For years, Shopify Inc. could do no wrong. But a case involving numerous former staff threatens to tarnish the one-time tech darling’s reputation among the country’s most desirable places to work.

The Ottawa-based e-commerce giant rose to prominence over the last two decades, becoming a juggernaut in the global tech industry. Like many other tech companies benefiting from people staying at home, Shopify saw its valuation skyrocket over the course of the pandemic, making it Canada’s largest tech company and at one point its largest publicly traded corporation by market capitalization. But with conditions returning to a pre-COVID state, it found itself with too many employees and not enough work.

Laying off about 20 per cent of its workforce, or about 2,300 employees, is never popular, but that is not what led to the company’s current predicament.

Many of these employees say they were presented with termination agreements, offering hefty sums in exchange for those employees giving up the right to sue, as is usually the case in these circumstances. However, once the workers signed the termination agreements, Shopify allegedly reneged on the offers and informed the departing employees that they would instead be receiving substantially smaller sums than initially promised.

The workers banded together and have sued for breach of contract in what has now developed into a $130-million class action lawsuit. This very public rebuke serves as a stark reminder to employers everywhere: a deal is a deal, and it is imperative to honour legally binding agreements.

A quick primer on contracts

A contract, at its core, is an exchange of promises that the law will enforce. Distilled to the most basic terms, a contract consists of two basic ingredients: An offer, in which one party presents terms and conditions, including, usually, a monetary sum; and an acceptance, whereby the other party accepts the offer, creating a mutual understanding, or a meeting of the minds.

As in almost all areas of law, there is no shortage of nuance, exceptions and asterisks. However, once an offer is accepted, whether verbally or in writing, and assuming no other contractual issues, a legally binding agreement is formed. Parties who fail to uphold their end of the bargain can then be sued in court for breach of contract.

It is not every day that a publicly traded corporation the size of Shopify gets accused of violating basic principles of contract law taught in the first year of law school.

The e-commerce giant now faces a lawsuit seeking not only the amounts that Shopify had allegedly agreed to pay the departing employees, but an additional $50 million in aggravated and punitive damages.

Aggravated and punitive damages are considered “exemplary” damages, not often awarded in cases of breach of contract. Where one party breaches a contract, the courts will make them pay as they agreed. However, where a court deems that a party’s conduct is “malicious, high handed, and oppressive,” these types of damages serve as arrows in a court’s quiver to send a message that such conduct is unacceptable.

Unfortunately for Shopify, court-awarded damages are not the only repercussions it may face if it is found to have backed out of its severance agreements.

While it is often said that all publicity is good publicity, failing to honour agreements with laid off employees, especially for a large employer, can result in substantial reputational damage and unfavorable optics. Prospective employees considering a job at Shopify could very well take a second look at the playing field before hitching themselves to a horse that kicks them on the way out.

Lessons learned

Employers take heed: a deal is a deal. Honouring your agreements with employees is not just a legal requirement; it makes good business sense. Organizations that do so avoid the risks of a protracted lawsuit, a demoralized workforce and the reputational damage of reneging on their word.

Lastly, this unfolding tale should serve as a warning to employers considering the opportunity to save a few dollars at the expense of your employees, or former employees. You have a duty to treat those working for you in good faith, and while a simple assessment of the economics of not doing so may make sense on paper, you may end up creating a case study on everything that can go wrong as a consequence.