When is a contract no longer a contract?

Case involving Ontario insurance agents sheds light on an old practice by employers when it comes to contracts

Employers often attempt to introduce new terms and conditions to the employment contract or relationship. At the same time, some employers will attempt to enforce these new terms and conditions without giving the employee the proper opportunity to assess the changes.

When an employer attempts to do this, it puts the employee in a particularly difficult situation. On one hand, if the employee refuses to accept the changes he may be terminated. On the other, if the employee agrees to the changes he may lose any argument to suggest the employer repudiated the contract of employment later on.

Belton v. Liberty Insurance Co. of Canada, a recent decision by the Ontario Court of Appeal, sheds new light on an employers' old practice.

This case involved insurance agents who, up until May 30, 1996, were commissioned sales representatives who sold life insurance for Prudential Insurance Company of America and property and casualty insurance for the Prudential America General Insurance Company (PAGIC).

In the spring of 1996, London Life acquired Prudential Canada's life insurance business. The agents continued to sell life insurance for London Life, but sold property and casualty insurance for PAGIC. Each agent also signed a PAGIC agent agreement in which they agreed they were independent contractors and that changes to the schedule of commissions had to be made within 90 days of the effective date of such change. In January of 1997 Liberty Mutual Insurance Company purchased PAGIC and renamed PAGIC the Liberty Insurance Company of Canada (LICC).

London Life entered into an exclusive distribution agreement with LICC whereby London Life agents would continue to distribute property and casualty products for LICC. The agents continued to sell for London Life and began selling property and casualty insurance for LICC, under the terms of their earlier agreement with PAGIC.

On Jan. 4, 1999, the agents were asked to sign a new LICC agreement which would change the commission structure under the old PAGIC agreement, placing greater emphasis on new sales, rather than renewals, as well as establishing minimum production levels for London Life and LICC sales. Under the LICC agreement an agent's agreement would be terminated if he failed to meet new minimum production levels. The agents were advised their current agreement with LICC would terminate on April 7, 1999.

The agents refused to sign the agreements and, therefore, LICC advised that their agreement with LICC was terminated. The agents started an action for wrongful dismissal.

At trial the agents took the position that in requiring them to sign the LICC agreement, which they claimed reduced their commissions and introduced new minimum production levels, LICC fundamentally breached their contract of employment, which amounted to constructive dismissal. The trial judge disagreed. But the Court of Appeal upheld the agents' position and found it was a constructive dismissal, finding the LICC agreement was a new agreement which thereby terminated the PAGIC agreement, and imposed a new agreement on the agents.

While LICC had the right to terminate the PAGIC agreement, it was obligated to provide the agents with reasonable notice for doing so. The agents were under no obligation to accept the LICC agreement and their refusal to do so could not be considered just cause for LICC terminating the PAGIC agreement under which they were employed. The court found LICC's letter of Jan. 4, 1999, gave the agents notice of the termination of the PAGIC agreement as of April 7, 1999, and included this period in the calculation of the reasonable notice period upholding the trial judge's assessment of the notice periods.

The court made some interesting comments relating to a constructive dismissal. Justice Juriansz said:

"The vulnerability of employees who believe they may have been constructively dismissed and the difficulty of making the life altering decisions they face must be recognized.

“In this context, it is understandable that such employees may wish to try to adjust to the new terms and conditions without affirming the employer's right to make these changes and before taking the radical step of advancing a constructive dismissal claim.

“Allowing employees reasonable time to assess the new terms before they are forced to take an irrevocable legal position not only addresses their vulnerability, but also promotes stability and harmonious relations in the workplace.

“For these reasons, I am of the view that the appellants had no obligation to acknowledge LICC's right to change the compensation schedule and that their failure to do so did not constitute a repudiation of their employment with LICC."

This decision sends a clear message to employers that implementation of new terms and conditions to an employment contract without allowing employees a reasonable amount of time to assess the new terms will not be tolerated.

In this decision the court clearly recognized the predicament in which employees are put when an employer attempts to introduce unilateral changes.

Employers therefore must provide reasonable notice of any amendments the employer may wish to make to their employees' contract. Without such notice the courts appear unwilling to find that the employees have an obligation to allow employers to make fundamental changes to the employment contract and that if they refuse to agree to such changes, this will not constitute a repudiation of their employment.

For more information see:

Belton v. Liberty Insurance Co. of Canada, 2004 CarswellOnt 3324 (Ont. C.A.)

Natalie MacDonald is an associate with Grosman, Grosman & Gale, a Toronto-based law firm specializing in employment law. She can be reached at (416) 364-9599 or [email protected].

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