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Small claims court rules termination clause that violates ESA in future is unenforceable

job-loss-severance-payThe impact of the Ontario Superior Court’s decision in Wright v. The Young and Rubicam Group of Companies (Wunderman), 2011 ONSC 4720, on the enforceability of termination clauses in employment contracts continues to be felt. Specifically, termination clauses which are held not to comply with the minimum standards established by the Ontario Employment Standards Act, 2000 (“ESA”) in the “future”, have been held to be unenforceable. Wright confirmed an earlier line of decisions.

In the recent case of Garreton v. Complete Innovations Inc., 2016 ONSC 1178, the Ontario Divisional Court held that if a termination clause could be non-compliant with the ESA at some point in the future, then it would not be enforceable. This means that even if the clause were valid for a termination that occurred today, if it could be argued it violated the ESA in the future, it would not be enforced.

In Garreton, the company had the employee sign the following termination clause which provided the employee would get her entitlement to termination pay but not severance pay:

Otherwise Complete Innovations Inc. may at any time terminate this agreement by providing the Employee with (1) one week notice if their duration of continuous employment with the Company is more than 3 months but less than 1 year. (2) weeks prior written notice of intention to terminate if the Employee duration of continuous employment with the Company is more than 1 year but less than (3) years. If the duration of continuous employment with the Company is more than 3 years each additional year will entitle the Employee to (1) one additional week of notice to a maximum of 8 weeks. … Complete Innovations Inc. shall maintain on your behalf your employee benefits for a period of not less than the period required by applicable statute.

The termination provisions set forth above represent all severance pay entitlement, notice of termination or termination pay in lieu thereof, salary, bonuses, automobile allowances, vacation and/or vacation pay and other remuneration and benefits payable or otherwise provided to you in relation to your employment by Complete Innovations Inc. and any preceding employment by any company.”

At the time of termination, the employee only had two years of service and was therefore only entitled to 2 weeks of termination pay. Although the company was a severance pay employer because it had a payroll of 2.5 million, the employee did not have the necessary five years of service to qualify for statutory severance pay.

Based on this contract, the company paid the employee her two weeks of Termination Pay.

The Ontario Divisional Court reviewed the clause and held that based on the Wright decision, the termination clause was invalid and the common law would apply:

  1. Section 5 of the ESA prevents contracting out of the minimum standards.
  2. The company was a statutory severance pay employer because it had a payroll of more than 2.5 million.
  3. The clause violates the ESA because it only provides for termination pay and expressly prohibited the payment of statutory severance pay under the ESA.
  4. Wright stands for the proposition that a termination clause which could violate the ESA in the future would not be upheld.

This decision is another reminder to employers to ensure that termination clauses provide for all entitlements prescribed by the ESA in order for them to be considered valid and enforceable. The company in this case should never have carved out its obligation to provide statutory severance pay.

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Simon Heath

Employment Lawyer and principal at Heath Law, Employment Lawyers
Simon Heath, BA, MIR, LLB, is the Principal of Heath Law, Employment Lawyers in Mississauga, Ontario. Simon represents both public and private-sector employers and employees (unionized and non-unionized) at all stages of the employment relationship with a focus in the areas of employment law, labour law and human rights law; these representations are made at all levels of courts and all administrative tribunals. Read more
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