B.C. Supreme Court frowns on salary continuance

Court cites established principle that damages for wrongful dismissal are paid in a lump sum

When it comes to salary continuance, employers and employees often find themselves sitting on different sides of the fence.

Employees usually want the full amount in a lump-sum payment. If a worker is awarded 10 months’ notice by the court, he wants a cheque cut for the full amount.

But employers sometimes want to stretch the payments out over the reasonable notice period, continuing the employee’s salary as if he was still working for the company until the obligation has been met.

As Justice Ian Pitfield of the British Columbia Supreme Court said in a recent decision, the question over which side is right is “difficult to reconcile.” That’s because courts have come down on both sides of the fence in numerous judgments.

Justice Pitfield waded into salary continuance during the case of Tull v. Norske Skog Canada Ltd. In that case the court ruled Richard Tull, 51, had been wrongfully dismissed and awarded him 20-months’ notice. Tull had worked for more than 13 years at a mill, rising to the senior rank of mill manager, paper operations.

Tull was one of two mill managers who reported to a vice-president. He was responsible for a staff of 300 and earned a base salary of $148,625. He also participated in Norske Skog’s short-term incentive plan, stock option plan and supplemental executive pension plan.

He was dismissed on Oct. 27, 2003, when Norske presented him with two options, neither of which he accepted. The first was a lump-sum payment arrangement providing for termination on Oct. 27 and payment of 80 per cent of 16 months’ base salary, the equivalent of 12.8 months’ notice. All benefits, including pension participation, ended on the termination date under this option.

The second option was a salary continuance arrangement. Tull would be terminated on the last day of a period of “termination leave” not exceeding 16 months. Leave and employment were to be terminated in the event he obtained alternate employment during the 16-month period. In that event, he would receive a severance payment equal to one month’s base salary multiplied by one-half the full number of months remaining in the leave period.

This amounted to half his base monthly salary. Benefits, except health, dental and basic group life insurance, were to cease on commencement of the termination leave. He would continue to have use of a company vehicle during this period.

When outlining the options, the company said the salary continuance arrangement would be the default option if he chose to accept neither, which is exactly what happened. Tull was placed on termination leave on Oct. 28, 2003. The leave would end, as would his employment, on Feb. 27, 2005.

The court ruled in favour of Tull, awarding him 20 months’ notice plus short-term incentive compensation and numerous other benefits. All told the court awarded him nearly $300,000.

Where the case got really interesting was in determining how Tull would get his money. Norske wanted the salary continuance arrangement to continue until the court-awarded notice period was paid. Tull said Norske was not justified in subjecting him to a salary continuance arrangement and wanted the full balance owing immediately.

But Norske argued the salary continuance arrangement was permitted based on previous caselaw. In making his ruling, Justice Pitfield examined a number of cases that had come down on both sides of the debate.

In Cooper v. MacMillan Bloedel Ltd. and MacDonald v. Woodward Stores Ltd. the British Columbia Supreme Court frowned upon the concept of salary continuance because, in both those cases, the offers of salary continuance amounted to a lesser award than a lump-sum payment.

In Spooner v. Ridley Terminals Inc. the British Columbia Supreme Court saw no reason in principle to reject salary continuance as a proper means of paying damages which flow from the termination of employment without reasonable notice.

No reason, that is, as long as the continuance is equivalent to the damages which would be fixed by a court. By starting the payments immediately upon termination, the employer can avoid the accumulation of pre-judgment interest on the amounts paid, the court said.

In Spooner the judge modified the salary continuance arrangement by increasing its duration to coincide with his determination of the reasonable notice period.

In Moody v. Lafarge Canada Inc. the British Columbia Supreme Court did not think salary continuance was appropriate. It said Lafarge terminated the plaintiffs’ employment and did not give reasonable notice. There was no agreement to accept payment of a salary continuance in the event of dismissal nor an acceptance by the plaintiffs, upon their employment termination, of payment on a monthly basis for the appropriate notice period. The court ruled the employees were entitled to a lump-sum payment and “should not have to wait for payment of the judgment amount spread over a period of months following the judgment.”

Those were just a few of the cases Justice Pitfield examined during the Tull case. He came to the conclusion that salary continuance was not an appropriate alternative.

“In my opinion, the principle that damages must be assessed on a once and for all, one-time basis, the requirement that the court resort to a kind of mandatory injunction or adjourn judgment to a point following expiry of the notice period if the effectiveness of a salary continuance arrangement is to be assured, and the fact that a salary continuance arrangement to which the employee does not agree reflects the employer’s attempt to unilaterally amend the employment contract, suggests that such arrangements should not be endorsed as a means of compensating an employee for damages in a wrongful dismissal action,” said Justice Pitfield.

He said discretion should only be exercised in favour of a salary continuance agreement if the amount to be paid to the employee in accordance with its terms is equivalent to that which the employee would have received had he been dismissed with working notice.

In Tull he said he would not exercise such discretion to allow the salary continuation arrangement to go on because:

•the notice period offered in the salary continuance by the employer was not reasonable;

•there was a failure to properly compute lost income by omitting short-term incentive plan compensation;

•there was a failure to appropriately compensate for certain lost employment benefits;

•there was no compensation for lost pension benefits;

•there was no clear definition of what “alternate employment” was that would result in a reduction of the monthly payments stipulated in the salary continuance arrangement; and

•the 50 per cent reduction in the event alternative employment was obtained was arbitrary.

“Acceptance of salary continuance arrangements, whether in the exercise of discretion or otherwise, represents a modification of the established principle that damages for wrongful dismissal are to be assessed as a lump sum, once and for all,” said Justice Pitfield. “Whether the law can and should be revised in that manner is a topic that should be addressed by the Court of Appeal.”

But he also said if both parties were amicable to salary continuance, nothing should prevent an employer and employee from entering into such an arrangement.

For more information see:

Tull v. Norske Skog Canada Ltd., 2004 CarswellBC 1860 (B.C. S.C.)

Cooper v. MacMillan Bloedel Ltd., 1991 CarswellBC 128 (B.C. S.C.)

Macdonald v. Woodward Stores Ltd., 1991 CarswellBC 872, 39 C.C.E.L. 58 (B.C. S.C.)

Spooner v. Ridley Terminals Inc., 1991 CarswellBC 308, 39 C.C.E.L. 65 (B.C. S.C.)

Moody v. Lafarge Canada Inc., 2000 CarswellBC 2597 (B.C. S.C.)

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