry.
A domestic inquiry is an inquiry held by the employer against an employee against whom certain acts of misconduct are alleged. The requirements for a domestic inquiry in light of decisions of the Malaysian Courts are more stringent than in other countries. The proceedings are conducted as if the inquiry is a criminal court action where:
(a) A panel consisting of at least 3 other independent employees of the employer will preside over the proceedings.
(b) The charges against the employee will be read to the employee and he will be asked whether he pleads guilty or not guilty.
(c) If he pleads not guilty, the ‘prosecutor’ will present the employer’s case and the produce witnesses who will tender the evidence relied on by the employer. The employee will be given the opportunity to cross examine the witnesses. Thereafter the employee will be invited to present his case in a similar manner. Verbatim notes will be taken of the proceedings.
(d) Both parties will then be given an opportunity to summarise their cases and the employee can raise mitigating factors in the event the panel finds him guilty of the charges.
(e) The panel will then deliberate and record its findings and recommendations in writing. The findings and recommendations will be forwarded to the relevant decision maker.
Thereafter the employer’s decision maker will study the evidence, notes and findings and recommendations and will make a decision on whether the employee is guilty of any misconduct and what punishment, if any, the employer will mete out to the employee.
The proceedings, which is akin to a criminal court hearing, is rather complex so employers need to decide if they wish to hold a domestic inquiry. The Malaysian Courts have held that the failure to hold one is cured by proceedings before the Industrial Court. So the failure to hold a domestic inquiry is not fatal. Nevertheless there are advantages to holding such inquiries which is summarised in the case MAS vs Mohd. Salem Abd. Majid [1997] 3 ILR 783 as follows:
“A due inquiry properly conducted and well-documented serves to ensure that a disciplinary authority has acted only after giving fair consideration to the matter. It also provides a reliable record for the employer to turn to when, due to the effluxion of time witnesses have become unavailable or memories have faded, the employer is faced with difficulties in having to prove his case before an industrial tribunal. Confronted with such forensic difficulties, an employer might well have to make extensive references to the records of the domestic inquiry”
Finally, in relation to what punishments are appropriate, not all misconduct will or should result in dismissal. Some misconduct on the part of an employee although acknowledged to be misconduct inconsistent with the terms of the employee’s employment may not be serious or grave enough to justify dismissal. The punishment that is meted out for misconduct must be commensurate with the misconduct.
Summary
Three key takeaways from this article which show that dismissal of employees in Malaysia can be tricky are as follows. The first is that despite clear wording in the contract allowing for termination of an employment contract by one party serving on the other termination notice, the dismissal of an employee by the employer must still be for just cause or excuse. Secondly, if an employee is dissatisfied with his dismissal and the Minister refers his claim to the Industrial Court, it is the employer who starts the proceedings and has the burden of showing that the dismissal is for just cause or excuse. Thirdly, before dismissing an employee for misconduct, where possible the employer may wish to conduct a domestic inquiry. There are numerous requirements to be complied with if an employer conducts such an inquiry in order for the Courts to accept that the inquiry was conducted in accordance with the principles of natural justice.
It is hoped that this article demonstrates why employers, especially those new to the country, should seek advice from local advisors when it contemplates taking any disciplinary action, especially dismissing an employee. This may go a long way to ensuring that the employer can satisfy its burden of showing that a dismissal of an employee is with just cause and excuse.
It is common to see a clause in employment contracts in Malaysia stating that “either party may give to the other two months’ written notice to terminate the employment contract”. The clause has led many employers in Malaysia to assume that by giving due notice pursuant to such a clause, it is safe from any form of action by the dismissed employee. However, this is not the case in Malaysia.
An employment agreement is not the final word on the parties’ respective rights and liabilities. The rights and liabilities of the employer and the employee are subject to and governed by the prevailing employment laws, in addition to and despite the contents of the written contract.
The Industrial Relations Act 1967
The Malaysian Industrial Relations Act 1967 creates a procedure which effectively protects an employee from being dismissed save with just cause or excuse. An employee who believes that he was dismissed without just cause or excuse may submit a representation to the Director General of Industrial Relations. An Industrial Relations Officer would then make attempts to reconcile the parties through mediation. If the matter is not settled, the Director General of Industrial Relations will notify the Minister of Human Resources who will then make a decision whether to refer the representation to the Industrial Court for adjudication. It has been held that the Minister should refer all representations to the Industrial Court unless it is frivolous or vexatious.
Termination by due notice but without just cause or excuse is a dismissal in respect of which the Industrial Court can make an order of:
(a) reinstatement and up to 24 months back wages from the date of dismissal to date of reinstatement; or
(b) up to 24 months last drawn salary as back wages and one month’s salary for each year of service in lieu of reinstatement (less payments already made to the employee, if any).
Employee Enjoys Security of Tenure
An employee in Malaysia therefore enjoys security of tenure. The employer may not terminate the contract of service as it pleases. The rationale for this protection can be found in the judgment of the Malaysian Federal Court in the case of Dr A Dutt V Assunta Hospital [1981] 1 MLJ 304. The Court in that case held referred to the following paragraph in the judgment of the Indian court in Gajendragadkar J. in RB Diwan Badri Dass & Ors v Industrial Tribunal Punjab Patiala & Ors AIR 1963 SC 630:
“The doctrine of the absolute freedom of contract has thus to yield to the higher claims for social justice. … Industrial adjudication does not recognise the employer's right to employ labour on terms below the terms of minimum basic wage. This, no doubt, is an interference with the employer's right to hire labour; but social justice requires that the right should be controlled. Similarly the right to dismiss an employee is also controlled subject to well-recognised limits in order to guarantee security of tenure to (industrial) employees. …”
Therefore despite clear words in an employment contract expressly providing that the employer may terminate the contract with notice, such termination by an employer with notice may still amount to be unjust dismissal, if the employer does not prove that it had just cause or excuse to dismiss the employee.
This by no means mean that employees enjoy absolute security of tenure and employers can never in any circumstance exercise their contractual right to terminate an employment contract. In certain instances, the law recognises the right of the employer to terminate the contract of employment in accordance with its terms, such as upon expiry of a genuine fixed term contract and upon retirement.
As for what amounts to just cause or excuse validating the dismissal of an employee, it depends on the grounds for the dismissal. There are two common reasons for dismissing an employee: due to poor performance or misconduct.
Poor Performance
A poor performing employee generally refers to an employee who is performing below the standard of performance expected of him by his employer. The Malaysian courts recognises the employer’s right to take disciplinary action for poor performance including and up to dismissal. This does not mean however that the employer has a carte blanche to terminate any time and any how whenever he becomes dissatisfied with the performance of his employee. Industrial jurisprudence as developed by the Courts points unequivocally to the requirement of a fair process which an employer ought generally to follow before it can come to a considered decision that due to an employee's poor or unsatisfactory performance the latter's services can no longer be retained.
Generally speaking, an employer should warn the employee before action is taken for the employee’s poor performance. In the case of I.E. Project Sdn. Bhd. v. Tan Lee Seng [1987] 1 ILR 165, the Court held that “[a]n employer should be very slow to dismiss upon the ground that the employee is found to be unsatisfactory in his performance or incapable of performing the work which he is employed to do without first just telling the employee of the respects in which he is failing to do his job adequately, warning him of the possibility or likelihood of dismissal on this ground and giving an opportunity of improving his performance. It is for the employer to find out from the employee why he is performing unsatisfactorily to warn him that if he persists in doing so he may have to go.”
The requirement is not so stringent in the case of an employee who occupies a senior management position on the basis that senior personnel should by reason of his seniority be aware of what is expected of him in discharging his functions and whether he is meeting the expectations of management.
Additionally, the employee must be given sufficient opportunity to improve. In this regard, the employer is expected to set standards or criteria of improvement for the employee.
The standards or criteria of improvement in the employee’s performance set by the employer must be fair and attainable. This is especially relevant in cases where the employees are required to meet a certain target or quota. In assessing whether the target is reasonable, the Industrial Court is entitled to consider targets met by other personnel who occupy the same or similar position at the same time, before or even after the employee’s tenure of employment. Similarly, if the employee alleges that the targets were not reasonable, he must be shown to have requested the employer to lower the target or make some changes to the target or sales system.
Misconduct
The term “misconduct” is not defined in any statute in Malaysia but attempts have been made to define this term by the Courts. Misconduct is defined by the Malaysian High Court in Syarikat Kenderaan Melayu Kelantan Sdn. Bhd. v Transport Workers Union [1990] 1 MLJ 5, as “… conduct so seriously in breach of the accepted practice that, by standards of fairness and justice, the employer should not be bound to continue the employment”.
Some accepted examples of types of misconduct are insubordination, wilfully disobeying lawful and reasonable orders or procedures, unprofessional conduct and breach of company policy, absence without leave, habitual lateness, breach of duty of trust and confidence, theft and using violence or abusive language at the workplace.
Burden and Standard of Proof – Employer Bears the Burden
In the Industrial Court, in a dismissal case, the burden of proof lies on the employer. It must prove the employee was guilty of a misconduct or performed poorly, and it is not the employee who must prove himself not guilty or that his work performance was satisfactory.
For this reason, unlike in a usual court action where it is the claimant who must start the case, the employer has to start the case, calling its witnesses and adducing evidence, whether oral or documentary, to prove the facts and circumstances which it contends constituted just cause or excuse for dismissing an employee.
The employer is under an obligation to produce convincing evidence to prove on a balance of probabilities that the employee committed the misconduct complained of or performed poorly.
Disciplinary Process – Should You Hold a Domestic Inquiry
When an employee is suspected of having committed misconduct, an employer must conduct an investigation. This will involve collecting and studying all relevant documents and taking statements from relevant persons. Once the investigation is complete, the employer must determine if misconduct has in fact been committed, if there sufficient evidence that the employee has in fact committed the misconduct and whether the misconduct justifies further action being taken.
The normal disciplinary process after completion of investigation will entail the employer issuing a letter to the employee setting out the allegations against the employee and asking the employee for an explanation or to produce evidence in his defence. If the employer is not satisfied with the explanation or the evidence provided, employers can commence a domestic inquiry.
A domestic inquiry is an inquiry held by the employer against an employee against whom certain acts of misconduct are alleged. The requirements for a domestic inquiry in light of decisions of the Malaysian Courts are more stringent than in other countries. The proceedings are conducted as if the inquiry is a criminal court action where:
(a) A panel consisting of at least 3 other independent employees of the employer will preside over the proceedings.
(b) The charges against the employee will be read to the employee and he will be asked whether he pleads guilty or not guilty.
(c) If he pleads not guilty, the ‘prosecutor’ will present the employer’s case and the produce witnesses who will tender the evidence relied on by the employer. The employee will be given the opportunity to cross examine the witnesses. Thereafter the employee will be invited to present his case in a similar manner. Verbatim notes will be taken of the proceedings.
(d) Both parties will then be given an opportunity to summarise their cases and the employee can raise mitigating factors in the event the panel finds him guilty of the charges.
(e) The panel will then deliberate and record its findings and recommendations in writing. The findings and recommendations will be forwarded to the relevant decision maker.
Thereafter the employer’s decision maker will study the evidence, notes and findings and recommendations and will make a decision on whether the employee is guilty of any misconduct and what punishment, if any, the employer will mete out to the employee.
The proceedings, which is akin to a criminal court hearing, is rather complex so employers need to decide if they wish to hold a domestic inquiry. The Malaysian Courts have held that the failure to hold one is cured by proceedings before the Industrial Court. So the failure to hold a domestic inquiry is not fatal. Nevertheless there are advantages to holding such inquiries which is summarised in the case MAS vs Mohd. Salem Abd. Majid [1997] 3 ILR 783 as follows:
“A due inquiry properly conducted and well-documented serves to ensure that a disciplinary authority has acted only after giving fair consideration to the matter. It also provides a reliable record for the employer to turn to when, due to the effluxion of time witnesses have become unavailable or memories have faded, the employer is faced with difficulties in having to prove his case before an industrial tribunal. Confronted with such forensic difficulties, an employer might well have to make extensive references to the records of the domestic inquiry”
Finally, in relation to what punishments are appropriate, not all misconduct will or should result in dismissal. Some misconduct on the part of an employee although acknowledged to be misconduct inconsistent with the terms of the employee’s employment may not be serious or grave enough to justify dismissal. The punishment that is meted out for misconduct must be commensurate with the misconduct.
Summary
Three key takeaways from this article which show that dismissal of employees in Malaysia can be tricky are as follows. The first is that despite clear wording in the contract allowing for termination of an employment contract by one party serving on the other termination notice, the dismissal of an employee by the employer must still be for just cause or excuse. Secondly, if an employee is dissatisfied with his dismissal and the Minister refers his claim to the Industrial Court, it is the employer who starts the proceedings and has the burden of showing that the dismissal is for just cause or excuse. Thirdly, before dismissing an employee for misconduct, where possible the employer may wish to conduct a domestic inquiry. There are numerous requirements to be complied with if an employer conducts such an inquiry in order for the Courts to accept that the inquiry was conducted in accordance with the principles of natural justice.
It is hoped that this article demonstrates why employers, especially those new to the country, should seek advice from local advisors when it contemplates taking any disciplinary action, especially dismissing an employee. This may go a long way to ensuring that the employer can satisfy its burden of showing that a dismissal of an employee is with just cause and excuse.
The Netherlands - House for Whistleblowers Act
By Dennis G. Veldhuizen, CLINT Lawyers & Mediators
On 1 March 2016, the House for Whistleblowers Act (Wet Huis voor klokkenluiders) (the Act) was adopted by the Dutch senate. The Act will enter into effect on 1 July 2016.
What’s up?
The Act a) provides for legal protection to whistleblowers and b) creates an authoritative body, the House for Whistleblowers (the House). The House advises on and initiates investigation into wrongdoing within organisations.
An overview of the Act's important elements:
• Employers who employ at least 50 employees are obliged to adopt a whistleblowers’ regulation. Such regulation must address at least (i) the manner in which an internal notification is dealt with; (ii) when a suspicion of wrongdoing has arisen; (iii) which responsible person must be notified of the wrongdoing; (iv) the confidential treatment of a notification; and (v) that the employee has the right to consult an advisor on a confidential basis;
• The employer must provide information about the circumstances under which a suspicion of wrongdoing may be disclosed externally;
• The definition of employee in the Act is broad. The term ’employee’ includes civil servants or any persons performing work other than under an employment contract, such as self-employed persons, trainees or volunteers.
The whistleblowers’ regulation must be approved by the Works Council prior to its implementation.
House for Whistleblowers
The new Act arranges for the establishment of a ‘House for Whistleblowers’. The House is split into a department of advice and an investigation department.
The advice department has the task to inform employees about the steps they can take when they suspect wrongdoing.
The investigation department can lodge an inquiry into the suspicion of wrongdoing. Furthermore, this department can initiate an investigation into the manner in which the employer handled the notification by an employee. Once the inquiry has been completed, the department draws up a report in which it makes recommendations.
The investigation department is authorised to request information and to demand inspection of business documents. The employer is obliged to cooperate with these requests. Cooperation may only be refused if the interests of national security are at stake or in case of a violation of professional secrecy or statutory regulations.
The employee can request the House to conduct an investigation. The House will not institute an investigation if (i) the request is obviously unfounded; (ii) the public interest or the seriousness of the wrongdoing is insufficient or (iii) or the suspicion of the wrongdoing is primarily subject to the assessment of another authority.
Protection
An employee who notifies a suspicion of wrongdoing may not be retaliated against by the employer. The employee can successfully invoke legal protection if three requirements are met:
• the suspicion of wrongdoing should be based on reasonable grounds;
• the notification is made in good faith; and
• the employee has acted with all due care both in procedural and material terms.
This protection relates to dismissal and salary reduction. The burden of proof in respect of the employer´s retaliation lies with the employee.
On 1 March 2016, the House for Whistleblowers Act (Wet Huis voor klokkenluiders) (the Act) was adopted by the Dutch senate. The Act will enter into effect on 1 July 2016.
What’s up?
The Act a) provides for legal protection to whistleblowers and b) creates an authoritative body, the House for Whistleblowers (the House). The House advises on and initiates investigation into wrongdoing within organisations.
An overview of the Act's important elements:
• Employers who employ at least 50 employees are obliged to adopt a whistleblowers’ regulation. Such regulation must address at least (i) the manner in which an internal notification is dealt with; (ii) when a suspicion of wrongdoing has arisen; (iii) which responsible person must be notified of the wrongdoing; (iv) the confidential treatment of a notification; and (v) that the employee has the right to consult an advisor on a confidential basis;
• The employer must provide information about the circumstances under which a suspicion of wrongdoing may be disclosed externally;
• The definition of employee in the Act is broad. The term ’employee’ includes civil servants or any persons performing work other than under an employment contract, such as self-employed persons, trainees or volunteers.
The whistleblowers’ regulation must be approved by the Works Council prior to its implementation.
House for Whistleblowers
The new Act arranges for the establishment of a ‘House for Whistleblowers’. The House is split into a department of advice and an investigation department.
The advice department has the task to inform employees about the steps they can take when they suspect wrongdoing.
The investigation department can lodge an inquiry into the suspicion of wrongdoing. Furthermore, this department can initiate an investigation into the manner in which the employer handled the notification by an employee. Once the inquiry has been completed, the department draws up a report in which it makes recommendations.
The investigation department is authorised to request information and to demand inspection of business documents. The employer is obliged to cooperate with these requests. Cooperation may only be refused if the interests of national security are at stake or in case of a violation of professional secrecy or statutory regulations.
The employee can request the House to conduct an investigation. The House will not institute an investigation if (i) the request is obviously unfounded; (ii) the public interest or the seriousness of the wrongdoing is insufficient or (iii) or the suspicion of the wrongdoing is primarily subject to the assessment of another authority.
Protection
An employee who notifies a suspicion of wrongdoing may not be retaliated against by the employer. The employee can successfully invoke legal protection if three requirements are met:
• the suspicion of wrongdoing should be based on reasonable grounds;
• the notification is made in good faith; and
• the employee has acted with all due care both in procedural and material terms.
This protection relates to dismissal and salary reduction. The burden of proof in respect of the employer´s retaliation lies with the employee.
Saudia Arabia - Prescribed Contracts and Work Regulations in KSA
By Sara Khoja, Clyde & Co
Part of the amendments to the Labour Law introduced in October 2015 included a provision for the Ministry of Labour to introduce prescribed form employment contracts and work regulations. These documents have now been published alongside the implementing regulations for the Amended Labour Law and will be of considerable interest for employers operating in the Kingdom.
Prescribed Contract
The contract is five pages long with eight main clauses which are identified as being either compulsory, optional or to be chosen depending on whether the contract is a fixed term or an unlimited term. The contract will need to be completed on line and generated electronically, printed off and signed by all parties.
The eight clauses are:
1. contract purpose and subject which sets out the role, whether the contract is fixed term or unlimited together with the start date of employment and the probationary period;
2. Days and hours of work on a daily or weekly basis. This clause also confirms the entitlement to overtime payable at the rate of a 50% surplus on the basic pay;
3. Duties of the employer which include paying the stated remuneration (which can also be expressed on a piecemeal basis); awarding annual leave, private medical insurance, registering the employee with GOSI, covering all recruitment costs, visa costs, repatriation costs (including if the employee dies), awarding maternity leave (and breastfeeding leave) if applicable, and awarding bereavement leave;
4. Duties of the employee which include performing work to the best of his ability and in line with instructions, taking care to preserve all equipment and property of the employer, working to the best of his ability to avoid any threat to health and safety, to undergo medical examinations at the employer’s request both before the employment starts or during the employment designed to ensure that the employee is fit to perform his job, to adhere to local customs and abide by laws and work regulations of the employer, agreeing to the employer deducting as necessary GOSI contributions through payroll;
5. Termination of contract whether on expiry of the fixed term or by written notice. This clause sets out the employer’s right to terminate under article 80 of the Labour Law and the entitlement of the employee to terminate under article 81 of the Labour Law. Importantly, this clause also provides for the employer and employee to agree the compensation payable for an unjustified termination of the employment;
6. End of service gratuity;
7. The application of the Labour Law, the model work regulations and the implementing regulations in conjunction with the provisions of the contract;
8. Process or format for communications between the employer and employee, importantly the employee is under a duty to inform the employer of his current or updated contact details.
Prescribed Work Regulations
The model work regulations have fifty-five regulations and an attached table of applicable disciplinary fines. An employer may seek to add to these provisions and apply to the Ministry of Labour for approval of these additional regulations. The application for approval must be submitted electronically and approval will also be sent electronically. Any regulations issued by an employer which are contrary to the Labour Law, the implementing regulations, model contract or model work regulations are void.
The model work regulations are extensive and some of its notable provisions include the following:
• Clarification that a repatriation ticket is not payable by the employer if an employee resigns without reason during the probationary period, or if the employee is not capable of performing the role he was recruited into, or if his repatriation is due to his violation of a law and a fine being imposed whether administrative or criminal;
• Eligibility criteria for promotion and the selection of equal candidates for promotion;
• Clarification that nursing breaks following a return from maternity leave are applicable whether the employee’s baby is being breastfed or bottle fed and, that it is the employee’s duty to provide written notice to the employer requesting the break and when she would like to take it during the working day;
• A duty on all employees to follow and adhere to Islamic principles and morals of behavior and, a duty not to mix with employees of the opposite sex; and
• A duty on employers to inform employees and instruct them on what is acceptable behavior in the workplace and in particular to instruct employees on the prohibition on any form of harassment or action which would undermine dignity and morals or any form of assault or harm of another employee.
Implementing Regulations
The implementing regulations provide extensive clarification of particular articles of the Labour Law, including, for example, the use of seasonal workers and the terms of their engagement, duty to keep personnel records, duties to employ Saudi nationals and the role of the Human Resources Development Fund, leave entitlements and record keeping, exemptions from overtime entitlement and procedures for reporting and dealing with work place accidents.
Of note are the following clarifications of specific articles of the Labour Law:
• Article 20 prohibiting an employer compelling an employee to work under duress includes a duty on the employer not to retain an employee’s passport without his written consent. The implementing regulations’ second appendix is an employee consent form for his passport to be held by the employer. This form must be issued in Arabic and also a language the employee understands;
• Article 28 on the recruitment and employment of disabled employees, and in particular the official registration and recognition of disability, as well as the management of disabled employees;
• Article 41 on the recruitment of foreigners, the transfer of sponsorship and the change in title or profession. There are extensive provisions on when sponsorship may be transferred between employers both with and without consent, and when employers can apply to amend employee professions and titles;
• Articles 42 and 43 on the duty to train KSA nationals. These provisions clarify that the employer has a wider remit to decide the format of training, the timing and the nature of training. However, such training cannot be regular ‘on the job’ training. It must be a programme of training, including instructive sessions and attendance by the employee. The employer must keep extensive records of who has been selected for training and the training received as well as issuing certificates of training; and
• Article 107 on permitted overtime hours is clarified to state that employees may be asked to work 720 hours of overtime in a year (an average of three hours a day) and can be asked by written agreement to do more overtime hours. This is a change from previous Ministry guidance which stated a cap on yearly overtime of 480 hours.
Part of the amendments to the Labour Law introduced in October 2015 included a provision for the Ministry of Labour to introduce prescribed form employment contracts and work regulations. These documents have now been published alongside the implementing regulations for the Amended Labour Law and will be of considerable interest for employers operating in the Kingdom.
Prescribed Contract
The contract is five pages long with eight main clauses which are identified as being either compulsory, optional or to be chosen depending on whether the contract is a fixed term or an unlimited term. The contract will need to be completed on line and generated electronically, printed off and signed by all parties.
The eight clauses are:
1. contract purpose and subject which sets out the role, whether the contract is fixed term or unlimited together with the start date of employment and the probationary period;
2. Days and hours of work on a daily or weekly basis. This clause also confirms the entitlement to overtime payable at the rate of a 50% surplus on the basic pay;
3. Duties of the employer which include paying the stated remuneration (which can also be expressed on a piecemeal basis); awarding annual leave, private medical insurance, registering the employee with GOSI, covering all recruitment costs, visa costs, repatriation costs (including if the employee dies), awarding maternity leave (and breastfeeding leave) if applicable, and awarding bereavement leave;
4. Duties of the employee which include performing work to the best of his ability and in line with instructions, taking care to preserve all equipment and property of the employer, working to the best of his ability to avoid any threat to health and safety, to undergo medical examinations at the employer’s request both before the employment starts or during the employment designed to ensure that the employee is fit to perform his job, to adhere to local customs and abide by laws and work regulations of the employer, agreeing to the employer deducting as necessary GOSI contributions through payroll;
5. Termination of contract whether on expiry of the fixed term or by written notice. This clause sets out the employer’s right to terminate under article 80 of the Labour Law and the entitlement of the employee to terminate under article 81 of the Labour Law. Importantly, this clause also provides for the employer and employee to agree the compensation payable for an unjustified termination of the employment;
6. End of service gratuity;
7. The application of the Labour Law, the model work regulations and the implementing regulations in conjunction with the provisions of the contract;
8. Process or format for communications between the employer and employee, importantly the employee is under a duty to inform the employer of his current or updated contact details.
Prescribed Work Regulations
The model work regulations have fifty-five regulations and an attached table of applicable disciplinary fines. An employer may seek to add to these provisions and apply to the Ministry of Labour for approval of these additional regulations. The application for approval must be submitted electronically and approval will also be sent electronically. Any regulations issued by an employer which are contrary to the Labour Law, the implementing regulations, model contract or model work regulations are void.
The model work regulations are extensive and some of its notable provisions include the following:
• Clarification that a repatriation ticket is not payable by the employer if an employee resigns without reason during the probationary period, or if the employee is not capable of performing the role he was recruited into, or if his repatriation is due to his violation of a law and a fine being imposed whether administrative or criminal;
• Eligibility criteria for promotion and the selection of equal candidates for promotion;
• Clarification that nursing breaks following a return from maternity leave are applicable whether the employee’s baby is being breastfed or bottle fed and, that it is the employee’s duty to provide written notice to the employer requesting the break and when she would like to take it during the working day;
• A duty on all employees to follow and adhere to Islamic principles and morals of behavior and, a duty not to mix with employees of the opposite sex; and
• A duty on employers to inform employees and instruct them on what is acceptable behavior in the workplace and in particular to instruct employees on the prohibition on any form of harassment or action which would undermine dignity and morals or any form of assault or harm of another employee.
Implementing Regulations
The implementing regulations provide extensive clarification of particular articles of the Labour Law, including, for example, the use of seasonal workers and the terms of their engagement, duty to keep personnel records, duties to employ Saudi nationals and the role of the Human Resources Development Fund, leave entitlements and record keeping, exemptions from overtime entitlement and procedures for reporting and dealing with work place accidents.
Of note are the following clarifications of specific articles of the Labour Law:
• Article 20 prohibiting an employer compelling an employee to work under duress includes a duty on the employer not to retain an employee’s passport without his written consent. The implementing regulations’ second appendix is an employee consent form for his passport to be held by the employer. This form must be issued in Arabic and also a language the employee understands;
• Article 28 on the recruitment and employment of disabled employees, and in particular the official registration and recognition of disability, as well as the management of disabled employees;
• Article 41 on the recruitment of foreigners, the transfer of sponsorship and the change in title or profession. There are extensive provisions on when sponsorship may be transferred between employers both with and without consent, and when employers can apply to amend employee professions and titles;
• Articles 42 and 43 on the duty to train KSA nationals. These provisions clarify that the employer has a wider remit to decide the format of training, the timing and the nature of training. However, such training cannot be regular ‘on the job’ training. It must be a programme of training, including instructive sessions and attendance by the employee. The employer must keep extensive records of who has been selected for training and the training received as well as issuing certificates of training; and
• Article 107 on permitted overtime hours is clarified to state that employees may be asked to work 720 hours of overtime in a year (an average of three hours a day) and can be asked by written agreement to do more overtime hours. This is a change from previous Ministry guidance which stated a cap on yearly overtime of 480 hours.
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