The Enforceability of a Termination Clause: When a Hypothetical Situation Can Result in Real Damages

May 10, 2016

In recent years, Ontario courts have been confronted with the question of whether termination clauses that may violate statutory minimum entitlements under the Employment Standards Act (“ESA”) at a future date are void.

In Wright v The Young and Rubicam Group of Companies (“Wright”), an employee who was terminated after five years of service was entitled to 13 weeks of base salary pursuant to his employment agreement. Although this entitlement exceeded his statutory entitlement of 10 weeks, Mr. Wright argued that the termination provisions in his employment agreement were unenforceable because there were certain circumstances where the notice pay provided in the agreement would be less than the statutory minimums. For example, if Mr. Wright had been terminated after 8.5 years of service, the entitlement provided for in his contract would not have met the statutory minimum.

The judge agreed with Mr. Wright, and found that the language of the termination clause evidenced an intention to treat the payment under the agreement as the totality of the employee’s entitlement to compensation on termination, regardless of whether the contractual provisions met the statutory minimums. As some of the contractual provisions fell short of the statutory minimums, the agreement was in violation of the ESA.  

However, there have been other decisions coming from the same court that have departed from this line of reasoning. For example, in Goldsmith v Sears Canada Inc, Mr. Goldsmith attempted to rely on Wright to support his argument that because certain sections of his employment agreement could potentially result in violations of the Act, the fact that such potential violations could possibly occur was enough to make those provisions void, even though they did not apply to his situation. The judge disagreed, finding that a potential violation of the ESA did not make a termination clause unenforceable.

These two lines of cases cannot be easily reconciled, and the court’s most recent decision on this issue does not help to resolve the conflict. In Garreton v Complete Innovations Inc., Garreton was terminated for cause after less than three years of employment. On appeal, the employer argued that the Small Claims Court judge had erred in concluding that they did not have just cause to terminate Ms. Garreton, and that she erred in failing to determine whether the termination provision in her employment contract was void and unenforceable. If the termination clause was enforceable, then Ms. Garreton would only be entitled to two weeks’ notice. Ms. Garreton argued that the termination clause was void because it potentially violated the ESA’s severance provisions (which only apply to employees with more than five years’ service).

The judge agreed with the reasoning in Wright and found that an employment contract must be considered at the time it is executed. If at that time, it does not comply with the ESA, then it is void and unenforceable.

In conclusion, until the Ontario Court of Appeal decides this issue, it is very difficult to predict whether a judge will conclude that a termination clause that does not comply with the Employment Standards Act in the future is enforceable or not.

Lessons to be Learned:

  1. An employer should have an employment lawyer review its standard employment contract every year or two to ensure that recent case law does not necessitate changes to wording in the contract.
  1. If there are two competing interpretations of an ambiguous term in an employment contract, most judges will adopt the interpretation that favours an employee.
  1. Until this issue is resolved by the Ontario Court of Appeal, there is considerable litigation risk related to the enforceability of certain termination clauses.

If you have any questions about your legal rights in the workplace, one of our lawyers would be happy to meet with you. Please call 647-204-8107 or email [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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