ESA Termination Clauses: Another One Bites the Dust

Jan 22, 2019

If you include a termination clause in your employment contracts that limits notice of termination to Employment Standards Act (“ESA”) minimums, then read on. This blog summarizes a case decided last month where the courts again refused to enforce an ESA termination clause.

The Employee

Catherine Bergeron signed a contract with the following termination clause before starting her $ 90 000 job as the General Manager at a health and fitness facility.

The Termination Clause

Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time. [underlining added]

There was also a probation clause in her employment contract which limited Ms. Bergeron’s notice of termination during the probationary period to: “only providing you with the minimum notice necessary to ensure compliance with the [ESA] as amended from time to time” (underlining added).

The Termination

A year and 4 months later (after the probationary period expired), the employer terminated Ms. Bergeron’s employment without just cause and paid her the two weeks she was owed under the ESA and continued her group benefits for two weeks as required under the ESA. Although under no obligation to pay her more than 2 weeks’ termination pay under the ESA, the employer decided to pay her an additional two weeks’ termination pay. In total, she received 4 weeks’ termination pay after about one year of employment.

The Initial Court Decision

Ms. Bergeron claimed the termination clause was not enforceable and the judge agreed by concluding that the termination clause was not sufficiently clear to rebut the presumption of reasonable notice at common law. As a result, the judge did not enforce the termination clause and concluded Ms. Bergeron was entitled to, among other things, pay in lieu of three months’ notice.

The Appeal

The employer appealed this decision to Ontario’s Divisional Court.

Test to Determine Whether a Judge will Enforce a Termination Clause

The Divisional Court formulated the following tests to apply when an ESA termination clause is challenged.

  1. All contractual provisions must meet the minimum notice requirements for termination without cause set out in the Employment Standards Act;
  2. There is a presumption that an employee is entitled to common law notice upon termination of employment without cause;
  3. Provided minimum legislative requirements are met, an employer can enter into an agreement to contract out of the provision for reasonable notice at common law upon termination without cause;
  4. The presumption that an employee is entitled to reasonable notice at common law may be rebutted if the contract specifies some other period of notice as long as that other notice period meets or exceeds the minimum requirements in the ESA;
  5. The intention to rebut the right to reasonable notice at common law “must be clearly and unambiguously expressed in the contractual language used by the parties;”
  6. The need for clarity does not mean a specific phrase or particular formula must be used, or require the contract to state that “the parties have agreed to limit an employee’s common law rights on termination”. The wording must however, be “readily gleaned” from the language agreed to by the parties;
  7. Any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause in accordance with the principle of contra proferentum; and
  8. Surrounding circumstances may be considered when interpreting the terms of a contract but they must never be allowed to overwhelm the words of the agreement itself.

Reasons Why Divisional Court Concluded Some of the Tests Were Not Satisfied

Test # 6: The intention to rebut the right to reasonable notice at common law “must be clearly and unambiguously expressed in the contractual language used by the parties”

Finding: The words “pursuant to the ESA” may be interpreted to mean that the notice period in the termination clause complies with the minimum requirements in the legislation, but they do not clearly provide that reasonable notice at common law no longer applies.

Test # 7: Any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause in accordance with the principle of contra proferentum:

Finding: The words in this termination clause provide that “the notice provision” is “pursuant to the Employment Standards Act” and group benefits coverage payments must be in accordance with the “minimum period required by the Employment Standards Act”. Read together, the minimum period required by the ESA could refer to both the notice provision and the group benefits coverage, or only to the group benefits coverage… where there are two plausible interpretations, the courts should prefer the interpretation that grants better rights to the employee, who did not draft the provision… Given these two possible interpretations, the motion judge made no palpable and overriding error in concluding that the provision should be interpreted in the manner that was more favourable to Ms. Bergeron.

In addition the Divisional Court noted: “The Supreme Court of Canada has confirmed that “contracts must be read as a whole, giving the words their ordinary and grammatical meaning”(Sattva at para. 47). This assists the court to determine the objective intentions of the parties to the agreement.” It then compared Ms. Bergeron’s rights on termination during the probationary period compared to her rights on termination after she had completed the probationary period and concluded:

The words “only” or “minimum” are not required language. However, the fact that the words “only” and “minimum” are used in the probation clause, and the word “minimum” is used in the group benefits provision of the termination clause, but neither is used in the notice provision in the termination clause, reflects a difference in the intention of the parties. … Based on the wording of the termination clause as seen in the context of the Agreement as a whole, the motion judge made no palpable and overriding error in concluding that the termination clause was not sufficiently clear and unequivocal to rebut the presumption that the reasonable notice requirements at common law apply:…

Does your head hurt? Mine does.

For more blogs on this issue, click here.

Lessons to Be Learned:

  1. I think including an ESA termination clause in an employment contract is still a good idea for some employees. But the clause must be very carefully drafted because some judges will bend over backwards not to enforce it.
  2. If you are going to include a probationary period clause in your employment contract then it must be very carefully drafted. For various reasons, I am not a big fan of these clauses. For blogs setting out these reasons, click here and here.
  3. If you have an ESA termination clause in your employment contract and you decide to pay a terminated employee additional termination pay then make sure the employee signs a release and indemnity for that additional amount.

For almost 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 directly 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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