An Employer’s Conduct Can Invalidate a Termination Clause

The Supreme Court of British Columbia in Klyn v Pentax Canada Inc., 2024 BCSC 273 emphasized the role that an employer’s conduct can play throughout the termination process. The court had to determine whether the employer (“Pentax”) repudiated its employment contract with Klyn through its conduct following termination.

Klyn began working with Pentax in June 2001 as an independent contractor but was later hired as an employee responsible for developing sales of Pentax’s products in BC. Prior to becoming an employee, Klyn signed an employment contract which stated his compensation was entirely commission-based. The employment contract included a termination clause, stating that if he was terminated without cause, he would receive the greater of: 

• The minimum entitlements pursuant to the British Columbia Employment Standard Act; or
• Four weeks of pay per completed year of service prior to signing the employment contract, plus an additional four weeks under the contract, to a maximum of 18 months.

The contract stated that compensation paid on termination would be based on an average of commission earnings over the previous two years. In 2014, Pentax changed their compensation structure from being entirely commission based to a base salary of $100,000 with new commission rates imposed.

In April 2022, Klyn’s employment was terminated without cause. He was entitled to several months of notice or payment, based on the termination clause. He received a termination letter which included various conditions on payments, including a monthly duty to report mitigation efforts including the disclosure of details of all job offers received. Klyn was later advised that Pentax would cease payments if he failed to comply with the reporting requirements. Following termination, Pentax paid only salary amounts and not commission amounts. In July, Pentax stopped paying the salary based on alleged non-compliance with the reporting obligation; this was months earlier than stipulated by the termination clause.

The parties agreed on the applicable law around repudiation. Repudiation is a breach of contract by one party giving rise to the right of the other party to terminate the contract and pursue the available remedies for the breach.

The court found that Pentax repudiated its employment contract post-termination when it:

• Failed to pay commission as part of the salary continuance. The court found that Pentax’s vague statements regarding a disagreement about the amount owed, did not justify their failure to pay any commission amounts.
• Ceased payments to Klyn after three months because Klyn did not comply with the demand to report mitigation efforts to Pentax. Although a duty to mitigate was part of the employment contract, the reporting requirement imposed by Pentax was not.

The court held that Klyn was entitled to common law reasonable notice. The court also ordered Pentax to pay $25,000.00 in punitive damages for its conduct.

Key Takeaways:

This decision is significant for employers because their conduct throughout the termination process can repudiate an otherwise enforceable employment contract. In situations where an employer fails to comply with its own obligations under an employment contract, there is a risk they may be barred from enforcing that contract.

The link to the full decision is available here.

For more information on this and other similar topics, please contact Scott Marcinkow or anyone else from our team listed on the Authors page.