After-Acquired Cause for Termination

In Canada, employers can terminate employees either without cause or for cause. If an employee is terminated without cause, they are generally entitled to receive notice of termination or severance. Conversely, an employee who is terminated for cause is not entitled to any notice of termination or severance.

But what happens if an employer terminates an employee on a without cause basis, but later discovers the employee had been engaged in wrongdoing, such as fraud? Can the employer rely on the wrongdoing to subsequently allege cause for termination?

In short, yes. An employer is entitled to assert "after-acquired" cause for termination if the employer learns of information that would justify termination for cause had the information been known to the employer at the time of termination. This is the case even if the employer already offered to pay severance or made a termination payment to the employee.

For example, in Lake Ontario Portland Cement Co. Ltd. v. Groner, the Supreme Court of Canada found the employee's fraudulent conduct during the employment relationship was grounds for after-acquired cause for termination because the employer only learned of the fraud after the employee was dismissed.

However, there are a couple of important limitations on an employer's ability to claim after-acquired cause for termination. In order to succeed in establishing after-acquired cause, the employer must be able to demonstrate that:

1. The employer did not have knowledge of the misconduct at the time the employee was terminated;
2. The employer did not condone the misconduct by failing to take timely action; and
3. The misconduct was sufficiently serious to provide grounds for termination for cause.

1. Knowledge of the Misconduct:

Importantly, an employer can only rely on after-acquired cause if the employer learns of the facts giving rise to the cause allegation after the termination. If an employer has knowledge of the employee's misconduct at the time of termination but nonetheless chooses to terminate the employee on a without cause basis, the employer is precluded from relying on that misconduct to claim after-acquired cause.

For example, in the recent case of Kaminsky v. Janston Financial Group, the employer had concerns about the employee's performance prior to her termination but decided to terminate her employment on a without cause basis. The Ontario Superior Court of Justice concluded that the principles of after-acquired cause did not apply, as the employer had knowledge of the performance concerns at the time of termination and chose not to act on them.

2. Condonation of the Misconduct:

Similarly, an employer's claim of after-acquired cause will be defeated if the employer condoned, either explicitly or implicitly, the employee's misconduct. If an employer is aware of or ought to be aware of an employee's misconduct but does not take timely action to address the misconduct the employer cannot subsequently rely on that misconduct to terminate for cause.

For example, in Doucet and Dauphinee v. Spielo Manufacturing Incorporated and Manship, the New Brunswick Court of Appeal emphasized that it is necessary to differentiate between: (1) the employee's misconduct that was truly hidden from the employer, and (2) the employee's misconduct that the employer ought to have been aware but failed to address. The employer could only rely on the truly hidden misconduct when claiming after-acquired cause.

3. Grounds for Termination for Cause:

To establish after-acquired cause the employer will also have to prove that the employee's misconduct was sufficiently serious to justify termination for cause. As we discuss in our blog post, Termination for Cause - A High Threshold, it can be very difficult for employers to establish grounds for termination for cause.

The high threshold for cause proved to be a barrier to the employer's claim of after-acquired cause in the case of Sandid v. Komtech. In this case, the employer claimed after-acquired cause based on the employee's alleged breach of a non-disclosure covenant in his contract. While the Ontario Superior Court of Justice acknowledged that the employer could rely on information it acquired after termination, it concluded that the employer's evidence did not to establish the employee breached the non-disclosure covenant or that it was sufficiently serious to justify termination for cause.

Conclusion:

After-acquired cause for termination allows an employer to assert cause for termination if the employer learns of facts that would have supported a termination for cause but were unknown to the employer at the time of termination.

However, the onus is on the employer to prove that it only discovered the facts after termination and that the facts justify termination for cause. If an employer knows of facts that may give rise to cause for termination but chooses to terminate on a without cause basis, they will be barred from asserting after-acquired cause.

With that in mind, employers are encouraged to speak to experienced legal counsel before terminating. If employers think there may be grounds to terminate for cause, it is especially important seek advice in a proactive and timely manner. Lee Workplace Law would be happy to help you address any termination or workplace issues you may encounter.