Employer Alert: Ontario Judges Are Refusing to Enforce Employer Friendly Termination Clauses

Oct 24, 2016

On October 18, 2016, I spoke to a room full of lawyers about the state of the law concerning the enforceability of termination clauses in employment contracts. In particular, I discussed termination clauses that attempt to limit an employee’s termination pay to the minimum notice of termination provided for under the Employment Standards Act (“ESA minimums clause”). This blog is a brief summary of my paper.

Why Does This Issue Matter?

For an employee earning $ 52,000 a year who is terminated after 25 years’ service, an enforceable ESA minimums clause could mean the difference between receiving $ 8,000 or $ 104,000 in termination pay. Conversely it means a potential $ 96,000 cost saving for the employer.

The Law

The Supreme Court of Canada has stated that an employee is entitled to receive reasonable notice of termination unless the contract of employment clearly specifies some other period of notice, whether expressly or implicitly, as long as the employee receives the minimum notice of termination set out in employment standards legislation. Further, absent considerations of unconscionability, there is nothing legally objectionable with an ESA minimums clause.

So the battleground is whether an ESA minimums clause clearly overrides the employee’s right to receive reasonable notice of termination.

Four Ways to Attack A Termination Clause

Employee lawyers have attacked the legal enforceability of ESA minimum clauses in different ways, such as:

  1. The Termination Clause is Ambiguous

In one case, a judge found the following clause to be ambiguous and therefore not enforceable:

“Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.”

In another case, a judge of the same court came to the opposite conclusion in connection with an ambiguous ESA minimums clause.

  1. The Termination Clause May Violate the ESA in the Future

In one case, an employee signed a termination clause that met the minimum standards set out in the ESA at the time it was signed but if the employee worked for a certain number of years it would no longer meet those standards. The judge found that a potential violation of the ESA rendered the clause unenforceable. Three years later a judge of the same court came to a different conclusion when interpreting a similar termination clause.

  1. The Termination Clause does not Satisfy the Minimum Requirements of the ESA

In one case, an employee signed an ESA minimums clause but it did not state that his group employee benefits would be continued during the ESA minimum notice period as required by the ESA. A judge concluded the clause was not enforceable because it did not satisfy the minimum standards set out in the ESA.

  1. The Termination Clause does not Explicitly Override an Employee’s Right to Receive Reasonable Notice of Termination

In 2016, a judge concluded the following clause was not enforceable because it did not clearly state the employee was giving up his right to receive reasonable notice of termination:

“Termination: Start date to three months: this length of service is a probationary period and the employee is not entitled to any notice or salary in lieu of notice…Three months to one year – one-week notice. One year to three years – two weeks’ notice. Three years and over – one week notice for each year of employment to a maximum of eight weeks. This policy shall be maintained in accordance with the ESA.”

This judge refused to follow an earlier decision by a judge of the same court that reached the opposite conclusion when interpreting a similarly worded clause.

Lessons to Be Learned

  1. Employee lawyers closely review ESA minimums clauses and often attack them in legal proceedings.
  1. Judges refuse to enforce ESA minimums clauses for many reasons.
  1. Because judges of the same court are disagreeing on whether termination clauses are enforceable it is extremely difficult to predict how a particular judge will interpret a particular termination clause.
  2. Employers should always require a new employee to sign an enforceable termination clause.
  1. Existing ESA minimums clauses should be carefully reviewed by an employment lawyer to determine whether they need to be amended to withstand judicial scrutiny.

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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