At common law, it is an implied term of every employment contract that, absent just cause to end the employment relationship, an employer must provide an employee with reasonable notice of termination (or pay in lieu). This obligation can be quite substantial, with severance awards upwards of 24 months’ salary plus compensation for things like lost benefits, incentive compensation, and other entitlements over the notice period. Although the parties to an employment contract can agree in advance to what the liability would be on termination, there are four easy ways to tank the enforceability of such clauses that can carry a heavy cost:
1) The Termination Clause is, or potentially is, Lower than the Statutory Minimum
For those employees falling under the minimum protections of the Employment Standards Act of British Columbia, it is critical that the termination clause not provide less than what the legislation requires on termination. If your termination clause provides something that is less than the minimum entitlement, then the Court will deem the termination clause to be unenforceable and the (often far greater) common law liability will kick in. The same costly consequence can apply even if what is provided for in the termination clause complies with what the legislation requires as at the time of termination, simply because there could be a time in the future when what is provided falls short of the statutory minimum entitlement.
2) The Termination Clause is Not Clear
The termination clause must be clear and unequivocal to be enforceable (both in its own language and in terms of consistency with the terms of other employment plans that may also speak to entitlements on termination). There should be no doubt what exactly is owed on termination and that what the clause provides for is in full and final compensation to the employee on termination. A clause stating that upon termination an employee will be entitled to “at least X months’ notice or salary”, without saying more, may not limit an employer’s severance liability for reasons of ambiguity, including that neither the notice nor the payment itself are well defined.
3) There is No Consideration for the Termination Clause
When employers want to introduce a termination clause into an already existing employment relationship, fresh consideration must be provided to ensure that clause stays enforceable. Without some new employment benefit to point to in exchange for the new clause (such as a promotion or raise, or a lump sum payment or signing bonus), the common law entitlements on termination can creep back into the relationship on termination.
4) The Employment Relationship has Changed
If the employment relationship has materially changed from the time the parties first entered into the employment contract with the termination clause, then there is a risk that a Court could conclude that the terms are “outdated” and no longer apply to the new, changed relationship. It is important to update employment contracts as the relationship changes so that they are consistent with job changes and the position currently held by the employee, or alternatively make clear in the original employment contract that the termination clause will continue to apply despite any changes, including material changes, to the employment relationship such as position, duties, compensation, and length of service.
Properly drafted termination clauses can help save employers time and money when managing the end of the employment relationship. Improperly drafted termination clauses can accomplish the opposite. If you need assistance in understanding your obligations on termination, please contact any member of our team and we are happy to help.