There have been several important decisions this past year dealing with the enforceability of termination clauses in employment agreements and how a court is to interpret a clause to determine the employer’s obligations to a departing employee. The importance of these decisions can be seen by contrasting the financial consequences that follow when an employer makes the decision to terminate an individual’s employment.
When a termination clause is enforceable and successfully limits an employee’s entitlements upon termination to the statutory minimums prescribed by the applicable employment standards legislation, an employer’s financial obligations associated with the amount of notice provided to the employee can be measured in terms of weeks. However, the length of the employee’s notice entitlement changes from weeks to months when a termination clause is either unenforceable or fails to limit the employer’s obligations.
When a termination clause is enforceable and successfully limits an employee’s entitlements upon termination to the statutory minimums prescribed by the applicable employment standards legislation, an employer’s financial obligations associated with the amount of notice provided to the employee can be measured in terms of weeks. However, the length of the employee’s notice entitlement changes from weeks to months when a termination clause is either unenforceable or fails to limit the employer’s obligations.
The risk of additional costs can be avoided by including a carefully crafted termination clause in all employment agreements that satisfy a court’s requirements for enforceability. Although this may sound easy, it has historically proven to be a challenge for employers.
First, for the termination clause to be enforceable it must clearly comply with the prescribed statutory minimum entitlements for employees. In Ontario, that means the termination clause cannot attempt to contract below the minimum entitlements found in the Employment Standards Act, 2000 (ESA).
Second, the termination clause must rebut the presumption that the employee is entitled to receive common law reasonable notice by specifying some other period of notice. That is, the language of the clause must provide the reader with a clear understanding of what the employee is entitled to receive upon the termination of his or her employment without cause by the employer.
The Ontario Court of Appeal recently addressed these issues in Wood v. Fred Deeley Imports Ltd. 2017 ONCA 158. In Wood, the court reviewed the policy reasons informing its approach and further provided welcome guidance on when a termination clause in an employment agreement will be found to be illegal.
In that case, ex-employee Wood successfully argued that the termination clause in her employment agreement was illegal because it failed to provide for the continuation of benefits and severance pay in contravention of the prescribed minimums under the Ontario ESA. The court held that where an employment agreement is ambiguous, the ambiguity is to be resolved in favour of the employee due to the imbalance in bargaining power between employers and employees, and the fact that employees are likely unfamiliar with their statutory protections.
The court also endorsed the propositions that an employee must know what his or her entitlements will be at the end of employment from the very beginning of the employment relationship, and that an employer’s conduct upon terminating employment without cause cannot be used as a tool to assist a trier of fact to interpret an ambiguous termination clause.
Therefore, for a termination clause to be effective, it must be objectively understood by both parties at the start of the employment relationship that the language is restricting the employee’s entitlements and that it does so in accordance with the prescribed ESA minimums.
The practical result of this and past decisions is to reinforce that employers have only one chance to meet the high standard for drafting termination provisions that are clear and unambiguous.
Recently, Norton Rose Fulbright Canada’s Daphne Fedoruk successfully argued that a termination clause found in an employment agreement did just that. In Lopez v. EMD Inc. (Canada) 2017 ONSC 7716, the plaintiff was dismissed from his employment and provided with his minimum entitlements under the ESA in accordance with the terms of the termination clause.
The plaintiff argued that the clause was ambiguous because the inclusion of the words “applicable statutory notice” did not clearly outline what was intended to be included and, therefore, could be interpreted as an attempt to contract out of the prescribed ESA minimum standards. The plaintiff also argued that the language was not sufficiently clear that his entitlements were limited to something less than the common law, and therefore did not adequately rebut the presumption of entitlement to common law reasonable notice.
The court rejected both arguments. It found that, read as a whole, the termination clause clearly specified that the plaintiff would receive only his minimum statutory entitlements and did not attempt to exclude benefit continuation during the notice period. Put simply, the court’s analysis focused on the words that were included in the language of the termination clause rather than on what was missing.
Given the above, it is helpful for employers to know that termination clauses in their employment agreements will not be unfairly voided simply for missing specific language. However, it remains important for employers to carefully review the terms and conditions outlined in a termination clause to ensure that it adequately defines the employee’s agreed upon notice period and entitlements upon termination without cause.
Ryan Freeman is an associate at Norton Rose Fulbright in Toronto.
This article is presented by LexisNexis on behalf of the author. The opinions may not represent the opinions of LexisNexis. This document is for educational purposes only.
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