Over the course of this past year there have been several important decisions 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.

For instance, where 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.  On the other hand, where a termination clause is either unenforceable or fails to limit the employer’s obligations, the length of the employee’s notice entitlement changes from weeks into months.  To further compound the issue for Ontario employers, if the period of notice includes a date when the employee becomes entitled to additional financial compensation (such as a bonus), then that payment can become part of the financial obligations the employer would owe to the employee.  This is because an employee is entitled to receive all compensation he or she would have otherwise received had the employee been permitted to work during the notice period.

The risk of additional costs can be avoided by including a carefully crafted termination clause in all employment agreements that can satisfy a court’s requirements for enforceability. Although this may sound easy, historically it has 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.  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.  In the past, to protect against a court ruling a termination clause was illegal, employers included a clause in the employment agreement to sever off any offending part of the termination provision, while allowing the employer to rely on the remaining language to limit the employee’s entitlements.

However, this tool reached a practical end in Ontario when the Court of Appeal released its decision in North v. Metaswitch Networks CorporationThe Court stated that it would be an error in law to simply void the offending portion and leave the rest of the termination clause to be enforced.  The operation of the rule endorsed in the Wood decision is that an entire clause would be void if even part of it was illegal.  Therefore, there would be nothing left to save because the entire termination clause will be considered void.

The practical result of these above decisions is to re-enforce a high standard on employers to draft termination provisions that are clear in their entirety and that there is only one chance to do so.  An important question remains: What does a termination provision have to include in order to clearly define an employee’s notice entitlement?  The answer came in the most recent Ontario Court of Appeal decision dealing with termination clauses.

In Nemeth v. Hatch Ltd., the Court ruled that no magic words are required to express the parties’ intention to agree to a notice period that is less than the employee’s common law entitlement.  Instead, a court must read the content of the language used in the agreement as a whole and determine if it has clearly and unambiguously demonstrated an intention of the parties to contract out of the employee’s common law notice entitlement.  Neither is it necessary for an employer to have language delineating the employee’s entitlement to statutory severance pay or benefits during the notice period.

The Court agreed that the analysis on enforceability should focus on the language that is included in the termination clause, rather than focusing on what is missing.  Therefore, simply remaining silent on certain aspects of the employee’s entitlements during the period of notice will not invite the presumption that the termination clause is unenforceable.  Instead the analysis will focus on whether the employer has fairly and clearly drawn a circle around its obligations to a departing employee, and whether that circle attempts to exclude an employment standard which the employee is statutorily entitled to.

Recently, Norton Rose Fulbright Canada’s Daphne Fedoruk successfully argued that a termination clause found in an employment agreement did just that and dismissed an employee’s claim for wrongful dismissal and punitive damages.  In Lopez v. EMD Inc. (Canada), 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.  Part of that clause stated:

[The Company] may terminate your employment without cause upon giving you the applicable statutory notice, termination pay and/or severance pay to which you may be entitled.

You agree that [the Company] may deduct from any payment of salary instead of notice under this provision your benefit plan contributions that were regularly made by you during the term of this Agreement in accordance with the terms of all benefit plans to be maintained under this provision for the minimum period prescribed by law.

The plaintiff argued that the clause was ambiguous because 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 to entitlement to common law reasonable notice.

The Court rejected both of these arguments, finding that reading the termination clause as a whole clearly specified that he would only receive his minimum statutory entitlements and that the termination clause did not attempt to exclude benefit continuation during the notice period.  The Court’s analysis focused on the words that were included in the language of the termination clause and not what was missing.  Reading the paragraphs together as a whole, the Court held the language clearly and unambiguously demonstrated the objective intention of the parties to limit the plaintiff’s entitlement to the minimums prescribed under the ESA and that the language did not exclude any employment standard.  Therefore, the termination clause was valid and enforceable.

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 it adequately defines the employee’s agreed upon notice period and entitlements upon termination without cause.

Should you have any questions on the enforceability of your employment agreements, please feel free to contact your usual Norton Rose Fulbright lawyer.

Please note that this post has been modified since it’s original publication.

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