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Transitional Consulting Services Agreements
When a business is purchased, the new owners can retain the services of the prior owner under a “Transitional Consulting Services Agreement” (“TCSA”). This contract functions in a manner similar to an employment contract. It would set out the terms by which the former owner/new employee would be compensated as well as their duties, benefits and length of service. These agreements can also contain restrictive covenants such as a non-compete or a non-solicitation. Such an agreement can confer the benefit of the former owner’s expertise while ensuring that they will not set up a competing business for a set period of time. While there can be significant benefits to such an arrangement, the following case demonstrates the dangers that can arise from a TCSA.
Constructive Dismissal in the Context of a TCSA
The recent decision, McGuinty v. 1845035 Ontario Inc. (McGuinty Funeral Home), 2019 ONSC 4108 (CanLII) serves as a warning for business owners looking to enter into such an agreement. This case centres around a funeral home in North Bay, Ontario. The original owner’s partner passed away. Being unable to finance a buy-out of his former partner’s stake in the business, the original owner elected to sell to a new owner and take up a TCSA in order to stay on as an employee. In this case, the TCSA was for a term of 10 years. The terms of the agreement also provided the employee with access to a motor vehicle and gas for both work and reasonable personal use. Eventually, the new owner took issue with the employee’s personal use of the vehicle and requested that the vehicle be returned. The employee held that the return of the vehicle was a fundamental breach of the TCSA that indicated an intention to no longer be bound by the terms of the agreement.
The judge considered the return of the vehicle and concluded that the contract was ambiguous in whether it allowed for reasonable personal use of the vehicle. The judge noted that the employer had been paying for the vehicle and gas for reasonable personal use for several months prior to the issue being raised. Further, the provision appears in the contract between other provisions that confer benefits onto the employee. The judge reasoned that allowing the vehicle to be used strictly for work purposes would not confer a benefit onto the employee, indicating that the employer intended to allow the benefit of personal use of the vehicle to flow to the employee.
Following the requested return of the vehicle, the employee took a medical leave of absence. When he briefly returned to the funeral home, he noticed that his photograph had been removed from the hallway and his desk had been moved to the basement kitchen. Other factors considered by the judge were the fact that the employee was not paid commissions he was owed and that the owner had hired another subordinate employee to independently track the employee’s hours without providing him notice. After the employee attended at the home to collect his personal belongings, the employer changed the locks. All of these factors taken together indicated that the employer had repudiated the TCSA and demonstrated an intent to no longer be bound by its terms.
In this case, as in many other fixed term contract cases, the judge awarded the full length of service contained in the TCSA. The employee received a judgment for the 9 remaining years of salary, commissions, the cost of the use of a vehicle and benefits. The total judgment for the plaintiff was $1,274,173.83.
Takeaways:
- A fixed term contract can have its benefits but also come with its fair share of burdens; consider all of the relevant factors in determining the appropriate fixed term for such an arrangement;
- If you are about to enter into such an agreement, ensure that the terms are sufficiently clear and flexible, such that there is no ambiguity in the interpretation of a term or that the contract may be ended upon providing notice;
If you have questions regarding this blog post or any employment law question, contact Monkhouse Law today to arrange a free, confidential 30-minute phone consultation.
About the Author: Walter Yoo is an Associate Lawyer at Monkhouse Law where he practices Employment Law.
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