CEO Dismissal Is Not a Wrongful Termination

by & Lewis Waring, Licensed Paralegal, LL.B., Articled Clerk, Editor

In a recent Alberta ruling, a Society was found to have wrongfully terminated a management contract with a company when it dismissed the company’s chief executive officer for breach of the management contract, but there was no wrongful dismissal as the CEO was not an employee, but an independent contractor.

Background

The Society operated an annual music festival in Alberta. In order to manage its festival, the Society consistently hired a separate organization to manage the festival. Part of that organization’s management of the festival was providing consultants to serve on the festival’s board of directors. These consultants included all central roles, such as president and chief financial and executive officers. As a result, neither the chief executive officer, president nor any other executive officer worked for the Society that actually operated the festival. Instead, the executive officers of the management company provided services to the festival as consultants.

The management contract stated that the relationship between the parties is a contractual one and the consultants perform their duties and obligations in accordance with the contractual relations established in the management contract. The consultant and any of its employees are not deemed to be employees and servants of the Society. The parties agree that the consultant is an independent contractor in the performance of its duties and obligations pursuant to the management agreement and that no master and servant relationship is to be created between the Society and any of its employees.

The CEO had a long and personal history with the festival, having worked with the management company for the festival for approximately 25 years, first as a volunteer and later as a member of its board. Over a three-year period, the individual was president and, at other times, also served as a chief financial officer, chief operations officer and chief executive officer. At the time of the termination, the individual was serving as CEO of the festival.

In 2017, the Society began to lose confidence in the management company after the CEO had altercations with important members of the festival. The CEO’s conduct was alleged by the board to constitute a failure of the management organization to fulfill its promises in a substantial or fundamental way. According to the contract, the Society could only cancel its responsibilities under the contract if there was a substantial or fundamental breach of the contract. Those alleged breaches were that the CEO had provided false information to the festival general manager and the CEOs actions could have caused significant damage to the festival and the Society.

The management company took the case to court. The trial judge determined that the working relationship between the parties indicated that the CEO was an employee of the Society who owned and operated the festival and that the CEOs actions did not breach the management contract. The trial judge said the incident of bad judgment, and the CEOs actions were not sufficient to terminate a long-term employee. The trial judge said the allegations were “unfounded allegations of deceit,” justifying compensatory aggravated damages for the CEO.

The Society appealed and argued that finding that the CEO was an employee of the Society was an error. It also claimed that not finding that the CEO had breached the management services agreement with the Society but instead finding he had committed only one single incident of bad judgment not sufficient for termination and awarding aggravated damages was an error.

On appeal, it was found that the CEO was not an employee of the Society. The management contract was clear that no employment relationship between the Society and the management company would ensue.

[35] The criteria the trial judge relied upon to classify [CEO] as an employee of the Society do not support her conclusion. As the trial judge acknowledged, the board of the Society was not involved in [CEO]’s day-to-day activities. It was a volunteer non-operational governance board. The salary allocated for services was paid to [management company], not [CEO]. Although office space, administrative support, and computer equipment were available to [CEO], they were contractually provided to [management company] for the use of [CEO] as [management company]’s employee. [CEO] received his annual salary from [management company] regardless of the number of hours he worked. [CEO] was provided a vehicle allowance and was on the Society’s extended health and dental plan, but that was part of the contract between the Society and [management company]. The same was true for the liability insurance which included [management company] as an additional insured. [CEO] did not work solely for the Society; at some point he also owned a shoe store. The original bonus provision in the agreement was exchanged in contract negotiations for increased compensation.

[36] The substance of the relationship was contractual between the Society and [management company], providing [CEO] s services as chief executive officer. This was in strict accordance with the management services agreement.

On appeal, it was found that the CEO was not an employee of the Society. He was an employee of the management company. The management company was an independent contractor to the Society providing the services of the chief executive officer.

The trial judge’s determination that neither the CEO nor the management company breached the management services agreement with the Society was upheld. Her decision that the Society breached the management services agreement with the management company was upheld.

The determination that the CEO, or the management company, was entitled to what the trial judge called aggravated damages was overturned.

As a result, the Society was required to pay the management company the amount of $147,003.40, comprised of 11 months’ compensation owing under the management services agreement, $135,135.00; GST on that amount, $6,756.75; and pre-judgment interest of $5,111.65. In addition, the Society was to pay the management company, not the CEO, the sum of $4,156.86 to compensate it for 11 months’ loss of benefits and pre-judgment interest.

The rights of organizations hired as independent contractors

In employment law disputes, independent contractors are often discussed when the employment status of an individual worker is at issue. Such disputes often turn on whether a worker is entitled to certain employment rights based on the nature of their relationship with the organization that hired them. However, it is important to also understand that an organization that contracts to provide services to another organization is also considered an independent contractor. This means that agreements between organizations involving the provision of services for a period of time are also governed by some of the same rules that govern relationships between organizations and individual workers that they may hire as independent contractors.

One of these rules that pertains to both organizations and individuals hired as independent contractors is the prohibition on wrongful termination of the contract. While independent contractors do lack some of the protections enjoyed by employees throughout Canadian provinces, they are protected from practices that violate their contract. One such protection enjoyed by independent contractors throughout Canada is the protection against wrongful termination. While an organization hiring another person or organization to provide a service is within their rights to terminate their relationship, it has to respect the rights of the terminated person or organization in doing so. In many cases, this entitles the terminated person or organization to compensation as a result of the termination.

Given the need to respect the rights of independent contractors, it is important to keep in mind who a company is contracting with. When a company hires another organization to provide services, it may end up interacting with that organization’s employees in a way that suggests they themselves have some rights under the contract. However, a company that hires an organization to provide services does not have direct obligations to that organization’s employees.

Understanding how your company relates to the organizations it hires and their employees is important. While the employees of hired organizations may feel like they directly work for your company, they are only directly related to their employer-the organization hired to serve your company. An employee only has employment rights against his or her employer, not the organizations that his or her employer does business with. It is important to keep separate the rights of an organization hired to provide serves and the rights of the employees that work for that organization, all the while ensuring that the contractual rights of organizations hired to provide services are respected.

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