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Termination clauses can be void even if only a possibility they could violate Employment Standards Act

As those who read my comments regularly will know, I recommend that every employee be asked to sign an employment agreement that sets out, among other things, the amount of notice or pay in lieu thereof that will be required in the event of a dismissal without cause. The terms do not have to be particularly generous or oppressive; they can be fair and reasonable and based upon the relevant circumstances. Whatever the terms, a specific dismissal without cause provision will eliminate all of the uncertainty that typically arises at the time of dismissal when the parties must assess, negotiate and possibly litigate what “reasonable notice” would be in light of all the circumstances.

There are many different approaches to drafting a dismissal clause. The amount of notice can be fixed regardless of the length of service (for example, six months), it can be based solely upon length of service (for example, three weeks per year), or it can be a combination thereof (for example, one month plus an additional week for every year of service). To be enforceable, the contract must be entered into properly (this has been discussed elsewhere). Furthermore, the termination clause itself cannot breach the applicable legislation, which sets out the minimum amount of notice that is to be provided in the event of dismissal without cause.

One issue that occasionally arises is how the courts will treat a clause that does not violate the legislation at the time of dismissal, but might in the future. For example, a clause might provide that in the event of dismissal without cause, the employee will be entitled to receive notice or pay in lieu thereof of five weeks. If the employee is dismissed before completing five years of service, then that clause would comply with Ontario’s Employment Standards Act. However, at some point in the future, five weeks will be less than what is required by the statute.

This situation arose recently in a case heard by the Ontario Superior Court of Justice. In Wright vs. The Young and Rubicam Group of Companies (Wunderman), the plaintiff had signed an employment agreement that had a fairly detailed schedule of notice to be provided in the event of dismissal without cause. He had been employed for slightly over five years, and according to the contract, was entitled to 13 weeks of base salary. As the Court confirmed, pursuant to the Employment Standards Act, the plaintiff would have been entitled to five weeks of notice and an additional five weeks of severance pay, which was less than his entitlement pursuant to the contract.

However, the Court went on to find that in the future, the contractual clause would have breached the Employment Standards Act. The judge gave a number of examples, such as if the plaintiff were to have been dismissed after eight and a half years of service. In that case, the contractual entitlement would have been 16 weeks of base salary, but the statutory entitlement would have 16 and a half weeks.

As a result, the Court found as follows:

As some of the contractual provisions fall short of the statutory minimums, assuming no change in the applicability of severance pay, the agreement is in violation of s. 5(1) of the Act.

The judge found the clause to be void, and the plaintiff was entitled to reasonable notice in accordance with the common law. He was 49 years old at the time of dismissal, held the position of president and was employed for slightly over five years. The evidence showed that it took him 12 months to find a new job. The Court awarded him pay in lieu of notice equivalent to 12 months.

My advice remains that employers should have every employee sign a contract of employment that sets out their entitlement to notice if dismissed without cause. In doing so, employers should consider a variety of scenarios to ensure that the provision does not and cannot infringe the statutory minimum amounts that are required.

Stuart Rudner
Miller Thomson LLP

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Rudner Law, Employment / HR Law & Mediation

Employment Lawyers and Mediators at Rudner Law
Rudner Law specializes in Canadian employment law and mediation. Rudner Law provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. Stuart Rudner is a leading HR Lawyer and founder of Rudner Law. Stuart and his team speak and write frequently on HR Law issues. Read more
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