It is well known that the obligation to give notice is a reciprocal one. The employee is subject to the same duty, absent a contract to the contrary, to provide fair notice of their resignation. The failure to do so will give rise to a claim for the reasonably likely damages suffered by the employer. The damage analysis is an important issue as it is distinct from the claim made by the employee.
Claims of this nature are often accompanied by allegations of breach of fiduciary duty, breach of confidence and related claims of unfair conduct when the departing employee also attempts to divert business to a new entity or new employer, or engages in similar unfair conduct.
The existence of this obligation is implied not only to an employment relationship but also to the “intermediate status” in which the relationship is not strictly one of employment nor is it one of an independent contractor/principal. The same factors will apply as in the instance of the similar claim made by the plaintiff in their parallel claim. These will include the degree of reliance, the extent of exclusivity which essentially look to the degree of dependency of each party to the other. The cases are fact driven. 1 Other factors have included (1) the extent of the worker control, (2) the ownership of equipment, (3) the profit and loss opportunity and the (4) extent of integration. These last factors come from older cases. The test again comes down to fairness and the extent of mutual dependency.
Principle of the Damage Claim
Once the notice period has been set, the damage claim may or may not be based solely on that time period. Many of the cases reviewed below deal with facts showing a breach of confidence or other wrongdoings, accompanied by the claim of unfair notice. These cases often allow for a damage loss well beyond the temporal period of the determined notice period. There is no reason to expect that such a damage assessment hinges upon the existence of such other proven wrongdoings. Such a loss may result from the failure to give notice as a singular cause of action.
Extent of the Notice
An important issue will be the number of months of notice that is fair. The purpose of the notice is, of course, to provide the employer with sufficient advance notice to replace the departing employee.
The cases are fact driven. There is no overall pattern in the decided cases.
The B.C. Court of Appeal considered this issue in its 2016 decision. 2 This case determined that important factors to this end included the duties of the employee, salary, and length of service. Issues may be taken with this analysis as the critical issue is how long it would reasonably be expected to take to find a suitable replacement, as was noted in the decision. Also a factor may be whether the resignation was a singular one or one in which multiple employees chose to resign contemporaneously. Further, an important issue would be the regional factors, such as an employer located in an isolated smaller urban centre where it may be difficult to attract a qualified replacement. In the B.C. Court of Appeal decision, one month was seen as fair for an estimator with little independent authority and whose job lacked a specialized skill. 3 The details of the position held by the departing employee will be important only to assess the time period required to replace this person.
In one case, an agreement drafted by the employer was agreed to be legally unenforceable, yet the term in the contract was determined to be an important consideration in the assessment of what the employer viewed as a fair period of expected notice. This was not the only evidence used to assess a brief notice period, as the court also considered the availability of other locally qualified personnel available to replace the two departing employees. The trial court then set the notice period for two employees who had worked between eight to ten years as two to three months. 4
The Siddhivarin decision recites examples of notice periods set in such instances, again noting that the cases are fact driven.
The Ontario Court of Appeal, in a brief endorsement, upheld the trial judge’s assessment of three months for a key employee in the plaintiff’s utility division, employed for 18 months. 5
Nine months was set by trial court in Alberta for two employees working in a specialized area of the oil and gas industry. 6 The Court of Appeal found that the trial assessment of nine months was overly modest. The appellate court viewed the correct period of notice as 18 months. The damage assessment was not increased by the Court of Appeal as it was left for counsel to determine.
In a case in which three employees consisting of the employer’s entire sales staff, having been employed from one to seven years, six months was set for the more senior employee and one month for the remaining two. 7
In the Siddhivarin case itself, the facts showed a dentist in Cranbrook, B.C., the reliance of the principal on associate dentists due to his personal health issues, and prior difficulty in attracting suitable persons. The evidence showed his prior experience was a wait of four to five months to his advertisement for an associate. The hiring of the associate in the instant case took three months from the initial advertisement to be hired. This was seen as the appropriate period in the counterclaim in this case.
In a case which went to the Supreme Court of Canada in 2008, the part-time branch manager of the RBC DS branch in Cranbrook, B.C. and the bulk of the investment advisors suddenly left the employer of RBC and took new employment with Merrill Lynch. 8 The trial judge set the notice period for the investment advisors and the branch manager at 2.5 weeks. The lost profits for this time period was set at $40,000, representing the profits which they would have contributed to RBC for this time period. This was upheld by the Court of Appeal. One might expect that this time period is unexpectedly modest. It is difficult to reconcile an 18 month notice period referenced in Tree Savers against this time period in RBC.
This being said, such was the decision. A further claim was allowed of $1.5 million against the manager for unfair conduct in this process.
As noted below, the trial judge in GasTOPS set the notice period for four critical employees as 10 to 12 months, a position with which the Court of Appeal noted that it did not necessarily endorse. 9
Assessing the Damages
Direct Loss of Profit
The damage claim will also be fact driven. There may be various components to the damage claim. The first is the direct financial loss suffered by the failure to give fair notice of the intent to resign.
In the case of the associate dentist, the claim was determined to be based on the expected net revenue to the business, that is revenue earned by the associate less his percentage, which was again to be reduced by variable expenses which were not to be expected given the absence of the associate. These will vary case by case. In this circumstance, expenses found to be variable were staffing costs, utilities and equipment costs. These expenses will be debated item by item in usual cases to assess whether they are truly variable or are fixed and cannot be offset.
In this specific case, the principal hired two other associates which complicated the damage assessment, as it was difficult to determine which of the two new hires had replaced the departed associate. The sum of $38,700 was found as being earned by the clinic from the substituted associate.
The damage claim was set at $21,000. The important issue in the damage assessment was the determination made of the financial loss suffered by the principal in the three month period.
Costs of Training New Staff
The 1992 Alberta Court of Appeal decision referenced above, 10 noted that the damage award should include the cost of training new replacements and other additional expenses. Expert evidence at trial showed that this cost was $146,000. This sum included increased travel expenses, higher management expenses, and the direct cost of replacing each employee. The trial judge had awarded half of this claim, seemingly on the basis that the notice period should be set at 9 months. The Court of Appeal noted that some of the training costs were, in any event, fixed, and not dependent on the period set as fair notice. This case involved other wrongdoings of the employees, apart from the short notice given. The employees had used confidential customer records and copied the design of their past employer’s mechanical device which was important to their new business.
Discount for the Contingent Risk
On appeal in the Tree Savers case, the employees argued that they may well have left in any event in a legitimate manner which should thus allow for a contingent discount to the damage claim. The Court of Appeal accepted the theoretical aspect of the submission, yet stated that the likelihood of this event happening, on the evidence as presented, was “fairly small”. It continued to state that the 50% reduction, that is in using 9 months as the notice period, “swamps any such allowance”. The impact on the damage assessment would have been modest, it noted and a new trial on damages was not practical.
Future Business Loss
The Tree Savers case also allowed for a damage claim based on the loss of future profits. This sum was in addition to the award for loss of profits up to the date of trial. The analogy was made to the claim made by an accident victim to be awarded lost income to the date of trial plus a sum for future economic loss. The assessment made for a future loss was decreased by 50% to allow for the contingent risk, which was found on appeal to be too severe a discount. The expert report had presumed a loss of future profits as “going on forever”. The appellate court took issue with this presumption, yet noted the 50% discount applied at trial overcompensated the risk factor in any event. The important issue from this analysis is that the future loss should be discounted to reflect some degree of contingent risk and should be capped at some future point in time, which in this case, was seen at 5 years beyond the date of trial. The discount of 50% was lowered to 30% . Both parties were reluctant to engage in a new trial to resolve the arithmetic of the damage claim. The court left the parties to agree on the amended damage claim.
The Supreme Court of Canada considered this issue of the future loss in its 2008 decision. 11 In this case, several investment advisors of RBC , including the branch manager of the Cranbrook office, left without adequate notice and began new positions with Merrill Lynch.
This case involved more than the investment advisors leaving and walking across the street to Merrill Lynch. The branch manager, Delamont, was found at trial to have failed to perform his duties in good faith, by planning the departure of virtually all of the RBC investment advisors. Prior to their departure, RBC client records had been secretly copied and provided to Merrill Lynch. The manager was found liable at trial for $1.5 million as bring responsible for the “near-collapse” of the branch.
The trial judge had found that the damage assessment for the failure to give advance notice was not one simply limited to the losses suffered in the notice period, given the finding of a breach of duty of good faith. The trial judge rejected the defendant’s arguments on this point, finding that reasonably contemplated losses were not confined to the notice period:
I do not conclude that the parties to his employment contract contemplated that Mr. Delamont’s liability for such a breach would be restricted to losses associated with the period of notice he ought to have given. [(2004), 2004 BCSC 1464 (CanLII), 50 B.L.R. (3d) 308, at para. 55]
The Court of Appeal took a different view. The majority concluded that the collapse of the RBC branch which followed, was one which was not a foreseeable consequence of this event. The reasoning was that neither party would have foreseen this “sort of alleged breach”. This, the Supreme Court determined, was the wrong question. The issue was whether there was a reasonable contemplation not of the breach, but these losses which followed. The trial decision of $1.4 million was restored on this issue:
The correct question to ask is whether, had the parties at the time of entering into the contract of employment directed their minds to the possibility that Delamont might orchestrate the departure of substantially all the office’s investment advisors, would they have contemplated a loss of profits giving rise to damages. In my view, the trial judge asked the correct legal question and arrived at an appropriate conclusion on the facts. There is no basis for interference on the grounds of Hadley v. Baxendale.
A similar conclusion was reached in the GasTOPS case. The trial judge found that the four individual defendants were “crucial to the direction and guidance of the company”. Each was fully aware that their sudden departure would reap havoc upon the employer’s business. Following the end of their employments, they used GasTOPS confidential business information causing severe harm to the employer’s business. The case was premised on more than inadequate notice, similar to the RBC case. The trial judge found that the time period to assess the damage claim was 10 years, whether the claim be founded in breach of confidence, fiduciary notice or the failure to give notice. The total damage award was $12,300,000. Costs at full indemnity came to a further $4.2 million.
The Court of Appeal noted that each cause of action was not assessed individually to this end and hence a review of prior cases dealing with a singular breach was not appropriate. 12
The employees submitted on appeal that the damage claim of 10 years could not be sustained on the distinct cause of action for the failure to give reasonable notice. The trial judge had, however, rightly conflated all causes of action to arrive at this 10 year damage assessment. The Court of Appeal agreed with the views of the trial judge who set out the impact of the failure to provide fair notice in these words:
The personal defendants’ failure to provide GasTOPS with reasonable notice of their intention to resign positioned the defendants as an alternative to GasTOPS’ existing and prospective customers’ software needs. It is important to keep in mind the extremely vulnerable position of the plaintiff as a result of the failure of the defendants to provide GasTOPS with reasonable notice. If the defendants had provided GasTOPS with 10-12 months notice, it could have, and in my view in all probability would have, made arrangements to replace these defendants and to have fulfilled its goal of converting its products to a Windows environment. If GasTOPS had been able to do so and hired new personnel in a timely manner to replace the defendants, the new personnel could have been introduced to its existing customers and potential customers and become familiar with its products. In such circumstances, the effect of the defendants’ breach of their fiduciary duty to GasTOPS would have been lessened greatly.
While the trial judge did state that he viewed the correct notice period as 10 to 12 months, this statement was not endorsed by the Court of Appeal. This finding, the appellate court noted, did not lead to a distinct damage award.
Future Damage Claim Based on Inadequate Notice
One could imagine a fact situation in which an employee was critical to a particular client or customer, such as an account executive in an advertising business, where the presence of that person is important to the continuity of that source of business. The failure to allow for sufficient notice could readily imperil the business relationship. Similarly, a company promoting a new business opportunity which is close to fruition could be seriously jeopardized should the key person leave on short notice. In each instance, the company’s damages may well be seen as such lost business or the lost opportunity. This may be so whether or not the departing employee maintains the business relationship or captures the pending opportunity in a new environment.
Whether the claim for inadequate notice is made, it may or may not be accompanied by further allegations of breach of a duty of confidence, fiduciary breach or similar claims based on unfair conduct before or after the end of employment. Frequently, claims for future losses, well beyond the notice period have been allowed. This is not necessarily dependent upon such other claims being made.
Departing Employees Allowed to Compete
In the context of the notice period once given, the employee remains unable to compete against the employer.
While an employee who has resigned, with or without proper notice, certainly cannot make use of his past employer’s trade secrets or confidential information or customer lists, they may, however, compete against their prior employer, absent a valid covenant to the contrary, following the completion of the notice period. 13 That person may, however, use the knowledge obtained in his prior employment in the spirit of fair and free competition. 14
Offer of Resignation and Acceptance
Where the employee has provided advance notice which is then accepted by the employer, a contract is formed. Should the employee breach this agreement and depart in advance of the agreed date, then there will also follow a claim made by the employer, on similar terms, for breach of contract. This issue of the creation of such a contract is discussed here.