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OCA upholds ESA related termination clause

termination clause

In Nemeth v Hatch (2018 ONCA 7), the Court was faced with the following termination clause:

The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

The Court decided that this clause was not ambiguous. This is what they said:

[14] It is clear from the plain language of the termination clause in the present case that the parties intended and agreed to limit the appellant’s common law notice entitlement. The clause clearly “specifies some other period of notice” that meets the minimum entitlements prescribed under the ESA: it contemplates the appellant receiving “one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.” It cannot be said that the appellant retained his common law entitlements in the face of this explicit language, which denotes an intent to the opposite effect. I agree that there is no ambiguity that the parties intended and agreed to displace the appellant’s common law notice entitlement. Whether they agreed to limit it to the minimum entitlements under the ESA is a question to which I return later in these reasons.

With all due respect to the Court, I suggest that it is not clear what the intentions of the parties were, for the following reasons:

  1. The Defendant took the position that the clause only required them to provide 8 weeks notice (the ESA maximum notice) notwithstanding that the Plaintiff had 19 years service. The trial judge agreed with that position. However, the Court of Appeal held that he was entitled to 19 weeks’ notice under that clause, in effect saying that the Plaintiff was entitled to the greater of the ESA entitlement or one week per year of service with a minimum of 4 weeks. So, tell me, how can the clause be unambiguous, and therefore “clear from the plain language”, when one judge sees it one way and another 3 judges see it another way?
  2. The clause makes no sense because the phrase stating “or the notice required by the applicable labour legislation” could never apply. If the person had 1, 2 or 3 years service, then the contractual minimum of 4 weeks exceeds the ESA minimums. If they had 4, 5, 6, 7, or 8 years service, the ESA amount would equal the contractual amount. If they had more than 8 years service, then the contractual amount would always exceed the ESA amount. How then can a clause which makes no internal sense and contains useless language be clear and unambiguous?
  3. The clause refers to “applicable labour legislation”. The Court assumed that the parties must have intended to  refer to the Employment Standards Act. Why not the Labour Relations Act? Why not the Employers and Employees Act? Why not the Employment Protection for Foreign Nationals Act? Why not the Human Rights Code? Why not the Occupational Health and Safety Act? Get my drift?

In the book “Ontario Labour and Employment Legislation 2016” by Thomson Reuters, there are 15 statutes listed. How is Mr. Nemeth, the plaintiff, supposed to know which sections of which Act are being incorporated into his employment contract. The above mentioned book requires 1360 pages to set out these statutes.

If one does a search in CANLII for “Ontario -Legislation -Labour “, you get 17 hits , but the ESA does not appear in that search.

I did a word search in the ESA for the word “labour”. I got 29 hits. They all referred to either the Labour Relations Board, a labour officer, Labour Day, the Ministry of Labour or the Canada Labour Code. Not a single reference to “labour” let alone “applicable labour legislation” in any section relating to the termination of employment.

Even a cursory review of the ESA shows you that there are numerous provisions in the Act that you would have to know in order to truly understand what the termination provisions of the ESA actually cover. To think that poor Mr. Nemeth was aware of all of this, let alone that he knew that he was actually giving up  a right to reasonable notice, (which he probably did not even knew he had), is unrealistic.

However, to this panel of the Court of Appeal, it was “clear” what the parties intended.

The reference to ambiguity voiding a termination provision comes from an earlier Court of Appeal decision called Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158.

In  that decision, Laskin J. sets out 8 Guiding Principles to be used in examining these types of clauses. I have summarized them as follows:

1. In general, courts interpret employment agreements differently from other commercial agreements. They do so mainly because of the importance of employment in a person’s life. As Dickson C.J.C. said in an oft-quoted passage from his judgment in Reference re Public Service Employee Relations Act (Alberta), [1987] 1 S.C.R. 313, at p. 368:

“Work is one of the most fundamental aspects in a person’s life, providing the individual with a means of financial support and, as importantly, a contributory role in society. A person’s employment is an essential component of his or her sense of identity, self-worth and emotional well-being.”

2. As important as employment itself is the way a person’s employment is terminated. It is on termination of employment that a person is most vulnerable and thus is most in need of protection: see Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701.

3. When employment agreements are made, usually employees have less bargaining power than employers. Employees rarely have enough information or leverage to bargain with employers on an equal footing: Machtinger, p. 1003

4. Many employees are likely unfamiliar with the employment standards in the ESA and the obligations the statute imposes on employers. These employees may not seek to challenge unlawful termination clauses: Machtinger, p. 1003

5. The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible,” over an interpretation that does not do so: Machtinger, p. 1003.

6. Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship: Machtinger, p. 1004.

7. A termination clause will rebut the presumption of reasonable notice only if its wording is clear. Employees should know at the beginning of their employment what their entitlement will be at the end of their employment: Machtinger, p. 998.

8. Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee: Ceccol v. Ontario Gymnastics Federation (2001), 149 O.A.C. 315, Family Counselling Centre of Sault Ste. Marie and District (2001), 151 O.A.C. 35.

I would respectfully submit that the Court of Appeal panel in this case did not give adequate consideration to Guiding Principles 4, 7 and 8.

This panel also dealt with the issue as to whether or not the fact that the clause did not reference severance pay that it fell afoul of the ESA. However, citing Laskin’s reasoning in Wood on how Roden v Toronto Humane Society, they decided as follows:

(ii) Is the termination clause void because it purports to contract out of the ESA?

[15] With respect to the second argument, I do not accept that the silence of the termination clause concerning the appellant’s entitlement to severance pay denotes an intention to contract out of the ESA. I agree with the motion judge’s conclusion that the termination clause purports to limit notice but not the severance pay that the appellant would receive on termination. This is a very important distinction.

[16] As such, this case falls within Roden v. Toronto Humane Society (2005), 259 D.L.R. (4th) 89 (Ont. C.A.), and is entirely distinguishable from Wood, for the reasons noted in the latter by Laskin J.A., at paras. 53 to 55:

53      In Roden, the termination clause in issue stated that the employer, The Toronto Humane Society, could terminate the employment of the plaintiff Roden “upon providing the Employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation”: see para. 55. Roden made the same argument as Wood: the termination clause contravened the ESA and was void because it failed to include The Toronto Humane Society’s obligation to continue its contributions to Roden’s benefit plans during the notice period.

54     Gillese J.A., writing for the panel, rejected this argument. In her view, the termination clause was simply silent about The Toronto Humane Society’s obligation to continue to contribute to Roden’s benefit plans. The clause did not contract out of an employment standard and thus was not void. She wrote, at para. 62:

The without cause provisions in question are of precisely the type that Iacobucci J. says are valid: they referentially incorporate the minimum notice period set out in the Act. The without cause provisions do not attempt to provide something less than the legislated minimum standards; rather, they expressly require the Society to comply with those standards. As I have said, in my view, the provisions do not purport to limit the Society’s obligations to payment of such amounts. That is, they do not attempt to contract out of the requirement to make benefit plan contributions. Because the contracts are silent about the Society’s obligations in respect of benefit plan contributions, the Society was obliged to –  and did – comply with the requirements of the Act in that regard.

55     The difference between Roden and this case lies in the wording of each termination clause. In Roden, the clause dealt only with The Toronto Humane Society’s obligation to give the notice of termination, as required by the ESA, or to pay Roden a lump sum for the notice period. It did not exclude The Toronto Humane Society’s additional obligation to continue to contribute to Roden’s benefit plans during the notice period. It said nothing about that obligation.

[17] As a result, I am of the view that the termination clause in this case does not provide less than the minimum severance obligations under the ESA, and is not void pursuant to s. 5(1).

I agree that when the Court of Appeal pronounces on a relevant legal issue it is binding on the Courts, even other panels of the Court of Appeal (unless the new panel has 5 judges, which this did not).

However this rule does not apply where the comments being relied upon are not relevant to the outcome of the case, what we common law lawyers call “obiter dictum.”

This is the classic definition of obiter dictum that we all learnt in law school:

A judge’s expression of opinion uttered in court or in a written judgement, but not essential to the decision and therefore not legally binding as a precedent.

In the Roden case the actual issue in dispute was whether or not the employer had just cause for termination. The trial judge held that there was just cause. The Court of Appeal upheld that finding of just cause.

The comments by the Court on the enforceability of the contract therefore were neither relevant or necessary with respect to the outcome of the case. This is classic obiter dicta, which is not binding on other Courts.

From what I can tell about this issue, neither the Court of Appeal in Wood nor in this case were made aware of this obiter dictum argument in relation to the Roden comments.

Since Wood purports to believe that it had to follow Roden, and Nemeth seems to believe that it had to follow Wood, if in effect the Roden comments  were not precedent setting, then could a future trial judge ignore Roden and decide that the clause is unenforceable given the 8 Guiding Principles in the Wood decision?

Only time will tell.

Barry B. Fisher LL.B.

Barry B. Fisher LL.B. is a mediator and arbitrator of both employment and labour relations matters . He offers three forms of ADR based on the clients’ needs: Mediation, Arbitration and Med/Arb. Barry is from the evaluative school of mediation and brings his over 30 years experience as an employment lawyer and legal author to the dispute. In addition to his knowledge of the legal issues involved in these disputes , he also has a deep understanding of the psychological factors that motivate both employees and employers. By combining these two skills, Barry is able to achieve a settlement rate of over 80% of the disputes that he mediates.

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