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Court of Appeal Protects Manager from Personal Liability on Employee Termination

A well-drafted contract protects not only the company but also its employees and senior personnel. In a recent decision, Richards v. Media Experts M.H.S. Inc., the Ontario Court of Appeal held that a terminated employee could not sue her boss personally for intentional infliction of nervous shock following the termination of her employment.

The plaintiff, Lauren Richards, had been employed as the company’s CEO for under one year when she was terminated for cause. She had signed an employment contract which limited her entitlements upon termination to 12 months’ pay. It also contained an exclusionary clause which provided that she had no further “right to receive any severance payment, damages or indemnity by reason of such termination” (the “Exclusion Clause”).

Ms. Richards brought a wrongful dismissal action and also claimed that the founder and Executive Chairman of the company, Mark Sherman, was personally liable for of the tort of intentional infliction of nervous shock. Mr. Sherman argued that the alleged tortious conduct was protected by the Exclusion Clause in the employment contract. The Court of Appeal agreed.

Ms. Richards argued that the Exclusion Clause did not apply to Mr. Sherman because he was not a party to her employment contract with the employer (relying on the legal principle of “privity of contract”).

The Court of Appeal found that such an Exclusion Clause in an employment contract could protect employees and officers of the company as well, so long as the following two-step test was met:

  1. The limitation of liability clause must, either expressly or impliedly, extend its benefit to the employee seeking to rely on it, and
  2. The employee seeking a benefit of the limitation of liability clause must have been acting in the course of employment.

The Court of Appeal found that it was implied that the Exclusion Clause extended to Mr. Sherman. Ms. Richards had negotiated her employment contract directly with Mr. Sherman and it was clear from their relationship that the Exclusion Clause was intended to apply. The Court also found that Mr. Sherman was acting on behalf of the company and in the course of employment when he terminated Ms. Richards’ employment.

This is an encouraging decision for members of management that are involved in employee terminations. However, key to the decision was the Court’s view that the Exclusion Clause “implicitly” applied to the Executive Chairman of the company and that the parties had implicitly intended it to apply in the circumstances.

Employers should make clear that the protective clauses in their employment agreements apply to both the employer and its officers, directors and management.

This blog was originally posted by Stringer LLP on First Reference Talks, January 8, 2013.

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