0386-99-ES Rose Marie Nidd, Applicant v. Cartier Supply & Rentals Ltd. and Ministry of Labour, Responding Parties.
Employment Practices Branch File No. 20033647
BEFORE: Pamela A. Chapman, Vice-Chair.
DECISION OF THE BOARD; July 14, 2000
This is an application for review of the decision of an Employment Standards Officer, brought by the applicant Rose Marie Nidd (“Nidd”), pursuant to section 68 of the Employment Standards Act (“the ESA”).
The applicant filed a claim with the Ministry of Labour on December 10, 1998, seeking the payment of termination pay and reimbursement for an expense of $10.00 for taxi fare by Cartier Supply & Rentals Inc. (“the employer” or “Cartier”), her former employer. The officer appointed to investigate her claim advised Nidd that expenses incurred during employment are not wages and therefore not recoverable pursuant to the ESA. The officer further concluded, having regard to the information provided by the applicant, that her contract of employment had been frustrated by a conflict of interest, within the meaning of section 57(10) of the ESA. She therefore refused to issue an Order to Pay.
At the hearing held in this matter on November 30, 1999 the applicant and employer had an opportunity to give oral testimony and to introduce into evidence various documents relating to Nidd’s employment with Cartier, as well as to make submissions concerning the application for review. Having regard to the evidence and to those submissions, the following is my decision.
THE FACTS
Rose Marie Nidd began work with the Boyd Group, which is the parent company of Cartier, on March 1, 1996, as a Data Entry/Customer Service Clerk. In December 1997 she assumed duties at Cartier, under the direction of Peter Pataffy, who was the General Manager. Pataffy reported to John Goodsell, who was the Manager of the Boyd Group of companies.
Cartier is engaged in the sale and rental of moving supplies such as boxes. As a clerk with Cartier, Nidd’s responsibilities included answering the phone, taking orders from customers, writing up invoices and collecting receivables. As a result, she had access to customer lists and information about the requirements of various customers.
On November 20, 1998 Peter Pataffy resigned his employment with Cartier. Nidd testified that he announced to staff that morning that he was leaving the company, and that he had told her previously, as much as a month before he resigned, that he intended to start up his own company in the same business as Cartier. However, she claims that she did not discuss with Pataffy at any time prior to her termination from Cartier the possibility of leaving the company and coming to work with him. Pataffy did not testify.
After speaking with staff, Pataffy left to go into a meeting with Goodsell, at which time he presumably advised the employer of his resignation. After the meeting he did not return to the office, but got into his car and left the premises.
Goodsell came into the Cartier premises shortly thereafter and announced a meeting of all the staff for 3:00 p.m. that afternoon. The company witness testified that the purpose of this meeting was to discuss with staff the impact of Pataffy’s departure and to develop a business plan to deal with his stated intention to go into competition against Cartier. While Nidd knew who Goodsell was, she had never worked directly with him.
When Goodsell convened the meeting he said “as you are all aware Peter Pataffy resigned today ... is there anyone here who has intentions of following him? I would like an answer now.” Nidd nodded her head “yes”. Goodsell asked her no further questions, but simply asked her to leave, saying that she would be paid her severance pay and that there was nothing personal in letting her go. She left Cartier and went over to the offices of Boyd where she called her husband to pick her up.
Nidd testified that she answered “yes” by nodding her head in response to Goodsell’s question because she “couldn’t lie”. She said that she had an intention to follow him, although he was not yet set up in his business, and that if he offered her a job she planned to accept. Nidd also testified that she found the atmosphere in the meeting with Goodsell very intimidating
When she received her Record of Employment, it indicated that she had been terminated for cause. A covering letter dated November 20, 1998 indicated that it was a written acknowledgment of her last day of employment. The applicant responded with a letter dated November 26, 1998, claiming termination pay on the basis that she had been terminated without notice on November 20, 1998. The company responded on December 17, 1998, indicating that they had “cause” for asking her to leave Cartier when she acknowledged that she was going to work for a competitor.
Elaine Robertson, the Vice-president of administration for the Boyd Group, who is responsible for human resources, testified that it was unusual for Goodsell to terminate employees without her involvement, but that he was caught off guard by Nidd’s response and felt that he had to act immediately given the sensitivity of the situation. He did not advise her that he had made any promise to Nidd that she would be paid severance pay, and the first Robertson learned of that assertion was when Nidd filed her claim. Goodsell did not testify.
Nidd began work with Pataffy Moving Supplies on December 1, 1998. As noted above, she testified that she had not yet received a job offer from Pataffy when she went into the meeting with Goodsell on the afternoon of November 20, although she was close to Pataffy and had discussed his plans, and felt that he would “help” her if she was terminated or decided to leave Cartier. According to Nidd, Pataffy called her at home later that day to see how she was and to “find out what had gone on in the office” after his departure. She told him that they had terminated her, and he offered Nidd a job.
It was acknowledged that Pataffy’s company is in direct competition to Cartier, and that it is located just down the road from the employer’s premises. Nidd performs there essentially the same duties as she had at Cartier, including ordering, purchasing, invoicing and collecting payables. Pataffy’s Moving Supplies was up and running by December 1, 1998, when Nidd began work, but a corporate search carried out by Cartier revealed that it had been registered in the early months of the summer. This search also revealed that a major supplier that Cartier used to do business with is a shareholder of the Pataffy company.
THE DECISION
- Sections 57(10)(c) and (d) of the Employment Standards Act provide as follows:
Subsections (1) and (2) [notice of termination pay] do not apply to,
(c) an employee who has been guilty of wilful misconduct or disobedience or wilful neglect of duty that has not been condoned by the employer;
(d) a contract of employment that is or has become impossible of performance or is frustrated by a fortuitous or unforeseeable event or circumstance;
As noted above, the employer characterized its decision to ask Nidd to leave the premises at the meeting with Goodsell as a termination for cause due to her acknowledgment that she was going to work for a competitor. The letter of termination describes this conduct as a “wilful neglect of duties and a gross misconduct which could not be tolerated by the company”.
The Employment Standards Officer relied upon section 57(10)(d) in dismissing the applicant’s claim for termination pay, stating similarly that she had acknowledged to her employer that it was her intention to work for a direct competitor. The Officer stated that “this situation is regarded as conflict of interest or frustration of contract”.
Earlier decisions have considered behaviour like that described in this decision as either wilful misconduct or frustration of conduct, depending on whether or not there is clear and cogent evidence that an employee has a firm plan to enter into competition with her employer.
One of the first cases under the ESA to consider whether an intention to work for another employer might constitute frustration of contract appears to be the decision of Referee Egan in Everest and Jennings Canadian Ltd. (February 4, 1988). The employee in that application had provided his employer with notice of his resignation effective in four weeks time. As he intended to go to work for a competitor, the employer cut short his notice and terminated him immediately, relying upon section 57(10)(d) (then section 40(3)(d)) of the ESA. In considering the application of the section to circumstances of this sort, the referee made the following statements:
It seems hardly necessary to restate the law that holds it as a general rule, that an employee, by necessary implication, undertakes to serve his employer with goodwill and fidelity (Robb v. Green (1895) 2 Q.B. 315) and that if the employee does anything which is incompatible with the due and faithful discharge of his duty to his employer, he may be dismissed without notice. The reason being that the loyalty and integrity of the employee to the interests of his employer goes to the very root and foundation of the contract of employment. The loss of such fidelity creates a fundamental breach of the contract. The breach of fidelity and contractual integrity may not cause immediate harm to the employer’s business, however potential harm is sufficient to destroy the contractual relationship (Laverty & Cooper Plating Inc. 17 C.C.E.L. 44).
The foregoing cases do not deal with questions arising under section 40 of the Employment Standards Act. They do, however, illustrate the circumstances, in which a contract of employment can be breached and discharged by the failure of integrity on the part of the employee vis-à-vis the employer. This enables the employer to dismiss the employee without recourse on the part of the latter. The breach of integrity thus renders the continued existence of the contract of employment impossible since its roots and foundation have been destroyed by the action of the employee.
The Ministry and the Employment Standards Officer took the position that in the circumstances of the present case, the Applicant could not establish that the contract of employment between itself and Johnston had been frustrated by a fortuitous or unforeseen event, and that consequently, the exception under section 40(3)(d) was not available to the Applicant. At the same time, the Ministry sought to establish that the contract of employment should have had a provision governing the kind of situation which in fact occurred and that, the absence of such a covenant leaves the Applicant liable under the provisions of section 40.
It is my view however, that the question raised in the circumstances of this case has to do with the first branch of the exceptions set out in section 40(3)(d) rather than with that related to frustration “by a fortuitous or unforeseen event or circumstance”.
The real question raised in the present circumstances is whether there was a breach of the contract of employment by the employee which destroyed the root and foundation of the agreement so that its continued performance became impossible as the latter term is used in section 40.
It is my view that having entered into negotiations for employment by a competitor of the Applicant while still purporting to be carrying out his duties with respect to the latter and having already agreed to work for the competitor at the time he gave notice, the employee, Johnston, placed himself in such a fundamental conflict of interest as to render his duty of loyalty and integrity, the key factors in a contract of service, beyond his performance. The employee’s breach went to the heart of the contract of service and made its continuation impossible.
In the result, I find that the Applicant has established that the contract of employment that had existed prior to the time of the employee’s termination became impossible of performance within the meaning of section 40(3)(d) of the Employment Standards Act. Order to Pay #04014 is, accordingly, rescinded.
This analysis was considered by another referee later that same year, in Lucas Industries Canada Limited (L-R. Betcherman, December 5, 1988). In that case, the employee similarly advised his employer that he was leaving its employ to work for a competitor, and the employer terminated his employment immediately. As in Everest and Jennings Canadian Ltd., the referee found that by his actions the employee had placed himself in a conflict of interest with his employer. The Ministry maintained its position that a contract of employment could only be frustrated by an unforeseeable event beyond the control of the parties, but this argument was again rejected by the referee, who accepted the conclusion of Referee Egan in Everest and Jennings that conflict of interest renders a contract of employment "impossible of performance" within the meaning of the section.
The Everest and Lucas decisions were considered by Referee Owen Gray in Crothers Limited (October 31, 1990), in another case where a resigning employee was terminated immediately upon offering notice. The employee in that case was a salesman with access to sensitive customer information, and the employer first proposed that he be relieved of his sales duties and reassigned during the period of his notice. The employee refused to accept reassignment and insisted that he had been terminated. The employer argued that the employee's discussions with another employer and acceptance of employment with that company constituted either wilful misconduct or frustration of contract, but the referee concluded that he need not consider these arguments given his finding of fact that the employee had resigned by refusing to accept the reassignment offered.
In Revere Electric Inc. (L. Alter, April 10, 1992) a sales employee resigned with notice after accepting work with a competitor, and the employer fired him immediately. The adjudicator upheld the termination without notice, but it is not clear whether in so doing he relied upon the notion of frustration of contract or characterized the employee's actions as wilful misconduct. His actual conclusion was stated thus: "I therefore find that the fear of potential harm to the employer was a sufficient business reason to dismiss the employee without the statutory notice". Similar considerations were referenced in The Glenview Corporation (D. Randall, August 6, 1993), in which the referee concluded that "the Claimant's access to confidential information was sufficient to enable Glenview to view the continued performance of the Claimant's contract of employment impossible...In conflict of interest situations...prejudice or harm to the employer need not be demonstrated; potential harm is sufficient". In a later decision, however, the same referee qualified this statement by stating that "the application of the 'impossible of performance' exception to a conflict of interest situation, required, at a minimum, evidence that the employee has actively entered into negotiations with a competitor" (Re Romero, [1994] O.E.S.A.D. No. 109, November 16, 1994). Referee Randall in that case also rejected an argument that the employee's plans to start his own business constituted wilful misconduct, noting that the standard in such cases is 'clear and cogent evidence' rather than mere suspicion.
The most recent case cited to me in which a referee has adopted this approach of characterizing employee conduct amounting to a conflict of interest as a frustration of contract is Re Yurman, [1995] O.E.S.A.D. No. 157 (T. Wacyk, December 14, 1995). Referee Wacyk adopts the reasoning in Everest and Jennings, and concludes that the contract of employment became impossible of performance when an employee accepted employment with a competitor.
As this review of the cases reveals, there is a long-standing approach by referees and adjudicators under the Employment Standards Act in which the language of section 57(10)(d) has been interpreted to support the termination without notice of employees who accept employment with a competitor of their employer. Under this analysis, such a decision by an employee is characterized as so fundamental a breach of the duty of fidelity owed to the employer that the contract is considered to be frustrated or impossible of performance. An employee’s plans must be firm, however, for a termination without notice to be justified.
The terms "frustration of contract" and "impossible of performance" both arise from the common law of employment and in that context they have been given a much narrower interpretation than is apparent in the cases decided under the ESA and reviewed above. Christie and England summarize the general law in this area as follows in their text Employment Law in Canada:
In the general law of contract the doctrine of frustration has the effect of automatically relieving the parties from their obligations when there is an unforeseen change of circumstances which makes further performance of their contract either impracticable or radically different from what they had originally intended...In the context of frustration, the policy choice is who should bear the risk of unforeseen events that render impossible further performance of the job which the employee was hired to do.
The types of unforeseen events which have been considered to give rise to the doctrine include the death or in some circumstances disability of the employee, or the destruction of the employer’s enterprise through some intervening event such as a fire. The focus in the common-law cases is very much on the notion of unforeseeability; events which are within the control of one of the parties are not considered to be frustrating events. For this reason, even the discontinuance of the employer's business for economic reasons has not been considered to render an employment contract frustrated or impossible of performance and an employer’s obligations to provide notice or pay in lieu thereof are maintained in lay off situations.
At common law, the type of conflict of interest situation which is described in the ESA decisions reviewed above would clearly be considered as giving rise to an issue of cause rather than frustration of contract. An example of such a case is Leith v. Rosen Fuels (1994), 5 C.C.E.L. 184 (Ont. H.C.), which is cited by Referee Novick in Re Magder, [1996] OESAC No.224 (October 4, 1996). The judge in that case was faced with a suit for wrongful dismissal brought by a senior manager who was dismissed after he made inquiries about the possibility of starting his own company in order to compete with his employer. The employer argued that the employee's efforts, which admittedly amounted to naught, breached the duty of fidelity owed by an employee and amounted to just cause for summary dismissal.
The court reviewed a number of decisions considering the extent to which it is permissible for an employee to enter into discussions with others about the possibility of competing with his employer, and even to make arrangements to leave employment for such a purpose. Mr. Justice Barr concluded that:
... merely planning on leaving the employer or plotting to do so and conferring with others like-minded is not, in 1984 at least, an offence against the contracts of employment .... employees are perfectly free to consider going on their own and competing, providing they have not signed a covenant not to do so, and that they can get together and discuss their plans and that they can go ahead and leave. However, once they have left, they are bound not to use against their former employer any information received in confidence. I say "information" to distinguish "knowledge" because obviously the employee of experience has learned a great deal in the employment and he is free to use that in his new employment or new enterprise. But he may not take away with him a list of clients or list of customers, not actively use the knowledge of clients or customers' affairs in his new business which he received in the course of the old.
- The referee in Re Magder appears to adopt an approach much like that in Leith Fuels in considering whether the actions of the employee in that case would support a summary dismissal. The employer in Magder, a lawyer in private practice, dismissed his junior some time after he learned of his intentions to go into practice on his own, in premises he had already rented nearby. It is not entirely clear whether the referee assessed those facts in the context of the frustration of contract exemption, or as potential wilful misconduct, but she concludes that termination pay ought to have been paid, making the following comments:
On the first issue, the evidence tendered clearly indicates that Mr. Magder’s actions in purchasing a building with a view to opening up his own practice at some point in the future did not render his employment contract with the Employer impossible to perform. In fact, Mr. Magder continued to work in much the same way as he had been for over three weeks after Mr. Stroud found out about his involvement in the purchase of the building and subsequent plans. While the evidence indicated that he was primarily completing his files and doing “cleanup work”, it was not disputed that he continued to interact with clients of the firm, have access to the firm trust accounts and carry on in the normal manner in which he had been working previously.
The essence of the argument put forward by counsel for the Employer and the Ministry representative was that by planning to leave the firm and start his own practice, the Claimant had placed himself in a conflict of interest position. While the fact of purchasing a building across from your employer’s office with the intention of operating a practice from there may, in some circumstances, give rise to a breach of trust or create a conflict of interest, the evidence in this case does not bear this out. It was not disputed that Mr. Magder neither solicited any of the Employer’s clients, nor asked any employees to leave the firm and join him in his practice. In fact, no suggestion was made that he acted in a manner that could be interpreted as being prejudicial to Mr. Stroud in any way, other than leaving his employ. The mere fact of planning to leave a law firm at some indeterminate point in the future to begin a new practice, whether in a building recently purchased or from rented premises, is simply not sufficient in my view to frustrate an employment contract or render it impossible of performance.
Counsel also argued that actual harm to the employer need not be demonstrated, and that potential harm would be sufficient to support a finding that an employment contract was no longer possible of continued performance. While I appreciate that the jurisprudence supports this notion, the fact that Mr. Stroud permitted the Claimant to keep working for 3 ½ weeks after finding out about his plans to leave, convinces me that he was not overly concerned about Mr. Magder’s continued employment causing any harm.
In considering the facts of the present case in light of the jurisprudence reviewed above, I have concluded that the summary dismissal of Ms. Nidd cannot be supported, either on the basis of a frustration of the contract within the meaning of section 57(10)(d) of the ESA, or because of wilful misconduct under section 57(10)(c).
I am troubled by the cases which have assessed conduct of the sort considered here as giving rise to a frustration of the employment contract, or rendering it impossible of performance. Having reviewed the reasons of Referee Egan in Everest and Jennings which appear to have given rise to this approach, it seems to me that he has fundamentally misapprehended the nature of the frustration concept, confusing it with the notion of a fundamental breach, and ignoring the notion that a frustrating event must be unforeseen or at least beyond the control of one of the parties. He supports that latter interpretation by an analysis of the statutory language which separates the first part of section 57(10)(d) (then section 40(3)(d)) which refers to a contract which is “impossible of performance” from the latter reference to a contract which “is frustrated by a fortuitous or unforseeable event or circumstance”. This language could as easily be interpreted to apply the final phrase to both the notions of impossibility of performance and frustration, and such an approach would be consistent with decades of judicial commentary on the notion of frustration of contract. As noted above, the type of conflict of interest which may arise from an employee either considering or actually accepting work with a competitor may be cause for a summary dismissal at common-law, but would not be considered to give rise to a frustration of contract given that it is conduct entirely within the control of the employee. I have concluded that a similar approach ought to be taken by adjudicators considering the possible application of the statutory exemptions under section 57(10) of the ESA to conduct of that sort. Thus, the question before me should be: has the claimant engaged in wilful misconduct within the meaning of section 57(10)(counsel) of the ESA?
Before I consider that question, let me state that if I am wrong in my assessment of the relevant statutory exemption, I would nonetheless reach the conclusion that the termination of Ms. Nidd without pay in lieu of notice could not be supported as arising because of a frustration of the employment contract, for the same reasons considered in Re Magder, and which are reviewed in more detail below in the context of wilful misconduct.
The present case is quite different on its facts than any of the other cases reviewed above, as the employee, on her uncontradicted evidence, had not actually reached a decision to leave the employ of Cartier prior to the conversation which led to her termination, and had no offer of employment from the competitor with whom she did go to work. The employer asked that I reject the employee’s evidence as implausible, given her evidence that she knew of Pataffy’s plans many weeks before the date of his resignation, and the fact that she started work with him so soon after her termination from Cartier. While the speed with which she was able to obtain a firm offer does raise some question about whether or not she and Pataffy had previously discussed at least the possibility of her coming to work with him, the employee gave her evidence simply and directly, and I accept that she did not know exactly when Pataffy was going to resign, and had not made any firm decision about whether to pursue employment with him. I also accept that her decision to do so was triggered by his resignation on November 20, 1998, and the events at the company which followed.
The employer argued that the evidence which came out at the hearing that Ms. Nidd knew of Pataffy’s plans long before the day in question yet did not advise anyone in management constituted further evidence of misconduct on her part. Given what I was told about the management structure of the companies, I cannot conclude that an employee at her level could be expected to go over the head of her supervisor and the most senior manager at the workplace to report on his activities, or that the failure to do so would constitute wilful misconduct.
It was certainly established that in her position Ms. Nidd would have access to sensitive customer information, but in the unique circumstances of this case that fact was of little significance, given that Pataffy, her manager, had already departed the premises and was presumably in possession of all of the same information. In any event, if the employer had concerns about the risk of maintaining Ms. Nidd in employment it had a number of options open to it: it could terminate her immediately with pay in lieu of notice as Goodsell is said to have proposed when he asked her to leave; it could reassign her to other duties, either permanently or during the period of working notice, as was done in Crothers Limited; or it could advise her of her responsibilities as an employee and respond in a disciplinary fashion if such a warning went unheeded.
I have concluded, however, that the response which the company ultimately decided was appropriate - to dismiss her without notice or pay in lieu thereof - was not justified in the circumstances. Goodsell’s decision to terminate Nidd was made on the spur of the moment and was based on very little information - indeed nothing more than a nod of the head. The company did not know whether the employee actually had a job offer with a competitor or had accepted a job, or when she planned to commence such employment, and as noted above I have accepted her evidence that she had no such firm plans. If the employer wished to support the decision to terminate as resulting either from wilful misconduct or because of a frustration of contract, it was incumbent upon it to undertake at least some investigation about the nature of the employee’s plans and thus be in a position to make a more accurate assessment of any potential harm to the employer’s interests.
Interestingly, this entire complaint could have been avoided had the employer’s first inclination, which was to dismiss the employee with the two week’s notice owed to her, been maintained. I heard no evidence from Mr. Goodsell, so must accept that this was his original offer to Ms. Nidd, and did not learn why the company changed its mind and decided to impose a summary dismissal.
Having regard to the unique facts of this case, it is clearly a situation closer to that outlined in the Magder and Romero cases reviewed above, where referees similarly found that the employee’s plans to compete with the employer were not firm enough to constitute either wilful misconduct or a frustration of the employment contract.
For these reasons, the Officer’s decision not to issue an Order to Pay is overturned, and the application is allowed in part.
DISPOSITION
- Cartier Supply and Rentals Ltd. is hereby ordered to pay to the claimant Rose-Marie Nidd two week’s termination pay in lieu of notice. As no evidence was heard to establish the claimant’s rate of pay, I will remain seized to determine the amount payable should the parties be unable to agree on the amount.
“Pamela A. Chapman”
for the Board