Mid-sized private company X decides its Vice President of sales, who they had poached a year ago from another company, actually can’t sell anything to save his life. In only one year, he managed to foster a sales culture of secrecy, reporting over-optimistic forecasts to management while remaining vague on the reality of the marketplace. He also failed to recruit good sales talent, and instead directed the sales team to chase any opportunity without a second thought for a solid, competitive sales strategy. Management meets to discuss his poor performance. They contemplate whether or not to address their concerns with him. They decide not to, that it would be less disruptive all-around if they just fire him out of the blue.

Someone suggests that maybe they should get legal advice before doing so. After all, he makes a lot of money, is in a fairly high position, and they want to make sure they do this right. The rest of management decides against seeking legal advice because they worry it will just prolong the situation and rack up additional cost. Revenue has already suffered at the hands of the VP, and the sooner he can be removed from the scenario, the sooner they can start to reverse the cascading effect of diminishing sales that he has created. Besides, one of the CEO’s favourite pastimes is to watch legal dramas on TV, and he is pretty sure that the company can fire this guy “for cause” because they have a good reason for firing him: he sucks.

Under the auspices of having an emergency meeting to discuss a new business opportunity, the CEO and calls him to the boardroom where the management team is waiting. They advise him that they are unhappy with his performance and they are letting him go. He misrepresented his sales skills to them, and he takes too much vacation. They are therefore dismissing him for cause, and they are not going to pay him any severance. He can leave his laptop and blackberry on the table and they will send him the rest of his personal things.

Days later, they receive correspondence from the VP’s lawyer, advising them that the VP wants a year’s worth of salary as severance, all of his unpaid commissions, ongoing benefits for a year, as well as damages for the humiliating way that he was dismissed. Company X decides to ignore the letter.

It doesn’t take long for the company to get served with a statement of claim against them and various members of management seeking $250,000 as severance, unpaid commissions of $100,000, benefits, and punitive damages for humiliation and discrimination. The VP alleges that his “excessive vacation” were actually sick days used to treat a health problem, and that the company knew about his illness. He states that the company is guilty of discrimination by firing him due to that illness and were also in violation of human rights laws. Furthermore, the way the VP was fired was degrading and unnecessarily callous. He’s therefore entitled to damages for humiliation.

Company X reports the matter to its insurer. Coverage was confirmed under the employment practices liability section of the company’s D&O policy. A seasoned employment lawyer was retained by the insurer to represent the defendants. Counsel reviewed the case and immediately advised that severance should be paid in this case. Termination for cause in Canada is only appropriate where an employee is guilty of serious misconduct and has therefore repudiated the employment contract. This was not the case here.

Attempts to settle were made, and reasonable severance was offered to the VP. The matter wouldn’t settle though, as positions had already become entrenched, and the VP refused to reduce the amount claimed on the grounds of humiliation and discrimination. He wanted his day in court and to expose the treatment he had received by his former employer.

Finally, on the eve of trial, the matter settled for an all-inclusive payment of $260,000.00. Defense costs paid by the insurer were in excess of $160,000.00.

Lessons learned:

1) Dismissals for cause are extremely difficult in Canada, unless there is proof of serious employee misconduct. Legal advice should be sought before taking this approach.
2) Consulting a lawyer prior to dismissal can help an employer avoid making serious mistakes in position and in method of termination. This can save time and money in the long-run.
3) Wrongful dismissal litigation can be very expensive, especially once positions are entrenched. EPL coverage can help offset this “cost of doing business”.