THE ENFORCEABILITY OF TERMINATION PROVISIONS IN EMPLOYMENT AGREEMENTS

March 24, 2017

Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158

                Often, employers want to limit their obligations to employees on termination by inserting provisions in employment agreements to deal with that issue.  Employees have challenged the enforceability of such clauses on the basis that the terms violate the Employment Standards Act, 2000 (“ESA”).  

The Ontario Court of Appeal has now released a helpful and instructive decision about this and it highlights the importance of drafting clear and unambiguous termination clauses.

                The termination clause in the case before the Court of Appeal reads as follows:
[The Company] is entitled to terminate your employment at any time without cause by providing you with two weeks’ notice of termination or pay in lieu thereof for each completed year or partial year of employment with the Company.  If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph … .   Payment and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

The payments made to the employee by the employer on termination actually exceeded the amounts to which she would have been entitled under the ESA, but the employee contended that because the termination provisions violated the ESA, the entire agreement was unenforceable and that she was entitled to significantly more notice at common law.

The lower court held that both the employment agreement and the termination provisions were enforceable. The Court of Appeal disagreed.

                The first argument raised by the employee was that the employment agreement was unenforceable because it was signed after she commenced employment and that there was no fresh consideration in exchange for her signature.  The Court of Appeal rejected that argument stating that the terms of the written agreement merely put into writing the verbal agreement reached by the parties. The Court went on to say, though, that “a written employment agreement might well be unenforceable if an employer includes in it a material term that was not part of the original employment relationship”.

                The Court of Appeal clearly affirmed that an employer and employee can agree by contract as to what the employer’s obligations are to the employee upon termination, but that contract is only enforceable if it complies with the minimum standards set out in the ESA.  There was no question in this case that the employer and employee agreed to a different notice period, but the Court concluded that the termination clause was unenforceable for the following reasons.

                The Court highlighted the employer’s obligations under the ESA and, in particular, the requirement that an employer must continue to contribute to an employee’s benefit plan for the specified period of time and the requirement to pay “severance” under the ESA (in this case, the employer met the statutory requirements to pay severance). 

The Court also noted that courts generally interpret employment agreements differently from other commercial agreements for a variety reasons. It then listed various considerations which were relevant to the interpretation and enforceability of termination clauses, including, the principle that “faced with a termination clause that could reasonably be interpreted more than way, courts should prefer the interpretation that gives the greater benefit to the employee”.

                Because the clause in question was worded in such a way to expressly exclude any other obligations except as stated in the clause itself, and, in particular, the employer’s statutory severance obligation and its obligation to contribute to the employee’s benefit plan during the notice period, it was not enforceable. (emphasis added)

                The employer tried to argue that the word “pay” used in the termination clause was broad enough to include both the base salary and benefits.  The Court, however, rejected that argument because the language was not clear enough.  At best, the interpretation of word “pay” was ambiguous and based on the principle of interpretation that where the clause can be interpreted in more than one way, the court should adopt the interpretation that is more favourable to the employee, the Court construed it against the employer.

                The employer also tried to argue that what it paid and what it offered to pay the employee after termination complied with the ESA standards and, therefore, that made the clause enforceable. The Court of Appeal rejected that argument and stated “… the enforceability of the termination clause depends only on the wording of the clause itself, and not what the employer may have done on termination …”. The Court also noted that allowing employers to rely on their conduct at the time of termination would be “inconsistent with one of the important considerations governing the interpretation of termination clauses:  these clauses should be interpreted in a way that encourages employers to draft agreements to comply with the ESA.  If employers can always remedy illegal termination clauses by making payments to employees on termination of employment, then employers will have little incentive to draft legal and enforceable termination clauses at the beginning of the employment relationship.”

In the end, the Court of Appeal affirmed that the employee was entitled to 9 months’ notice of termination.
               
Jeffrey A.L. Kriwetz
E-mail: jkriwetz@garfinkle.com
Direct Line: 416.869.7618
 
 
*Please note: The views expressed in this article are those of the writer and have been provided for information purposes only. Nothing in this article should be relied on as specific legal advice in any particular case. For such advice, please contact the writer directly.
 

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