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Ontario Court Upholds Termination Provision – Confirms Favourable Shift in Employment Agreement Interpretation for Employers

As we all know, there have been a number of court decisions in recent years which have found termination provisions in employment agreements to be unenforceable because those provisions failed to specifically refer to severance requirements or the continuation of benefits.  However, the Ontario Court of Appeal released a decision in 2016, Oudin v. Centre Francophone de Toronto, where a termination provision was upheld despite the fact that it did not specifically set out each and every obligation the employer owed to the plaintiff under the ESA.  CCP blogged (on June 29, 2016 and February 9, 2017) about how the Oudin decision signalled a shift from an overly technical analysis of the contract language to a focus on the parties’ intentions.

In a recent favourable decision for employers, Ontario’s Superior Court of Justice confirmed that shift away from the pre-Oudin overly technical approach.

In this case, Omar Hassan Farah was employed with EODC Inc. for 6.5 years, most recently as Senior Systems Administrator, when his employment was terminated. Farah entered into an employment agreement with EODC three years prior to the termination of his employment, when he was already an EODC employee. The agreement stated:

At any time, following the conclusion of the Probationary Period, the Employer may terminate the Employee without just cause simply upon providing him/her with the entitlements prescribed in the Employment Standards Act, 2000 (“the Act”) or any amendments thereto. The Employee hereby acknowledges that he/she has had the opportunity to review the relevant portions of the Act and/or to consult with legal counsel about their impact on his/her current entitlements upon termination of his/her employment. [Emphasis added.]

Based on the agreement, EODC provided Farah with 6 weeks’ termination pay and 6.42 weeks’ severance pay as required by the Employment Standards Act, 2000. Farah rejected EODC’s interpretation and brought a wrongful dismissal suit seeking nine (9) months’ pay in lieu of reasonable notice.

Farah argued that the termination language was ambiguous and therefore unenforceable. Specifically, he argued that because the agreement failed to define the length of the “Probationary Period”, it was ambiguous as to when such a probationary period ended and what his rights were during such a period. Farah also argued that the phrase “with the entitlements prescribed in the Employment Standards Act, 2000” was ambiguous.

The Court rejected both arguments and held that while the probationary period was not defined in the agreement, it had been defined in a previous agreement between the parties and was not ambiguous when read in the context of the employment relationship. The Court emphasized that Farah had an opportunity to review the agreement with legal counsel.

Farah also argued that the employment agreement was void because it lacked “legal consideration” (an exchange between the parties required for any agreement to be enforceable). However, EODC demonstrated that Farah’s base salary was increased by two percent, from $36.05/hr to $36.77/hr at the time that the agreement was entered into. The Court found the salary increase was sufficient consideration in exchange for Farah to be bound the new agreement.

Take home for employers:

• The Court found this termination provision to be enforceable despite it not specifically referring to severance pay, the continuation of benefits, or to any other employee entitlements. This is great news for employers as, prior to Oudin, the absence of these references had been interpreted by courts as an attempt to contract out of the minimum requirements of the ESA.
• The Court held that a two percent pay increase was sufficient consideration for having Farah enter into a new employment agreement. Employers can take some comfort in knowing that a relatively small pay increase may support the implementation of new employment agreements. (For more information on how to properly implement employment agreements with existing employees, click here).
• The Court placed significant emphasis on the fact that Farah was given the opportunity to review the agreement with a lawyer. Employers ought to ensure employment agreements are provided to employees with ample time for review with legal counsel should they choose to do so. Employment agreements should also expressly state that the employee has been provided with such time for review.