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Is the Termination Clause in your Company's Employment Agreement Enforceable?

It is common for employers to prepare written employment agreements containing termination provisions that seek to limit employee notice entitlements upon termination to the minimum standards as set out in the Employment Standards Act (“ESA”).  

Employers do this because in the absence of an enforceable termination provision, employees are entitled to common law reasonable notice of termination, or pay in lieu thereof, and common law notice is highly generous relative to the minimum requirements of the ESA.

Equipped with the knowledge that an employer can contract out of all but its minimum statutory obligations, some employers have nevertheless failed to take advantage of this cost-reducing strategy. Other employers have entered into these notice limiting agreements but have failed to revise them in order to keep pace with the ongoing developments in this area of the law and the changing circumstances in their workplace. Many of these agreements may be outdated and unenforceable.

Moreover, it is no secret that courts generally dislike enforcing this type of agreement and will look for any reason to declare a termination clause void and instead award common law reasonable notice damages in the place of the of the ESA minimums. The key is to draft contractual provisions that will withstand judicial scrutiny and to revise them as necessary.

The following four factors may be rendering the termination provision in your employment agreement void and unenforceable.

1.       The termination provision excludes benefit continuation

Under section 61(1) of the ESA, employers are required to maintain the benefits to which the terminated employee would have been entitled to had he or she continued to be employed during the notice period.

If a termination provision expressly or impliedly excludes benefit continuation from the employee’s termination entitlements, the entire termination provision is void and the employee will be entitled to common law reasonable notice of termination instead.

In a recent decision, an Ontario Court ruled that a termination provision which limited an employee’s entitlements upon termination to the minimum requirements of the ESA was void because the clause excluded benefit continuation from the employee’s entitlements. The employee would have been entitled to three weeks of notice under the ESA but will instead likely be entitled to common law notice ranging from four to eight months’.

2.     The termination provision limits the employees entitlements to an amount less than the minimum standards of the ESA

Section 57 of the ESA sets out the minimum notice requirements under the ESA. A termination provision that provides for less than the minimum notice period required under the ESA is considered void by courts and is unenforceable.  The courts will instead award the employee common law reasonable notice in these circumstances.

In the leading decision in this regard, an employee was entitled to four weeks’ notice pursuant to the ESA. His employment agreement provided for two weeks’ notice. The Supreme Court of Canada held that the termination provision was therefore void and awarded the employee common law reasonable notice of seven months’ instead.

3.     The employee’s position has changed considerably since the original agreement was entered into

Where an employee’s level of responsibility and corresponding status with a company has escalated significantly throughout his or her employment, courts have concluded that the employment contract originally entered into could not have been intended to apply to the position in the company ultimately occupied by the employee.

The rationale of the courts is that whereas a harsh termination provision might have been justifiable at the date of hiring when the employee occupied a relatively junior position, it becomes unjustifiable if the employee is subsequently promoted to a higher level position which would normally carry a lengthier notice provision.

In one decision, an employee entered into an employment agreement that limited his notice entitlements. After 24 years with the company the employee was terminated. The court set aside the termination provision since the employee had risen through the ranks from a “junior credit man” to vice-president of administration and awarded the employee 21 months of salary representing the common law reasonable notice period.

4.       The termination provision was drafted in an ambiguous manner

Two additional mistakes are commonly found in termination provisions. The first is when the clause only refers to “ESA notice” and does not including specific language addressing statutory severance pay, which is not notice driven.  The second error involves failing to clarify that there are no other obligations owing to the employee other than the ESA entitlements.  Courts require clear language that the employee will not be entitled to any additional notice other than his/her statutory notice and severance entitlements before finding a termination provision enforceable.

In these circumstances, courts will find that the termination provision is ambiguous and that it should be interpreted against the interests of the employer, who drafted the agreement.

The following sample termination provision is an example of a clause that should withstand judicial scrutiny:

Following the probationary period, in the event that it becomes necessary to terminate your employment without cause the Company will provide you with such notice (or payment in lieu of notice) or severance pay that may be required to meet the requirements of the Employment Standards Act, 2000, as amended.  You understand and agree that the Company has no obligation to make any additional payments to you or to provide you with any additional notice upon termination. You also understand and agree that the Company would not have entered into this agreement if it were required to provide notice in excess of the Employment Standards Act, 2000.

If your employment is terminated without cause, the Company will continue your group insurance benefit coverage for such period as the Employment Standards Act, 2000 shall require, provided such coverage is available from the insurer.   

For clarity, in the event that you are dismissed without cause, all benefits and compensation required to be continued under the Employment Standards Act, 2000 will be continued. 

The Company may terminate your employment without notice where just cause exists for the dismissal.

Requiring employees to enter into employment agreements containing enforceable termination provisions is one of the easiest and most cost-effective ways for employers to reduce the costs of doing business. As outlined above, failing to do so can result in significantly increased damage awards in certain circumstances.

It is also important for employers to periodically have their employment agreements and templates reviewed by legal counsel to ensure compliance with ongoing developments in the law and changes in the workplace. Some proactive strategies include having employment agreements reviewed prior to promotions, new hires or on an annual basis.

The lawyers at CCPartners can assist employers with drafting and revising employment agreements and termination provisions that will withstand judicial scrutiny and reduce expense to employers.