Employment lawyers spend quite a bit of time with their corporate clients preparing and implementing employment agreements, policies and HR processes and procedures, as well as regularly reviewing and updating such documents to keep them current with the law. One of the most important clauses in any employment agreement is the termination clause, which, when done correctly, can significantly limit an employer’s obligations to an employee upon dismissal, both by expressly limiting the amount of notice or pay in lieu of notice an employee will receive, and by eliminating any uncertainty about the employee’s entitlements at the end of the employment relationship.
One of the struggles employers have faced in the last several years is uncertainty regarding what is required in order to ensure that a termination clause will be upheld by the courts if challenged. This uncertainty is a direct result of a number of contradictory decisions from the courts where termination clauses have been put to the test and either upheld or found wanting. These decisions have produced two opposing standards for termination clauses.
The first is the standard of near perfection, arising from decisions in which the courts have firmly stated that in order for a termination clause to successfully oust an employee’s entitlement to reasonable notice at common law, the clause must be precisely and unambiguously drafted, leaving no room for error. The second standard is far more forgiving, and arises from cases in which courts have upheld termination clauses which are potentially problematic on the basis that it was still clear that the intent of the parties was to opt out of the employee’s common law entitlements.
We have written numerous articles and blog posts reviewing the various decisions that have resulted in these conflicting standards. Most recently, in January, 2018, we wrote about the Ontario Court of Appeal’s decision in Nemeth v Hatch Ltd. In Nemeth, a dismissed employee attempted to argue that the termination clause in his employment agreement was not enforceable because it did not expressly limit his entitlements on dismissal to those required by the Employment Standards Act, 2000, and, further, failed to mention his statutory entitlement to Severance Pay.
In upholding the termination clause, the Court of Appeal noted that while the parties’ intention to opt out of an employee’s common law entitlements must be clear and unambiguous, there was no “specific phrase or particular formula” required in order for an employer to achieve this. Similarly, the Court of Appeal did not agree that the fact that the termination clause was silent with respect to Severance Pay denoted an intention on the part of the employer to contract out of the ESA. The decision in Nemeth was therefore a strong endorsement of the “less than perfect” standard for termination clauses.
The recent decision of the Alberta Court of Appeal in Holm v AGAT Laboratories Ltd., on the other hand, appears to adopt the standard of near-perfection, in direct contrast to the decision of the Ontario Court of Appeal in Nemeth.
In Holm, the employee sued their former employer, seeking damages for constructive dismissal. AGAT Laboratories argued that if the employee was constructively dismissed, his entitlements were limited by the termination clause contained within his employment agreement, which provided as follows:
In the event we wish to terminate your employment without just cause, we agree that we will give you notice of the termination of your employment, or at our absolute discretion, we will pay you, in lieu of such notice, a severance payment equal to the wages only that you would have received during the applicable notice period. This will be in accordance with the provincial legislation for the province of employment.
At trial, the court found that the termination clause did not contain “sufficiently restrictive language” to limit the employee’s entitlements to only those set out under the Alberta Employment Standards Code. In particular, the judge noted that the termination clause only required that the applicable notice period be “in accordance” with the Code, but did not eliminate the possibility of notice beyond the statutory minimums.
Interestingly, this was one of the arguments raised by the employee in Nemeth, where the termination clause also did not contain express language opting out of the employee’s common law entitlements. In Nemeth, the Ontario Court of Appeal held that such exact language was not required so long as the intentions of the parties were clear and unambiguous. In contrast, although the judge in Holm acknowledged that it “may have been the intention of the draftsman” to opt out of the employee’s common law entitlements, the judge was not prepared to enforce the employer’s interpretation of the termination clause in the absence of express language.
The Alberta Court of Appeal agreed with the trial judge, finding that the termination clause established a “floor” with respect to the employee’s entitlements, but not a ceiling. The Court of Appeal concluded that, at best, the termination clause was ambiguous, and that such ambiguity had to be resolved in favour of the employee. As a result, the clause did not operate as a bar to the employee pursuing damages at common law.
The decision in Holm again leaves employers and employees in a position of uncertainty with respect to when termination clauses will be upheld by the courts. Until this area of the law becomes more settled, we continue to recommend that employers take the time to ensure that termination provisions are drafted so as to clearly and unambiguously opt out of an employee’s entitlements at common law, and in full compliance with the requirements of the applicable employment standards legislation. Likewise, employees should never enter into an employment agreement under the assumption that the termination clause contained therein will not be enforceable. Particularly given the state of the law in Ontario, employees who do so may very well be agreeing to a significant reduction of their entitlements upon dismissal.