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Close Only Counts in Horseshoes: Court Confirms Termination Clause that “Potentially” Violates ESA Not Enforceable

At CCP, we are big believers in the value of a well-written employment agreement to reduce liability at the point of a dismissal on a non-cause basis.   The Divisional Court’s recent decision in Garreton v. Complete Innovations Inc. is an important reminder of the importance of ensuring termination clauses comply with minimum employment standards legislation, whether or not an employee would be entitled to those statutory minimums at the time of their dismissal.

In Garreton, the employee signed an employment agreement at the commencement of employment that allowed Complete Innovations to dismiss on a without cause basis by providing the minimum notice requirements set out in the Employment Standards Act, 2000, as well as group benefit continuation during the statutory notice period.  The contract did not include the employee’s right to statutory severance pay, which she would have been entitled to after five (5) years of service since Complete Innovations was also a severance employer in the circumstances.  Ms. Garreton was dismissed for cause and as an alternative argument her employer asserted that if there was no legal cause to dismiss, Ms. Garreton was only entitled to two (2) weeks’ statutory notice pursuant to her employment agreement.   Ms. Garreton asserted that the termination provision was void as it “potentially” violated her statutory rights by not providing for severance pay entitlement even though at the time of dismissal she would not have been entitled to severance pay with less than five (5) years’ service.

The Small Claims Court judge did not address the employer’s alternate argument and found that since the company did not have cause Ms. Garreton was entitled to five (5) months’ salary for wrongful dismissal damages.   On appeal, while the Divisional Court agreed with the employer that the judge ought to have considered the issue of the enforceability of the termination provision, the Divisional Court found that the clause was unenforceable because it did not include any right to the statutory severance entitlements.   The Court concluded that the termination provision provided less than an employee’s statutory entitlements in circumstances where the employee had five years’ of service.  The Court went on, citing the Supreme Court of Canada’s decision in Machtinger v. HOJ Industries Ltd., to find that it was enough that the clause “potentially” violated Ms. Garreton’s statutory entitlements to render it void in the circumstances.   The Divisional Court specifically rejected the position advanced in another lower court decision, John A. Ford & Associates Inc. v. Keegan where the judge held that the termination clause “must conform to provincial employment standard legislation for the particular employee, in the particular circumstances” in upholding the termination provision in that case.   The Divisional Court in Garreton ruled that the contract must be viewed at the time it is entered into and that a “potential violation in the future is sufficient” to void the termination provisions.

But for the omission of the statutory severance language, the termination clause would likely have been enforceable, and instead of paying five (5) months’ salary the employer would have only been obligated to pay two (2) weeks.   This case underscores the importance of drafting language that ensures compliance with the provincial employment standards legislation in all cases and anticipating possible changes once the employment agreement is signed.  For example, if the employer was not required to pay severance at the time of hiring because it did not have an annual payroll of 2.5million dollars but subsequently grew to pass the monetary payroll trigger, the contract would still have to have been drafted to contemplate that potential additional liability.    Unfortunately, unlike horseshoes and hand grenades, coming “close” to compliance with statutory obligations will not be enough to save a termination clause.  For this reason, it is critical to always get expert legal advice on the drafting of employment agreements.   The lawyers at CCP regularly assist employers in the drafting of employment agreements for all levels of employment.  Click here for a list of our team members who can provide guidance in the drafting, amending and presentation of employment agreements in your workplace.