As we have written in the past, the enforceability of termination clauses is a hotly contested area of employment law. Employers who draft proper termination clauses in employment contracts can significantly limit their liability when terminating employees.

A termination clause that is poorly written will not be enforced by a court. If the clause is not enforceable, then the employee is usually entitled to a longer notice period (or more termination pay). This is why employee counsel often attack the enforceability of a termination clause.

A recent decision by the Ontario Court of Appeal (“OCA”) has found that a termination clause was not enforceable and as a result, the employer was ordered to pay the terminated employee almost double the termination pay she would have received under the termination clause.

Minimum Standards for Notice of Termination, Benefit Continuation & Severance Pay

Under Ontario’s Employment Standards Act, 2000 any employee with 3 months’ service is entitled to up to 8 weeks’ notice of termination and the employer is required to continue employee benefits during this notice period. In addition, if the employee has been employed for 5 years and the employer’s payroll is over $ 2.5M, then the employee is also entitled to one week severance pay for each year of service up to 26 weeks.

Wood v Fred Deeley Imports Ltd.

In this case, the Employer terminated an 8-year Employee after it sold its assets to Harley-Davidson. The Employer provided the Employee 13 weeks’ working notice, where it paid her salary and benefits. After the working notice, the Employer provided the Employee with  8 weeks’ termination pay. The Employer took the position that the 13 weeks’ notice and 8 weeks’ termination pay was what it owed the Employee pursuant to her termination clause.

Termination Clause

In this case the termination clause stated: “[The Company] is entitled to terminate your employment at any time without cause by providing you with 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph…. The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.”

Initial Decision     

The judge found that this termination clause was enforceable. Despite not expressly mentioning that the Employer would continue contributing to the Employee’s benefit plans, the judge found that it was enforceable as it provided more than the minimum payment under the ESA. The judge also noted that the Employer continued its benefit contributions throughout the notice period. The Employee appealed this finding to the OCA.

OCA Decision

The OCA overturned the motion judge, finding that the termination clause was unenforceable because it did not provide for benefit plan continuation.

The termination clause said nothing about benefit contributions, and the following language specifically excluded benefit contributions: “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph”, and “the payments and notice provided for in this paragraph are inclusive of your entitlement to notice, pay in lieu of notice and severance pay pursuant to the [ESA].”

The Employer argued that even though benefit continuation was not stated in the termination clause, the word “pay” included both salary and benefits. The OCA disagreed and found that the word “pay” was ambiguous, as it clearly does not include both salary and benefits. Where the language is unclear, courts will interpret it in favour of the employee.

Although the above finding was enough to find the termination clause unenforceable, the OCA went one step further by finding that the failure to comply with the severance pay obligation under the ESA also rendered it unenforceable.

The termination clause was worded in such a way that the Employer could deprive her of severance pay. By stating that she would receive two weeks notice of termination per year of service, it was not clear whether the notice was for termination or severance pay, which are two separate obligations. Because the termination clause did not clearly satisfy the Employer’s obligation to pay the Employee her statutory severance pay, the clause was found unenforceable.

Because the termination clause was unenforceable, the Employer was ordered to pay the Employee 9 months’ in lieu of reasonable notice, instead of the 21 weeks (~5 months) the Employer originally provided to the Employee. Because the termination clause was not enforceable, the Employer had to pay the Employee almost twice the amount owed under the termination clause, plus legal costs. This is the cost of a legally unenforceable termination clause.

Lesson To Be Learned

Employers can drastically limit their termination pay obligations to employees by including a legally enforceable termination clause in an employment contract. Although the case law is still unsettled, this recent decision by Ontario’s highest court should put employers on notice that termination clauses must, at a minimum, comply with all ESA obligations. Employers should consult an employment lawyer to determine whether their termination clause is enforceable.

For over 25 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]