Enforceability of termination clause in employment agreement

Those of us that practice employment law understand that our Courts will not hesitate to deem a termination clause in an employment agreement unenforceable if they are provided with a reasonable basis upon which to do so. In recent times, we have seen two noteworthy cases that have dealt with termination clauses and been decided in favour of the employee. Employers and their counsel should be mindful of these cases as they implement employment agreements, if they hope to be able to rely upon them.

In the summer of 2012, the Ontario Court of Appeal’s rendered its decision in Bowes v. Goss Power Products Ltd. In that case, the Court ruled that if an employment contract contains a termination clause, the employee will not be required to mitigate her damages by seeking new employment unless the clause specifically says so. After years of advising employers to use termination clauses, all of a sudden, having an enforceable termination clause could work to the employer’s detriment! Not surprisingly, this case caused many employers, and employer counsel, to re-draft their employment agreement templates and include mitigation provisions.

Just recently the Ontario Superior Court of Justice considered a disputed termination clause in Stevens v. Sifton Properties Ltd. The clause in question read as follows:

13. With respect to termination of employment, the following terms and conditions will apply:

(a) The Corporation may terminate your employment for what it considers to be just cause without notice or payment in lieu of notice;

(b) The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the Employment Standards Act of Ontario.

(c) You agree to accept the notice or payment in lieu of notice and/or severance pay referenced in paragraph 13(b) herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.

The plaintiff mounted a number of attacks on the clause in a motion seeking summary judgment, including an allegation that the clause failed to properly reference the Employment Standards Act and that clause provided a “floor but not a ceiling” for the amount of notice While these two arguments failed, the third was accepted by the Court.

The successful argument focussed on the fact that the termination clause provided for pay in lieu of notice of termination, but did not provide for continuation of benefits. Although the employer did, in fact, continue the plaintiff`s benefits during the notice period, the plaintiff argued that the lack of any reference statutorily required benefits was a breach of the Employment Standards Act, and the clause was therefore unenforceable. Wording in the agreement which sought to explicitly limit the plaintiff`s entitlement in the event of dismissal to that provided for in the contract was a crucial factor in the Court`s finding that the clause was unenforceable. As a result, the common law requirement of reasonable notice applied.

In its decision, the Court provided a review of the law with respect to the enforceability of termination clauses:

• In Canada, it has been established common law since at least 1936 that employment contracts for an indefinite period require the employer, absent express contractual language to the contrary, to give reasonable notice of an intention to terminate the contract if the dismissal is without cause.
• The common law principle of termination only on reasonable notice is a presumption, rebuttable if the contract of employment clearly specifies some other period of notice, whether expressly or implied.
• If applicable employment standards legislation sets minimum requirements, but also provides that contracts specifying greater “benefits” to an employee prevail over the minimum standards in the legislation, the common law presumption of reasonable notice is such a “benefit”, (if the period of notice required by the presumption is greater than that required by the legislation), and the minimum notice periods set out in such legislation therefore do not by themselves operate to displace the presumption at common law of reasonable notice.
• While that presumption may be displaced by sufficiently clear contract language specifying notice periods shorter than that required by common law, applicable employment standards legislation prohibiting any attempt to contract out of the minimum standards required by the legislation renders any contract provisions providing for lesser benefits than the minimum standards “null and void”.
• If a clause in an employment contract is rendered “null and void” by operation of employment standards legislation, then it is null and void for all purposes, and cannot be used as evidence of the parties’ intention to displace the common law presumption of reasonable notice. “If the intention of the parties is to make an unlawful contract, no lawful contractual term can be derived from their intention.”
• Consistent with such goals, if an employment contract fails to comply with the minimum requirements of employment standards legislation, the appropriate sanction or disposition is a finding that the presumption of reasonable notice has not been rebutted, (i.e., rather than an order that an employer minimally comply with the Act). This gives employers an incentive to ensure that all aspects of employment contracts comply with the legislation, (to avoid the potentially longer notice periods required by common law), and in consequence more employees are likely to receive the benefit of the minimum notice requirements.

I still advise employers to use employment contracts with termination clauses. However, I remind them not to be “too greedy”, as a clause that goes too far and breaches the statutory requirements will be unenforceable, resulting in a court treating the situation as if the clause did not exist in the first place.

Stuart E. Rudner
Partner
Rudner MacDonald LLP