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Law Column

March 2010 Law Column

LABOUR LAW

The employment termination notice and compensation

Patrick Choquette, attorney
Rémi Authier, student-at-law

 

On November 20, 2009, the Court of Appeal rendered an important decision in Château inc. (Le) v. Niro (2009 QCCA 2314), clarifying the impacts of the employment termination notice and severance payments.

 

In this particular case, Mr. Niro, a company vice-president, was dismissed. Mr. Niro’s employment contract stipulated that he was to be given one year’s notice of his termination. Instead of having Mr. Niro work for an additional year, the company paid out an amount equal to the salary that Mr. Niro would have earned in the year and terminated his contract immediately. Mr. Niro’s employment contract also specified that he was entitled to stock options, which accumulated during his years of employment. Mr. Niro therefore asked the Court for the right to exercise his stock options for the 12 months of the termination notice period.

 

Québec Superior Court ruled in favour of Mr. Niro but the decision was unanimously overturned by the Court of Appeal, which made an important distinction between the prohibition against waiving a reasonable notice as set out in the Civil Code of Québec and the power to modify the conditions of this notice. The Court stated that though the notice is mandatory, the resulting compensation may be modified to exclude certain benefits such as the right to stock options. In fact, the contract’s wording determined the Court’s decision. It is therefore very important to read an employment contract carefully in order to establish the benefits that would still be available to the employee once he/she is terminated. However, the notice must be reasonable in light of the circumstances.

 

The Court of Appeal also established that the end of the employee-employer relationship generally coincides with the end of the notice period but could nevertheless occur sooner. Therein lies the significance of the Court’s decision: the Court of Appeal concluded that the work carried out by the employee is an essential component of the employment relationship. The employer’s decision to no longer require the employee to work and instead pay out compensation ends the employment relationship.

 

The judges concluded that severance payment equivalent to the notice period ended the work relationship. Mr. Niro therefore could not exercise his stock options for the 12 months following his termination since the work relationship had ended when the first severance payment had been made.

 

This decision highlights the importance of thoroughness when drafting employment contracts. Particular attention should be paid to compensation clauses but also to employment termination clauses. The verdict provides employers with greater flexibility when drafting such clauses but also obligates them to comply with the conditions they stipulate.