A termination clause can save an employer a lot of money
An employer can significantly reduce the amount of termination pay that it would otherwise owe an employee by including a termination clause in an employment contract.
Accordingly, most employers require that all new hires sign an employment contract with a termination clause.
Often the employer tries to limit the employee’s entitlement on termination to the minimum notice of termination required under Ontario’s Employment Standards Act (“ESA”).
Employee lawyers routinely attack termination clauses
Employee lawyers often claim that these ESA termination clauses are not enforceable and there have been a myriad of court cases dealing with this issue.
Three termination clauses that have been litigated
Here are three termination clauses that were litigated and an indication as to whether or not the judge concluded the clause was legally enforceable:
- Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000, as amended from time to time. (Not enforceable)
- In the event Hampton wishes to terminate your employment without cause they may do so by paying you the minimum amounts required pursuant to the ESA in force at the time of termination; no further compensation shall or will be provided. You agree by signing this agreement that such amounts are the total compensation you will receive if terminated without cause. (Not enforceable)
- If you are terminated by IBM other than for cause, IBM will provide you with notice or a separation payment in lieu of notice of termination equal to the greater of (a) one month of your current annual base salary or (b) one week of your current annual base salary, for each completed six months worked from your IBM service reference date to a maximum of 12 months of your annual base salary. This payment includes any and all termination notice pay, and severance payments you may be entitled to under provincial employment standards legislation and Common Law. Any separation payment will be subject to applicable statutory deductions. In addition, you will be entitled to benefit continuation for the minimum notice period under applicable provincial employment standard legislation. In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (“statutory entitlements”) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment. (Originally not enforceable but decision reversed on appeal)
As you can see, although it is theoretically possible to limit an employee’s rights on termination to ESA minimums, it is difficult to do so in practice because trial judges are reluctant to enforce them.
Lessons to be learned
- Every employment contract should have a termination clause.
- If an employer wants to limit an employee’s rights on termination to ESA minimums then the termination clause should be drafted extremely carefully.
- Because trial judges have not adopted a uniform approach to interpreting ESA termination clauses and new decisions on this issue are being released regularly, every organization should have an employment lawyer review its termination clause regularly.
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- Specific penalty clause renders an ESA termination clause unenforceable - September 13, 2022
