The Benefits of Failsafe Provisions
The Ontario Court of Appeal recently released a decision on the enforceability of termination clauses in employment agreements that contain failsafe provisions.
Background
A “failsafe provision” is a portion of a termination clause that provides that, regardless of what the termination clause provides, an employee who is terminated on a without cause basis will always receive at least the minimum notice of termination, benefit continuation and severance pay the employee is entitled to receive under employment standards legislation.
Amberber v IBM Canada Ltd.
Mr. Amberber’s employment contract contained a termination clause that entitled him to notice of termination equal to the greater of (a) one month’s salary, or (b) one week of your current annual base salary, for each completed six months worked since his start date, up to a maximum of 12 months’ salary. This amount expressly included all payments to which the employee might be entitled under employment standards legislation and at common law. This part of the clause, which the motion judge termed as the “options provision,” was followed by a failsafe provision.
After he was terminated, Mr. Amberber sued IBM Canada Ltd. (“IBM”) for wrongful dismissal and claimed he was entitled to pay in lieu of notice at common law. At the motion, Mr. Amberber advanced three arguments. The motion judge only gave effect to one of the arguments: the termination clause failed to rebut the presumption of common law reasonable notice of termination.
The motion judge found that although the termination clause was one paragraph, it broke down into two parts. The inclusive payment provision immediately followed the options provision, so the motion judge interpreted that the provision applied to the first part. Because the inclusive payment provision was not repeated at the end of the clause, it was not clear that the inclusive payment provision was meant to apply to the failsafe provision. The motion judge found that the inclusive payment provision could just as easily have been included at the end of the paragraph and could have just as easily been specified to apply to both scenarios.
On appeal, the motion judge’s decision was overturned. The Ontario Court of Appeal found that the motion judge made a fundamental error when she subdivided the termination clause into what she regarded as its constituent parts and interpreted them individually. Rather, the clause must be interpreted as a whole, and when read as a whole, there could be no doubt as to the clause’s meaning. To hold that the inclusive payment provision applies to only one part of the clause but not the other, gave the clause a strained and unreasonable interpretation. The Ontario Court of Appeal reminded judges that the court should not strain to create an ambiguity where none exists.
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:
- 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
- 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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