Why Termination Clauses in Employment Contracts are Being Litigated

Trends in Employment Contracts

Increasingly, employers are requiring new hires to sign an employment contract which contains a termination clause.

An employer can limit its termination pay obligation to the minimum standards set out in the Ontario Employment Standards Act (ESA minimum).

Absent such a clause an employee is generally entitled to “reasonable” notice of termination which is almost always more than the ESA minimum.

Why Termination Clauses are being litigated

Because the difference between the ESA minimum and reasonable notice can be as much as 96 weeks pay, employees are increasingly challenging the validity of ESA minimum clauses.

An Example of a Termination Clause That Was Recently Litigated

Consider the following clause which was considered in a case, Howard v Benson Group, 2015 ONSC 2638 (CanLII), earlier this year:

“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.”

Do you think this clause is clear or ambiguous?

The employer claimed this clause was clear and should be enforced.

The employee claimed this clause was ambiguous for three reasons.

Namely;

• it failed to explain what is meant by the words “amounts paid”;
• it failed to explain what is meant by the term “any”?;
• it failed to explain whether the payment of the “amounts” extinguish all of the employer’s obligations to the employee on the dismissal of the latter; namely, are such payments in full satisfaction of the employer’s obligations to the employee arising out of statute, common law or otherwise, including benefits and any bonuses?

 Reasons for the Judge’s Decision

The judge concluded the clause was ambiguous and that an ambiguity as to the employee’s entitlements to the minimum standards provided under the ESA “must be construed against the (employer) … having regard to the power imbalance that exists between an employer and employee….”

The judge was “…not prepared to find that the Employment Contract … detract(s) from, an implied term under the common law requiring “reasonable notice” for the termination of the employment of the (employee).”

As a result of this decision, the employee was entitled to be paid an additional $194,284.93.

Lesson to be learned

If your organization wants to limit its termination pay obligations to the minimum standards set out in the ESA, it is important to have your current termination clause periodically reviewed to ensure that it will withstand the scrutiny of Ontario’s judges.

For the past 25 years, Doug MacLeod of the MacLeod Law Firm has prepared employment contracts for employers. If you have any questions, you can contact him directly at 416 317-9894 or at [email protected]