Is My Termination Clause Good?

A termination clause in an employment contract states how much notice of termination an employer is required to provide an employee. The employer can provide working notice of termination or pay instead of working notice, but almost all employers provide termination pay instead of working notice.

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).

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

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.

In the 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 Employment Standards Act. The judge also noted that the Employer continued its benefit contributions throughout the notice period. The Employee appealed to the OCA.

The OCA overturned the motion judge, finding that the termination clause was not enforceable. There were two main reasons why the OCA concluded this clause was not enforceable.

First, the termination clause did not include that the Employer would contribute to the Employee’s benefit plan during the notice period. Because the Employment Standards Act requires benefit continuation during the notice period, the termination clause was unenforceable.

Second, the termination clause did not properly include severance pay. The Employment Standards Act also requires that certain Employers provide severance pay upon termination. Because the termination clause was unclear on severance pay, the clause was found unenforceable.

Lessons for Employees

1. If you have not signed an employment contract with a termination clause, then you are generally entitled to reasonable notice of termination which can be one month termination pay (or more) for each year of service.
2. If you have signed an employment contract with a termination clause, this clause may not be legally enforceable. If not, you are entitled to reasonable notice of termination which is almost always more notice than most employees are entitled to receive under the employment contract.
3. Many terminated employees are offered a severance package in exchange for signing a release which is an agreement not to sue an employer for more termination pay. If you are terminated, you can consult with an employment lawyer to determine whether the termination pay you are being offered is fair. If you have signed an unenforceable termination clause, you may be entitled to more termination pay than set out in your employment contract.

If you would like to speak to a lawyer at MacLeod Law Firm, you can reach us at [email protected] or 647-204-8107.