A “termination clause” is a type of contractual term which specifies entitlements owed to a worker at the end of their employment. They come in many different shapes and sizes. Whatever the construction, the usual motivation for employers in drafting termination clauses is to control costs and provide for certainty at the end of the employment relationship.
In this article, we review two recent decisions concerning termination clauses and discuss the lessons they provide for drafting effective employment agreements.
Ousting the common law and the need for a contractual ‘ceiling’
Most disputes concerning termination clauses focus on whether the language used falls afoul of employment standards legislation. However, the question of whether a termination clause is legal, or illegal, is only one part of the analysis. To be effective, a termination clause must also opt out of implied common law entitlements.
Employees, by default, are assumed to be entitled to reasonable notice of their dismissal (which usually ranges from a low of a few weeks to a high of 24 months). Employers can opt out of the reasonable notice regime by substituting an alternate formula or entitlement via a written employment contract.
It is vital when drafting termination clauses, however, to ensure that whatever formula is used actually ousts the presumption of reasonable notice. For instance, termination clauses that merely indicate workers will be provided with entitlements “pursuant to” or “in accordance with” employment standards legislation are typically insufficient: see Movati Athletic (Group) Inc. v. Bergeron, 2018 ONSC 7258. What is missing from such clauses are words to the effect of “and that is all you get.” In other words, a ceiling.
The need for a clear ceiling in termination clauses recently came up at the Alberta Court of Appeal in the case of Bryant v. Parkland School Division, 2022 ABCA 220. Bryant centered on the following termination clause:
This contract may be terminated by the Employee by giving to the Board thirty (30) days or more prior written notice, and by the Board upon giving the Employee sixty (60) days or more written notice. [emphasis added]
When reviewing this clause, Alberta Court of Appeal zeroed in on the words “or more” and considered what meaning they should be accorded. In answer, the Court concluded:
…it is clear the clause does not unambiguously limit the employees’ right to common law reasonable notice. The clause does not clearly fix the employees’ notice entitlement. It does not impose an upper limit on the amount of notice an employee is entitled to receive. It does not suggest that 60 days is the maximum notice to which an employee is entitled. To the contrary, it explicitly provides that an employee can be entitled to more notice. The inclusion of the words “or more” recognizes a longer notice period as a realistic possibility.
By not including a ceiling, or upper limit, Parkland School District’s termination clause failed to achieve its most basic purpose: ousting the common law in favour of an alternate severance formula. Instead, it merely provided a floor for the minimum amount of reasonable notice which must be issued.
Think twice before putting fixed penalties in your contracts
Moving closer to home, the Superior Court of Justice for Ontario issued a decision in early August concerning fixed penalties. These are portions of an employment contract that specify an automatic outcome in response to certain types of misconduct.
At issue in the case of Henderson v. Slavkin et al., 2022 ONSC 2964, were confidential information and conflict of interest clauses. Each ended with a warning to the worker that any violation would provide “cause” for dismissal and result in immediate termination without notice or compensation of any kind.
Justice Brown took issue with these fixed penalties. In so doing, she noted that for an employee to be dismissed absent notice or compensation, the Employment Standards Act, 2000 requires “wilful misconduct, disobedience or wilful neglect of duty”. Put another way, the worker must have been acting “bad on purpose“.
The fixed penalties in Henderson, by contrast, disregarded the statutory requirement to examine the intentionality of a worker’s conduct. Such an approach is inherently problematic, for as Justice Brown noted: “One can conceive of a situation where confidential information may have been inadvertently disclosed in a situation where it is not wilful and/or where it is a trivial breach.”
The entire employment contract in Henderson was set aside due to its flawed fixed penalties. Ironically, that included an otherwise enforceable termination clause found elsewhere in the parties’ contract.
Termination clauses must be drafted with care and reviewed on a regular basis. The focus of the courts when reviewing contracts is not static. Where once most attention was paid to language concerning without cause terminations, today a broader analysis is applied. Consideration is given to each and every contractual provision which touches upon cession of employment. From this, a few lessons may be drawn. First: keep it simple. Shorter employment contracts are typically preferable. Not only are they easier to read and understand, but they also provide less opportunities for error. Second: keep on topic. The employer’s chief mistake in Henderson was straying into issues of discipline and discharge when otherwise discussing confidential information and conflicts of interest. Finally: square the circle. The purpose of most termination clauses is to set an alternate formula to common law reasonable notice. If an employer nonetheless forgets to cap, or otherwise limit, their severance formula, such an objective will remain unfulfilled.
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