News broke yesterday that the City of Edmonton had terminated the employment contract of Simon Farbrother, the City Manager. Mayor Don Iveson stressed that the difficult decision was not the result of a single incident, but rather the need for a fresh perspective and managerial style. Edmonton civic watchers well know there have been a number of difficulties, delays, and missteps among a series of infrastructure and transportation projects of late, especially the much maligned Metro LRT line. Could any of these problems be traced to Mr. Farbrother’s job performance? I have no idea. It was another detail in the story that caught my eye.
The Mayor confirmed that terminating Mr. Farbrother’s contract will cost the City approximately $800,000, representing the value of two years of Mr. Farbrother’s pay and benefits. Why the large sum and what, if anything, can the City do about it?
Reports suggest that the severance pay is a “contractual obligation,” meaning that there was a term in Mr. Farbrother’s employment contract that stipulated a particular amount to be paid to him in the event the City terminated his contract. I have not seen the particulars of Mr. Farbrother’s contract.
The first point to emphasize is that a termination provision stipulated in a contract of employment is fully enforceable unless the employee quits, or the contract has been terminated “for cause.” Although inadequate performance may have led to the decision to terminate Mr. Farbrother’s contract, nothing has been alleged which comes close to the standard required to support a lawful termination for cause; namely, conduct which “violates an essential condition of the employment contract, breaches the inherent to the work relationship, or is fundamentally or directly inconsistent with the employee’s obligations to his or her employer.” (McKinley v BC Tel, [2001] 2 SCR 161 at para 48).
The City, therefore, may have good reason to terminate Mr. Farbrother’s employment, but it does not have “cause” in the legal sense. Accordingly, at law, the termination is considered “wrongful” in the sense that no notice was given to Mr. Farbrother that his employment contract would be ended.
If Mr. Farbrother’s contract had contained no termination provision he would have been entitled to his statutory entitlements under Alberta’s Employment Standards Code. As an employee with five years of service, Mr. Farbrother would have been entitled to four weeks of pay (see s. 56).
Mr. Farbrother would have also been entitled to a great deal more under the common law of employment. Had he sued the City for wrongful termination, a court would have calculated his pay in lieu of reasonable notice on the basis of a flexible calculus of factors: character of employment, length of service, age, and availability of similar employment (the Bardal factors, cited with approval in Honda Canada v Keays, 2008 SCC 39 at para 28).
Calculating pay in lieu of reasonable notice, as Justice John Laskin once wrote, is “an art not a science” (Minott v O’Shanter Development, [1999] OJ No 5 (OCA), but employment lawyers are reasonably good at predicting a range of outcomes based on precedent.
Mr. Farbrother is in his mid-50s, and has five years of service in a very senior managerial position. He did not leave long-term employment to take his position with the City of Edmonton, prior to taking the City Manager position, having been employed by the City of Waterloo for approximately four years prior to taking his most recent position. His job is relatively unique (there aren’t, by definition, many positions at the top of the civic administrative chain), but his managerial skill set and experience is also reasonably transferable. The economic downturn may impact his employment prospects somewhat, but presumably not as dramatically in the public sector.
At common law, Mr. Farbrother would likely have sought something in the nature of twelve months of reasonable notice, while the City would have argued that something closer to eight months would be appropriate. A court may have split the difference. The amount of reasonable notice owed would have inched higher the longer Mr. Farbrother remained employment. Of course, these common law damages would have been subject to mitigation. That is, Mr. Farbrother would be obligated to attempt to secure alternate employment. If he was successful in doing so within the period of reasonable notice, any amounts earned would have been reduced from the amount the City owes.
Parties to an employment contract regularly remove themselves from the uncertainties of this common law process by stipulating in the contract itself how much will be paid in the event of a termination, as appears to have been done in the case of Mr. Farbrother’s contract. Such provisions can take different forms. They can be drafted to be subject to mitigation, i.e. to only pay reasonable notice if Mr. Farbrother is unable to secure alternate employment (or to continue to pay the difference if he secures a lower paying job). They can be drafted on a sliding scale so that the longer the employee remains employed, the longer the period of contractually entitled reasonable notice will be in the event of termination.
It is difficult to discern from media reports the precise nature of the contractual entitlement, but it sounds to me as if the termination provision here simply calls for two years of pay with no requirement to mitigate, likely either by lump sum payment, or in the form of salary continuation.
For several reasons, this strikes me as a bad deal for the City of Edmonton and its residents. A contractual provision on termination can be good for both parties entering into an employment contract because it provides certainty in the event of termination, and avoids costly litigation and recourse to lawyers and courts. Here, the only certainty the City of Edmonton bargained for was the certainty that it would pay Mr. Farbrother termination pay much more than he would have been entitled to at common law.
As one of my former students put it, in effect, the termination provision functioned as a delayed signing bonus. Amortized over his five years of service, Mr. Farbrother’s termination pay added approximately $160,000 to his annual income.
The City of Edmonton may argue in its defence that Mr. Farbrother would not have taken the position without the security of the termination provision. It is, undoubtedly, a competitive market for top level managerial talent. It is obviously important that our public institutions to be able to hire talented people to handle demanding work. But too often, such employment contracts in the public sector are burying within their terms lucrative incentives and pay provisions that are excessive and unnecessary to attract talented individuals. Moreover, they can function to deceive the public by hiding the true salary consequences for highly paid public employees.
The City of Edmonton, as it well knows, will have to pay its contractual obligations to Mr. Farbrother. A larger issue remains. Why is the City agreeing to such terms in the first place? It is important for public employers not to be overly seduced by a hiring process (and the headhunters they employ to run them) that identifies and targets a single individual for the job. When contractual demands become excessive during negotiations, employers need to be able to walk away and know that there are other people qualified for any job. It also is worth bearing in mind, even in the hopeful moments of hiring, that sometimes city managers might need to be replaced and new skill sets required. The City of Edmonton should have known that when it signed Mr. Farbrother’s contract.
Among the many issues for the City to examine in the wake of Mr. Farbrother’s departure is its employment law hiring practices. Bargain harder, Edmonton.
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