Author: Howard Levitt
Publication: National Post
Hypocrisy can afford to be magnificent in its promises; for never intending to go beyond the promises, it costs nothing. –Edmund Burke
Fair-weather friends, empty promises: Both cost nothing and are worth nothing. But employers’ promises are a different matter. However blithely and disingenuously proferred, those have an ultimate cost.
Graham J. Orr relied on the word of his employer, Magna, and specifically that of Frank Stronach. He was recently awarded $1.65-million when those promises proved empty.
In the fall of 2000, Stronach offered Orr the position of executive vice-president and chief financial officer of his new Magna Entertainment Corp.
Orr had worked for Magna for 13 years and had risen to a very senior position, earning $1.4-million a year.
Stronach made Orr an offer he couldn’t refuse, including a $2-milllion signing bonus. But Orr wisely insisted on an employment agreement with generous conditions if he was ever fired, particularly in the early days of the job. Perhaps it was to protect himself from the vicissitudes of fortune or the new venture, or his position not working out in the manner Stronach foresaw. If he was fired in the first three years, Magna Entertainment would pay him severance of 24 months. If he survived those first three years, that would drop to 12 months.
Orr started with Magna Entertainment on Jan. 1, 2001. By mid-2002, Stronach and James McAlpine, the president and chief executive of Magna Entertainment, had become dissatisfied with Orr’s performance. Orr was kept in the dark, while a headhunter was retained to secure his replacement. Senior Magna executives were weighing the costs of firing him. In March, 2003, McAlpine told Orr he was being replaced. He also suggested Magna International Inc. might have opportunities available that Orr should look into. No termination date was provided.
Discussions ensued, including with Stronach, about a comparable position. Orr was told on June 4, 2003, that his last day as chief financial officer at Magna Entertainment would be July 28. As months passed, Orr grew frustrated. He wanted the two years severance he had negotiated. He was worried that, if this continued until January, 2004, the severance would be reduced to 12 months. But a senior executive at Magna Entertainment, reassured him this was not the intent. Stronach also addressed Orr’s concerns, reassuring him he did not want him to leave. Orr was told not to worry, “something would materialize.”
Finally, Orr was given the title of executive vice-president, special projects, at Magna International, and his contract was assigned to that division. This was a lesser position than he was accustomed to, but he was told they were still looking for a comparable one.
On Jan. 9, 2004, just nine days after the three years were up, Magna International gave Orr one year’s working notice of termination. When Orr asked Stronach about the notice, he said Stronach replied it was of no significance, just a formality and he hoped a permanent job would still come along. In June, Orr was told not to bother going into work. There would be no other position for him at Magna.
He sued Magna Entertainment, Magna International and Stronach personally, claiming 24 months severance pay from the March, 2003, notice of termination. The case was defended on the basis that Orr had taken another job with Magna International after the termination from Magna Entertainment. Because he stayed at Magna past three years, he was only owed 12 months severance under the contract.
In a decision released last month, Madam Justice Klowak of Ontario’s Superior Court of Justice awarded Orr two years severance, plus interest. She had little time for Stronach’s “remarkably convenient lack of memory and extraordinary ability to skirt around and evade inconvenient answers.” Nor was she pleased by Stronach’s comment that paying Orr two years instead of one was a waste of shareholders’ money.
Madam Justice Klowak found that the promise of a comparable position was the only reason Orr had remained and that he had agreed to forego demanding a generous severance in return for the assurance a new position was being sought.
Ultimately, Madam Justice Klowak found that only Magna Entertainment and Magna International were liable to pay the two years severance.
What does this saga of broken promises show? Employers intent on bypassing an onerous severance pay provision in an employment contract should:
Seek legal advice as to how safely reduce the costs. In this case, the failure to find Orr a comparable position, to negotiate a new contract or to give him working notice from the beginning proved far more costly than honouring the contract.
Be careful of promises made to employees about the availability of comparable positions. If employees act on the strength of those promises, you may be liable.
Ensure no employee is left in a “twilight zone.” If an employee takes another position in the company after being terminated, conclude a new employment agreement so there is certainty about the terms of employment and any subsequent termination.
Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers. He practises employment law in eight provinces and is author of The Law of Hiring in Canada, soon to be released.