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 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:
- 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.
- 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.
- 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.
- 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
- Employee lawyers closely review ESA minimums clauses and often attack them in legal proceedings.
- Judges refuse to enforce ESA minimums clauses for many reasons.
- 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.
- Employers should always require a new employee to sign an enforceable termination clause.
- 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]
In the recent decision of Andros v Colliers Macaulay Nicolls Inc., the Ontario Court of Appeal (“OCA”) found yet another termination clause to be unenforceable. In this decision, the OCA reaffirmed and clarified various principles surrounding the enforceability of such clauses.
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