Termination Clauses

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In this world nothing can be said to be certain, except death and taxes.  – Benjamin Franklin

In Ontario, perhaps we can add “challenges to termination clauses” to this list. Over the past few years, we have seen countless cases in which dismissed employees have argued that, for one reason or another, they should not be held to the terms of the termination clause in their employment agreement. While the cases have taken a variety of approaches and made it difficult to identify a guiding principle that would withstand the next decision, the recent trend seems to be a willingness to enforce the intent of the parties.

The latest decision is from Mr. Justice Monahan of the Ontario Superior Court, in a case involving a claim by a Law Clerk. In Burton v. Aronovitch McCauley Rollo LLP, the clause in question read as follows:

a) AMR may, at its sole discretion, terminate your employment without cause (a “Non-Cause Termination”). In the event of a Non-Cause Termination, AMR shall provide you with severance pay in accordance with the Employment Standards Act, as amended, and any successor legislation, if so required as at the time of a Non-Cause Termination; and

b) Notwithstanding the foregoing, and for greater certainty, if the amounts which you would receive upon a Non-Cause Termination, as set out above, are less than the amounts to which you would be entitled under the Employment Standards Act, as amended or any successor legislation, then you shall be entitled to notice, severance pay, and any other payment required by the relevant legislation in force as at the time of the termination.

Typically, these challenges can be divided into two broad categories:

  1. Challenges to the contract as a whole (ie. for lack of consideration), or
  2. Challenges to the termination clause (ie. for breaching the applicable employment standards legislation).

In Burton, the challenge was based upon the clause itself. The plaintiff asserted that the failure to explicitly provide for continuation of benefits during the notice period constituted a breach of the employment standards legislation. The Court reviewed three of the previous judicial interpretations of termination clauses with “broadly similar wording”:

  1. Roden v. The Toronto Humane Society,
  2. Wood v. Fred Deeley Imports Ltd., and
  3. Nemeth v. Hatch Ltd.

In the first and third of those decisions, the termination clause was deemed to be enforceable. In the second, it was not.

As the court explained, there was good reason for the distinction between the decision in Wood and the other two decisions, one of which came before and one of which came after. The clauses in question were as follows:

Otherwise, the Employer may terminate the Employee’s employment at any other time, without cause, upon providing the Employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation.

Case: Roden v. The Toronto Humane Society

Analysis: Enforceable. The fact that the termination clause was silent with respect to the obligation to continue to make benefit plan contributions did not represent an attempt to “contract out” of the employer’s obligations under the Act. Instead, the termination clause referentially incorporated the minimum notice period set out in the Act, which would include the obligation to continue benefit plan contributions. Thus the termination clause did not attempt to provide something less than the legislated minimum standards under the Act and was legally enforceable.

[The Company] is entitled to terminate your employment at any time without cause by providing you with the 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph… The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

Case: Wood v. Fred Deeley Imports Ltd.

Analysis: Not enforceable. There was no explicit reference to the statutory obligation to make benefit plan contributions during the notice period. “However, the termination clause went on to provide that “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph”, and also stated that the “payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.” On its plain wording, the clause required the employer to provide termination pay only, thereby excluding the employer’s obligation to contribute to the employee’s benefit plans during the notice period. For this reason, the clause was an attempt to reduce the employer’s obligationsbelow the minimum required by the Act and was legally unenforceable.”

The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

Case: Nemeth v. Hatch Ltd.

Analysis: Enforceable. The silence of the termination clause on this point did not reflect an intention to “contract out” of the Act. This was because it did not include the “all-inclusive” language that had been fatal to the validity of the clause utilized in Wood.

As you can see from the analysis set out above, the critical distinction between Wood and the other two cases, including the recent decision in Nemeth, was that in the Wood, the clause contained wording that explicitly attempted to limit the employer’s obligations to those set out in the class itself. The other two clauses, and other clauses in cases where the termination clause was upheld, did not contain such restrictive wording. As a result, the courts were able to find that in those cases, the employer did not attempt to limit the employee’s entitlement to less than that required by legislation.

As I have stated in the past, a saving clause which provides that in the event that the entitlements pursuant to the clause fall below those required by the applicable legislation at any time, the requirements of the legislation will prevail. This will protect the employer from inadvertently breaching the legislation, even if the legislation changes in the future.

By way of background, it is important to remember that by default, every employee is entitled to reasonable notice of dismissal pursuant to the common law. However, that entitlement can be displaced by contract. The contract must be clear with respect to its intention to do so, but the recent trend seems to be that the wording does not have to be perfect so long as the intent of the parties is clear.

In the Nemeth decision, the court noted that “it was not necessary for the parties to use a specific phrase or particular formula, provided that the parties’ intention to displace common law rights could be readily gleaned from the language agreed to by the parties”.

So how did the Court rule in Burton? The Court held that the wording of the clause incorporated the minimum notice required by legislation and clearly displaced the Plaintiffs entitlement to notice pursuant to common law. Furthermore, the wording “any other payment required by the relevant legislation” was found to include the obligation to continue benefits. The Court also noted that there was no wording like that in Wood which limited the employer’s obligations to those specifically set out, so even silence on the issue of benefits would not be fatal. As a result, the clause did not breach the employment standards legislation and was found to be enforceable.

This case continues the common sense trend and when the cases referenced in the decision are looked at as a whole, there does seem to be an identifiable rationale. Employers should be extremely cautious with respect to the wording that they use in termination clauses, and should use saving clauses, which explicitly state that the requirements of the legislation will prevail,  rather than all-encompassing clauses which state that the employer’s only obligations are those set out in the clause itself. Otherwise, the clause may end up being worthless.


Originally published by Canadian HRReporter.

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