Employment Contract: Another Reason to Review and Update It

Jun 28, 2012

Employment Contracts

We recommend that every new hire sign an employment contract with a termination clause.

If the termination clause provides the employee with more than the minimum notice of termination provided under the Employment Standards Act, then can a terminated employee collect termination pay from your organization and salary from another employee at the same time?

Last week, the Ontario Court of Appeal decided that the answer to this question was yes, unless the termination clause explicitly permits the terminating employer to deduct the salary from the new employer.

The Facts: In this case, Mr. Bowes was entitled to six months notice of termination or pay in lieu of this notice under the terms of his written employment contract. He was terminated without any notice. He found another job during the six months following his termination earning the same income and his former employer stopped paying him termination pay.

The Decision: The Court of Appeal concluded that Mr. Bowes could collect termination from his former employer and income from his new employer until six months after his termination.

Lesson to be learned:  An employer should make sure that the termination clause in its employment contract explicitly addresses this issue of what happens to any income that a terminated employee earns during the agreed upon notice period.

The provincial government and judges are forever changing the employment law landscape. It is important to review your employment contracts, policies and practices to make sure they comply with all employment laws and are up to date.

We offer one-hour employment law check-ups where we will review your organization’s legal obligations and any employment law policies that are of particular interest to you. To give you some idea of the areas you can review, check out our Workplace Audit: 20 Areas to Consider.

If you want to amend your employment contract to enhance your management rights or have us conduct an employment law checkup at your workplace, please email us at [email protected] or call us at 1-888-640-1728.

There are many ways to attack the termination clause in an employment contract. 

I am now surprised if employee counsel does not claim that their client’s  termination clause is not legally enforceable - usually because the termination clause does not allegedly comply with the Employment Standards Act.

This blog considers a case, McKercher v Stantec Architecture Ltd., 2019 SKQB 100, where an employee successfully attacked the termination clause in his contract because he did not explicitly agree to it after being promoted. 

The Facts

In 2006, Mr. McKercher commenced employment as a staff architect. The termination clause in his employment contract stated: 

Termination other than for cause will be with notice or pay in lieu of notice, based on your length of service. If the Employer terminates your employment for other than just cause you will receive the greater of:

  1. a)   Two weeks notice or pay in lieu of notice during the first two years of employment increasing by one week for each additional completed year of employment to a maximum of three months notice or pay in lieu of notice.

      or

  1. b)   The minimum notice of termination (or pay in lieu of notice) required by applicable statutes.

Eleven years later, when Mr. McKercher was employed as a Business Centre Sector Leader, his employment was terminated. The employer paid him the three months termination pay he was owed under his employment contract.

 

Another way to attack a termination clause: What is the changed substratum doctrine?

An Ontario judge in a 2012 case, MacGregor v National Home Services, 2012 ONSC 2042 (CanLII), described this legal doctrine as follows: "The changed substratum doctrine … provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed."

 

The rationale for this doctrine has been described by one judge, Schmidt v AMEC Earth & Environmental Ltd., 2004 BSCS 2012 (CanLII), as follows: "In my view, it was incumbent on the defendants to advise Mr. Schmidt that they intended to continue to rely upon the termination provision set out in the Agreement when substantial changes in his employment occurred. This would have allowed him to consider the matter and to negotiate for other terms. If the defendants wished to continue to rely on the termination provisions there ought to have been a ratification of the provisions as the nature of Mr. Schmidt’s employment changed."

 

Decision

The judge hearing this case relied on the following factors when deciding not to enforce the termination clause in the employment contract: ”...there is no evidence that (the employer) made it clear to the (employee) that the notice of termination provisions were intended to apply to the positions to which he was promoted. The employment agreement contains no express wording to this effect, nor does it contain any wording to support the inference of such an intent. Further, and in keeping with the analysis in Schmidt, the Court received no evidence that, as it promoted the plaintiff, SAL reasserted its understanding and expectation that the notice of termination limit would remain in effect.”

 

Lesson to be learned:

An employer should make it clear that the termination clause in an employment contract applies when an employee is promoted. This expression of this intent should be in writing and should be clear and unambiguous. I recommend that an organization’s employment be reviewed by an employment lawyer every year or two. If your employment contract does not address this issue then think about doing so the next time it is reviewed.

 

For 30 years, Doug MacLeod of   the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

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