Termination Clauses: (Yet) Another One Bites the Dust

Jan 7, 2020

I advise employers and employees and therefore regularly draft and review termination clauses. The issue of whether a termination clause complies with the minimum notice requirements set out in the Employment Standards Act (the “ESA”) may be the most litigated issue in employment law over the past 5 years.  So employment lawyers like me pay close attention to what the courts are saying on this issue.

In my opinion, for the last 5 years or so, the Ontario courts have been struggling to provide lawyers with guidance on when a termination clause complies with the ESA and whether a savings provision will cure any defect in a termination clause.

This blog summarizes two Ontario Court of Appeal (“OCA”) cases that appear to be in conflict.  

In 2015 the Ontario Court of Appeal upheld the trial judge’s decision in Oudin v Le Centre Francophone de Toronto, 2015 ONSC 6494. In this case, the judge found that a savings provision could cure a defect in a termination clause in an employment contract that did not comply with the ESA. Here are two clauses in the employment contract that were considered:

s. 4 TERMINATION OF AGREEMENT 

During the period of employment, CFT may terminate the employment of the employee without notice or payment of indemnity for all serious incidents (see Policy on disciplinary measures RH-8020), gross negligence or continuing incapacity considered permanent, incompetence in the exercise of his functions or breach of article 10 of this agreement (confidentiality and exclusivity).

Note: Denying an employee termination pay for “continuing incapacity considered permanent” violates the provisions of the ESA 

 12. Waiver and Severability

12.2  If any of the provisions of the present agreement is invalid or unable to be performed by virtue of any law, regulation, order or any other requirement or other principle of law, this modality shall in such case be considered to be modified or nullified, but only to the extent necessary to comply with the statute, regulation, order, legal requirement or principle and the other dispositions of the present agreement shall remain in force.

The trial judge concluded that the savings clause could cure the part of the termination clause that violated the ESA. In particular: 

The parties have explicitly spelled out what they intend to do in the event any part of the contract is found to be unenforceable.  In s. 12(2) the parties have provided that “[i]f any of the provisions of the present agreement is invalid or unable to be performed by virtue of any law, regulation…this modality shall in such case be considered to be modified or nullified, but only to the extent necessary to comply with the statute, regulation, order, legal requirement or principle and the other dispositions of the present agreement shall remain in force” [translation].  

I conclude that section 12(2) directs that section 4 must be modified to remove the reference to permanent disability from the list of reasons (“motifs”) in s. 4.  Removing that reason alone is the minimum extent necessary to give effect to s. 5(1) of the ESA and can be simply and logically done while introducing neither ambiguity nor uncertainty in the remainder of the clause as so modified.  That is precisely what s. 12(2) directs be done in plain and simple language. There is no reason to disregard the express direction of the parties as contained in s. 12(2).

After the OCA upheld this decision, employer counsel started adding saving provisions like section 12 above to their employment contracts.

In late 2019, the OCA appears to have reversed itself in the Rossman v Canadian Solar Inc., 2019 ONCA 992 decision. 

In this case, the termination clause which included a savings provision stated, in part:

9.01 The parties understand and agree that employment pursuant to this agreement may be terminated in the following manner in the specified circumstances:

(c) by the Employer, after the probation period, in its absolute discretion and for any reason on giving the Employee written notice for a period which is the greater of:

(i) 2 weeks, or

(ii) In accordance with the provisions of the Employment Standards Act (Ontario) or other applicable legislation,

or on paying to the Employee the equivalent termination pay in lieu of such period of notice. The payments contemplated in this paragraph include all entitlement to either notice of pay in lieu of notice and severance pay under the Employment Standards Act Ontario. In the event the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement. The Employee agrees to accept the notice or pay in lieu of notice as set out in this paragraph as full and final settlement of all amounts owing by the Employer on termination, including any payment in lieu of notice of termination, entitlement of the Employee under any applicable statute and any rights which the Employee may have at common law, and the Employee thereby waives any claim to any other payment or benefits from the Employer. Benefits shall cease 4 weeks from the written notice. [Emphasis added.]

Note: Limiting benefit continuation to 4 weeks violates the provisions of the ESA for employees with 5 or more years service. 

The OCA concluded the savings clause could not cure a part of the termination clause that violated the ESA. In particular: 

 In this context, saving provisions in termination clauses cannot save employers who attempt to contract out of the ESA’s minimum standards. Holding otherwise creates the risk employers will slip sentences, like the four-week benefits clause, into employment contracts in the hope that employees will accept the terms. This outcome exploits vulnerable employees who hold unequal bargaining power in contract negotiations. Moreover, it flouts the purpose of the ESA – to protect employees and to ensure that employers treat them fairly upon termination: …

While employers are entitled to contractually amend the ESA’s notice requirements, as long as they respect the minimum standards, they are not entitled to offend them. Employers must have an incentive to comply with the ESA’s minimum notice requirements. They cannot be permitted to draft provisions that capitalize on the fact many employees are unaware of their legal rights and will often refrain from challenging notice provisions in court: Machtinger, at p. 1004. Attempting to reconcile the provisions of the Termination Clause with the benefit of hindsight runs counter to the remedial purpose of the ESA.

Astonishingly, the court did not refer to its earlier decision on Oudin

For the life of me, I cannot reconcile these two decisions. So advising clients just got more difficult. And the legal risk in these kind of cases has just increased. 

For over 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]

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