We thank Glenn Gibson, John Pirie & Michael Nowina for this post.

In an unreported judgment Pallotta v. Cengarle, Court file CV-16-56337 released on February 27, 2020, Faieta J. found real estate lawyer Licio Cengarle vicariously liable for his clerk’s mortgage fraud scheme as well as for breach of trust. This case is a cautionary tale for professionals and employers about the need for internal controls.

Background

The lawyer, Mr. Cengarle, trusted his long-time real estate clerk, Rose De Filippis. She was given a high degree of autonomy in terms of dealing with the clients, drafting documents, arranging meetings, arranging for clients to sign the required documents and closing real estate transactions. Eventually, Ms. De Filippis violated that trust by committing fraud. This specific case involved $200,000 received from the Plaintiffs based on the false representation from Ms. De Filipis that those funds would be would be lent to a local land developer. Instead, Ms. De Filippis used the $200,000 for her own purposes. She had become involved in a real estate scheme in Panama, which encountered difficulties, and required infusions of cash. Her employer, Mr. Cengarle, testified that he is also a defendant in 15 other actions related to Ms. De Filippis’ frauds but denied responsibility for those frauds.

Vicarious liability in the employer-employee relationship

Employers may be independently liable for the actions of their employees under the doctrine of vicarious liability. Vicarious liability in a fraud context is based on the rationale that the party who puts a risky enterprise into the community may fairly be held responsible when those risks emerge and cause loss or injury to members of the public. There are three types of cases where vicarious liability has been traditionally been imposed: (1) cases based on the furtherance of the employer’s aims; (2) cases based on the employer’s creation of a situation of friction, confrontation or intimacy inherent in the employer’s enterprise; and (3) the dishonest employee case typically involving theft or fraud.

In imposing liability on Mr. Cengarle, the Court took into account several policy considerations set out by the Supreme Court of Canada in Blackwater v. Plint, 2005 SCC 58:

  • Vicarious liability may be imposed where there is a significant connection between the conduct authorized by the employer or controlling agent and the wrong.
  • Having created or enhanced the risk of the wrongful conduct, it is appropriate that the employer or operator of the enterprise be held responsible, even though the wrongful act may be contrary to its desires.
  • The fact that wrongful acts may occur is a cost of doing business.
  • Faced with two faultless parties, a much stronger justification exists for placing the risk of loss on the party who introduced the risk and is better able to control that risk.

The court found Ms. De Filippis to be an employee and emphasized the significant connection between the risk created by Mr. Cengarle having her manage all aspects of his real estate practice, and the fraud that she perpetrated on the Plaintiffs. This risk could have been prevented with greater oversight.

Key Takeaways
  • Get an independent review of your businesses’ internal controls.
  • Puts checks and balances in place around key employees, particularly those with autonomy in relation to financial matters.
  • Consider whether your business insurance provides adequate coverage for acts of employee dishonesty.

At common law, employers have a right to terminate an employment relationship, subject to reasonable notice of termination. When an employer breaches this implied duty, employees are entitled damages for wrongful dismissal, which presumptively include damages for lost incentive compensation unless an employer unequivocally ousts that right in an employment agreement or incentive plan. In Matthews v. Ocean Nutrition Canada Limited, the Supreme Court of Canada confirmed that absent “absolutely clear and unambiguous” language in the employment agreement or the incentive plan restricting such entitlement, incentive compensation is considered part of the damages owed in lieu of common law reasonable notice.

Key Takeaways

Suppose employers want to restrict employee rights to incentive compensation. In that case, they must review and revise their employment agreements and incentive plans to ensure that the courts will uphold such an outcome. What has become apparent from a series of Ontario Court of Appeal cases and the SCC’s Matthews decision is that a court will strike down such a clause if there is any ambiguity. Language that might appear sufficient (i.e., requiring “full-time” or “active“ employment) is not enough to limit an employee’s post-termination entitlement to incentive compensation because the law deems employees to be employed during the reasonable notice period.

Background

David Matthews worked as a food scientist and senior executive for Ocean Nutrition Canada Limited and its predecessor companies starting in 1997. As a member of the senior management team, Mr. Matthews participated in Ocean Nutrition’s Long Term Incentive Plan (“LTIP”) under which he was entitled to a sizeable payment in the event of a sale of the company (“Realization Event”).

In 2011, Mr. Matthews resigned from his employment. Approximately one year later, Royal DSM N.V. acquired Ocean Nutrition for $540 million, triggering a payment under the LTIP. Mr. Matthews did not receive a payment due to exclusionary language in the LTIP, which required participants to be “full-time” and “active“ employees on the date of a Realization Event to receive a payment.

Following the sale, Mr. Matthews sued Ocean Nutrition for wrongful dismissal alleging that the Chief Operating Officer had constructively dismissed him by reducing his job responsibilities and lying about his status and future with the company. Mr. Matthews argued that he was entitled to a reasonable notice period of 15 months and payment under the LTIP.

Lower Court Decisions

At trial, the Court held that Mr. Matthews had been constructively dismissed and awarded 15 months notice of termination and approximately $1.1 million in damages for loss of the LTIP payment. The trial judge held that the LTIP did not clearly limit Mr. Matthews’ entitlements post-termination, and had Mr. Matthews remained with Ocean Nutrition during the notice period, he would have been employed when the company was sold, and the LTIP payment was triggered.

On appeal, the majority of the Nova Scotia Court of Appeal agreed that Mr. Matthews had been constructively dismissed and upheld the notice period, but overturned the finding that he was entitled to damages for loss of payment under the LTIP. Relying on an exclusionary clause, the majority held that the language in the LTIP was clear that Mr. Matthews would not be entitled to the LTIP payment after his employment ended, regardless of the reason. But the dissenting justice would have awarded Mr. Matthews the LTIP because of the employer’s bad faith conduct. He would not have awarded Mr. Matthews the LTIP because of the limiting language in the LTIP.

Supreme Court’s Decision

The Supreme Court of Canada overturned the Court of Appeal’s decision. It held that the LTIP language did not clearly and unambiguously oust Mr. Matthews’ right to the incentive payment. It refused to entertain Mr. Matthews’ bad faith claim because that issue was unnecessary to determine the issue of Mr. Matthews’ entitlement to LTIP. The SCC also clarified that employees should bring bad faith claims as part of the doctrine established by the SCC in its cases of Wallace and Keays.

When determining an employee’s right to bonus or benefit payments during the reasonable notice period, the SCC reiterated that courts must consider the following:

  1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
  2. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

For the purposes of calculating wrongful dismissal damages, the SCC confirmed that the employment contract is not treated as “terminated“ until after the reasonable notice period expires. Since an employee effectively remains employed with the company during the reasonable notice period, exclusionary language such as “full-time“, “active”, or “actively employed” is not sufficient to limit an employee’s entitlement to incentive compensation during the notice period. The SCC also noted that reference to “termination without cause” does not cover “termination without notice.”

In applying this framework, the SCC held that if Mr. Matthews had been given proper notice of termination, he would have remained a full-time employee on the date of the sale of the company, and would have received a payment under the LTIP. The majority also held that Mr. Matthews was entitled to damages related to the LTIP payment, as the exclusionary language requiring an employee to be “full-time” or “active” at the time of the sale was not sufficiently clear to remove Mr. Matthews’ common law right to damages.

Earlier this summer, several Ontario municipalities established bylaws requiring businesses to ensure masks or face coverings are worn by the public in enclosed public spaces (see our earlier article here). On October 3, 2020, the Ontario government amended the Rules for Areas in Stage 3, O Reg 364/20 (the “amended regulation”), establishing similar requirements for most Ontario businesses, summarized below.

Who Must Wear Masks or Face Coverings?

Generally speaking, businesses and organizations must ensure that anyone located in an indoor area within their premises, or within a vehicle that is operating as part of the business or organization, wears a mask that covers their mouth, nose, and chin.

Continue Reading Ontario Amends Mask and Face Covering Requirements for Businesses

The Ontario Government now requires most Ontario businesses and organizations to implement a workplace screening tool that requires staff members and essential visitors to complete a medical questionnaire before entering the workplace each day. This new requirement is established under the Reopening Ontario (A Flexible Response to COVID-19) Act, 2020 and became effective on September 26, 2020. Continue Reading New COVID-19 Workplace Screening Requirements for Ontario Businesses

After almost six months of school closures across Ontario due to the COVID-19 pandemic, school is now back in session for most students. The provincial government’s education model includes a voluntary back-to-school regime that provides parents and students with the option to engage in online learning from home or to have children physically attend at school. With recent cases of COVID-19 on the rise this fall, outlined below is a summary of what employers should be aware of regarding their obligations to accommodate employees with children that are not attending in-person school or childcare.[1] Continue Reading Back to School: An Employer’s Obligations to its Parental Employees

The Ontario Government amended a previous regulation to extend deemed infectious disease emergency leave (“IDEL”) under the Employment Standards Act, 2000 (the “ESA”) until January 2, 2021.

This is an update to our previous blog post, Ontario Files New ESA Regulation Affecting COVID-19-Related Leaves, Temporary Layoffs & Constructive Dismissals, where, on May 29, 2020, the Ontario Government filed a new regulation changing the rules regarding employee eligibility for IDEL, temporary layoffs and constructive dismissals under the ESA. The regulation retroactively “deems” non-union employees who were not performing their duties, working reduced hours, or receiving reduced wages (at the employer’s behest) to be on IDEL.

Previously, the regulation dealt with the time period beginning March 1, 2020 and ending “six weeks after the declared emergency ends.” The Government has called this the “COVID-19 Period.” However, the Ontario Government has now extended this “COVID-19 Period” to January 2, 2021.

Continue Reading Ontario Amends ESA Regulation Affecting COVID-19-Related Leaves, Temporary Layoffs & Constructive Dismissals by Extending COVID-19 Period

On July 17, 2020, the federal government announced that it would extend the Canada Emergency Wage Subsidy program (“CEWS”) until December of 2020, and proposed several significant changes that will, among other things, allow more employers to access subsidies.

On July 20, 2020, the federal government introduced Bill C-20, An Act respecting further COVID-19 measures, to extend and adapt the CEWS program. On July 21, 2020, Bill C-20 received its third reading, and is expected to receive royal assent very soon. If passed, Bill C-20 will retroactively impact the CEWS program, generally commencing with the fifth qualifying period which commenced on July 5, 2020 (subject to a “safe harbour” discussed below). Continue Reading Federal Government Extends & Amends Canada Emergency Wage Subsidy Program

Starting July 7, 2020, the City of Toronto will require businesses to ensure masks or face coverings are worn by the public in their enclosed public spaces.

Key Takeaways
  • The City of Toronto’s bylaw will come into force on July 7, 2020. It is currently set to expire on or about October 1, 2020, but may be extended.
  • The new bylaw will generally apply to all indoor spaces within the City of Toronto that are openly accessible to the public. The bylaw will not require individuals to wear masks or face coverings in workplaces that are not openly accessible to the public will not be required.
  • A list of public spaces exempted from the bylaw can be found here: https://www.toronto.ca/home/covid-19/covid-19-what-you-should-do/covid-19-orders-directives-by-laws/mandatory-mask-or-face-covering-bylaw/
  • Under the bylaw, there are exceptions for individuals who are unable to wear a mask or face covering for medical reasons, and for children under two years old. There are further exceptions for individuals who are, for example, eating a meal or engaging in athletic or fitness activity.

Continue Reading Many Municipalities Make Masks Mandatory

As of January 1, 2021, the new stand-alone Work Place Harassment and Violence Prevention Regulations (the “Regulations”) will come into force to ensure employers prevent harassment and violence in federally regulated industries and workplaces. The Regulations will apply to all federal work places covered under Part II of the Canada Labour Code (the Code), including the federally regulated private sector, the federal public service and parliamentary work places. It will replace Part XX (violence prevention) of the Canada Occupational Health and Safety Regulations (COHSR), as well as portions of two other regulations that include violence prevention provisions.

Key Takeaways

Once the Regulations come into force, employers must:

  1. Prepare the workplace harassment and violence prevention policy working jointly with the policy committee, the workplace committee, or the health and safety representative;
  2. Assess the risk of workplace harassment and violence;
  3. Inform and train employees, and participate in training themselves;
  4. When an incident of harassment or violence is reported, respond within seven days;
  5. Keep records on every incident of harassment and violence in the workplace and report annually to the Labour Program; and
  6. Implement corrective measures in response to the investigation report of an investigator to prevent future occurrences of harassment and violence.

Continue Reading New Workplace Harassment and Violence Prevention Regime for Federally Regulated Employers