Are Your Company's Termination Provisions Enforceable?

September 30, 2013

Written By Michelle D. MacGillivray and Carl Cunningham

Background

Where an employer does not have cause to terminate a non-union employee and where there is no provision specifying the period of notice of termination or the duration of employment in an employment contract, there is an implied obligation at law on the part of an employer to provide "reasonable notice" of termination or pay in lieu of notice. At common law, reasonable notice of termination varies depending on factors such as the employee's age, length of service, character of employment and availability of alternate employment. There is no absolute limit on reasonable notice, but it will only exceed 24 months in exceptional cases. Common law notice is generous relative to the minimum requirements of employment standards legislation and an employee may dispute his or her common law entitlements upon termination. As a result, many employers use a written employment contract with a termination provision to rebut the presumption of reasonable notice at common law and specify a pre-determined length of notice. To be enforceable, a termination clause should: (a) provide the employee with no less than his or her entitlement under minimum applicable standards legislation; and, (b) use clear language to confirm the amount of notice specified is a cap on the employee's entitlements.

The decisions below highlight the challenges an employer may face if in attempting to put a cap on the employee's entitlements the termination clause inadvertently provides the employee with less than his or her statutory entitlements.

Stevens v Sifton Properties Ltd.

In Stevens v Sifton Properties Ltd., Ms. Stevens was employed in the position of head golf professional. The terms and conditions of her employment were governed by an offer letter which included the following termination clause:

With respect to termination of employment, the following terms and conditions will apply:

(b) The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the Employment Standards Act of Ontario.

(c) You agree to accept the notice or payment in lieu of notice and/or severance pay referenced in paragraph 13(b) herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.

Following roughly three and a half years of service, the company terminated Ms. Stevens' employment without cause and paid her three weeks' pay in lieu of notice of termination. The company also continued her group benefits for three weeks.

Ms. Stevens commenced an action for wrongful dismissal, claiming that she was entitled to reasonable notice at common law. Notwithstanding the company's voluntary provision of group benefits at the time of termination, she argued that the termination clause in the offer letter was unenforceable on the basis that the clause purported to allow the company to terminate her employment without continuing her benefits during the statutory notice period. Ms. Stevens argued that this violated sections 61(1)(b) and 5(1) of the Employment Standards Act, 2000 (Ontario) (ESA). The former section compels employers to continue all benefits during the statutory notice period, while the latter forbids them from contracting out of this employment standard.

The court agreed the clause attempted to contract out of the ESA and relied on the last statement of the termination clause that the contractual entitlements were "in satisfaction of all claims and demands arising out of statute or common law." The court characterized this "catch all" statement as an attempt to "draw the circle" around those rights and entitlements that Ms. Stevens would receive on termination of employment with an "all-encompassing specificity" or "catch all specificity" that resulted in the impermissible exclusion and denial of benefit continuation during the statutory notice period to which she was entitled pursuant to the ESA. Because the termination clause did not expressly address continuation of benefits during the statutory notice period, the court deemed the entire clause to be void and unenforceable.

Moreover, the court held that the issue is not whether the employer acted in compliance with the minimum requirements pursuant to the ESA, but whether the wording of the termination clause is in compliance with those minimum requirements. In other words, it was effectively irrelevant that the employer actually maintained Ms. Stevens' benefits for the notice period. The fact that there was a possibility that she would receive less than her minimum statutory entitlements under the ESA was sufficient to render the termination clause void and entitle her to reasonable notice at common law.

Wright v Young & Rubicon Group of Cos.

The court in Stevens relied heavily on the decision in Wright v Young & Rubicon Group of Cos. In Wright, the dismissed employee also claimed that the contractual termination clause, which provided for pay-in-lieu of notice of termination, but did not provide for benefits, was void and unenforceable. The clause at issue stated:

This payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.

The court held that the clause was not in compliance with the ESA on the basis that it excluded reference to the continuation of benefits during the statutory notice period. The court found that the "payment" referred to in the termination clause was limited to base salary. It was the court's view that if such payment is to be treated as inclusive of all entitlements to compensation, there will be no compensation flowing to the employee in respect of benefits, which are an integral part of compensation.

Even though the company had voluntarily maintained the dismissed employee's benefits for the notice period, the termination clause was still regarded as null and void and the employee was entitled to reasonable notice at common law.

Lessons for Employers

1. Periodically review your contracts “ It is important to periodically have your employment contract, or template, reviewed by legal counsel to ensure compliance with ongoing developments in the law (e.g., once per year).
2. Be careful with "catch all" language “ In attempting to clearly rebut the presumption of reasonable notice at common law the employer must be careful not to use imprecise "catch all" language that inadvertently restricts an employee's entitlement on termination to less than his or her statutory entitlements.
3. Don't forget the benefits! - In Stevens and Wright, both termination and severance pay were referenced in the applicable termination clause; however, other ESA entitlements including continuation of benefits were not referenced. Failing to address benefits in the termination clause may result in the employee being entitled to reasonable notice at common law. A similar argument may also be made by employees with respect to a failure to reference vacation pay payable on statutory termination pay.
4. Words and actions are important “ The termination clause must comply with the ESA and even if an employer takes steps to act in accordance with the ESA (e.g., voluntarily maintain the former employee's benefits for the notice period), such voluntary continuation of benefits may not be enough to correct the deficiency in the contract.

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