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Enforcing Termination Provisions – Things Not Getting Any Easier For Employers

CCPartners has blogged about the benefits of including termination clauses in employment agreements and the common pitfalls associated with drafting these clauses. You can see that blog here.

The Ontario Superior Court recently provided employers with yet another reminder about the care that has to be taken when drafting employment contracts and particularly their termination provisions.

In Miller v. A.B.M. Canada Inc., Paul Miller was hired by A.B.M. Canada Inc. as a management accountant. Upon being hired, Miller entered into an employment agreement with A.B.M. which contained a termination provision limiting notice of termination to the minimums provided by Ontario’s Employment Standards Act, 2000 (“ESA”). The termination clause stated as follows:

Regular employees may be terminated at any time without cause upon being given the minimum period of notice prescribed by applicable legislation, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation. [Emphasis added].

When A.B.M. discovered a number of shortcomings in Miller’s performance, the decision was made to terminate his employment on a without-cause basis. By that time, Miller had been employed for 17 months and was therefore entitled to two weeks’ notice of termination, or pay in lieu of notice, as prescribed by the ESA. When A.B.M. provided Miller his two weeks’ pay in lieu of notice, he brought a wrongful dismissal claim, arguing that the termination provision did not meet the requirements of the ESA and that he was entitled to the common law standard of reasonable notice instead.

A.B.M. argued that the termination clause was set out in plain language and was clear in limiting Miller’s notice to two weeks’ pay.

The Court disagreed with A.B.M., finding that the termination provision did not extend Miller’s pension contributions or car allowance for the duration of the notice period, as required by section 61(1) of the ESA. The Court based this finding on the fact that Miller’s pension contributions and car allowance were not included under the heading of “salary” in the employment agreement, while the termination provision only allowed for “salary” in lieu of notice.

The law is clear that contract provisions that provide a lesser benefit than the ESA minimums are void. Since the ESA minimums provide for benefit continuation and the term “salary” – as defined in the contract and specified in the termination clause – did not, the Court found the termination clause in Miller’s employment agreement to be void and awarded him three months’ common law reasonable notice.

What is especially concerning for employers about this decision is that the Court failed to address the portion of the clause that stated “or as may otherwise be required by applicable legislation”. This phrase appears to clearly set out the mutual intention of the parties to limit payments in lieu of notice of termination to the statutory minimums, and yet was ignored by the Court.

In total, Miller was awarded $38,050.39 in common law damages whereas he would have received only $9,690.00 pursuant to the ESA minimums.

While 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, this decision clearly illustrates the importance of periodically reviewing employment agreements and templates to ensure compliance with ongoing developments in the law.

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