Court of Appeal Gives Clarity to Termination Clauses

Mar 3, 2017

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]

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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