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Employment Standards

The Court of Appeal of Ontario revisits termination clauses

Over the last few years, we have seen a lot of see-sawing in the courts when it comes to the enforceability of termination clauses in employment agreements. In some recent cases, the courts have adopted a more purposive approach, upholding termination clauses even where they were not perfectly drafted.

For example, we recently wrote about Farah v EODC Inc., where a termination clause that did not explicitly mention the continuation of benefits and did not explicitly reference the fact that the employee would not receive notice pursuant to the common law was still upheld by the Ontario Superior Court. Even though the termination clause was imperfect, it was good enough for the court to conclude that the common law presumption had been successfully rebutted.

A purposive approach: Oudin v Le Centre Francophone de Toronto

A similar conclusion was reached by the Ontario Superior Court (and upheld by the Court of Appeal) in Oudin v Le Centre Francophone de Toronto. In that case, the court upheld the termination clause despite the fact that the provision potentially offered a notice period below that required by the Employment Standards Act, 2000 (ESA), did not provide for benefit continuation, and failed to mention severance pay.

In addition to the intent of the employer, the court also considered the existence of a severability provision in the employment agreement, which the court relied on to modify certain aspects of the termination provision to render it enforceable. This seemed to signal a more purposive approach, where the courts would enforce a termination clause if the intentions of the parties were clear.

The pendulum swings back: Wood v Deeley

Conversely, earlier this year in Wood v Deeley, the Court of Appeal struck down a termination clause which did not expressly indicate that the employer would continue the employee’s benefits during the notice period, and also failed to contemplate severance pay. The court reached its decision despite the fact that the employer had, in fact, continued to pay for the employee’s health and dental plan and offered to contribute to her RRSP during the notice period.

This decision appeared to confirm that a breach or potential breach of the ESA will render a termination clause invalid, regardless of the actual impact on the employee.

The recent decision of the Court of Appeal in North v Metaswitch Networks Corporation follows the hard line established in Wood, and provided the court with an opportunity to directly revisit its decision to use a severability clause to modify and uphold a problematic termination clause in Oudin.

The termination provision in North attempted to limit the employee’s entitlements upon termination without cause to only those required under the ESA. However, it also included the following statement: “In the event of the termination of your employment, any payments owing to you shall be based on your base salary, as defined in the agreement.”

The employee argued that this sentence rendered the termination clause void, as it contravened the ESA by excluding the employee’s entitlement to his commission. The employer took the position that this one sentence should be “excised from the agreement” using the severability clause, as the court had done in Oudin. At trial level, the employer’s argument succeeded, and the modified termination provision was upheld.

The Court of Appeal firmly rejected this approach, noting that where a termination clause attempts to contract out of the ESA, the result is that the court is to deem the entire clause void. In that regard, relying on a severability provision to merely void the offending portion of the termination clause, leaving the remainder of the clause to be enforced, constitutes an error in law. In reaching this decision, the court confirmed that “where a termination clause contains ‘even one’ instance of contracting out of an ESA employment standard, the clause is void.” In such cases, there is nothing for the severability clause to fix — the termination provision is struck down, and the common law applies.

Where does that leave us?

As we have written about many times before, the unpredictable treatment of termination clauses continues to suggest that this area of the law remains unsettled, and contributes to significant uncertainty for both employers and employees. However, both the decisions in Wood and North indicate that courts are prepared to take a firm stance against termination provisions that do not comply with the law.

From our perspective, the safest course of action for an employer continues to be to take the time to ensure termination provisions are clear, unambiguous and in full compliance with the requirements of the applicable provincial employment standards legislation. This includes ensuring that the termination provision expressly states that an employee will receive only the entitlements described therein, and that the provision fully encompasses all of the employee’s potential entitlements pursuant to statute.

Although a court may not be prepared to fix a termination provision through the use of a severability clause, an employer can still take steps to protect themselves against an inadvertent breach of employment standards legislation by including a “saving provision” within the termination clause which provides that if the termination clause currently or subsequently falls below the requirements of the applicable legislation, it should be interpreted so as to comply with those obligations.

Similarly, employees should never assume that they have no recourse against their employer simply because they signed an agreement which contains a termination clause. In many cases, that clause (and perhaps the entire agreement) will be unenforceable.

The unfortunate result of all the uncertainty, however, is that parties sometimes have to either settle or “roll the dice,” not knowing how a court will treat their particular situation.

Originally published by the Canadian HR Reporter.

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