Employers often seek to limit their termination liability with termination clauses. If a termination clause does not meet the minimum requirements of the Employment Standards Act, 2000 ("ESA"), then the termination clause will not be valid and an employee will be entitled to reasonable notice at common law, thus increasing an employer's liability (see, for example, Machtinger v. HOJ Industries [1992] 1 SCR 986 (SCC)). Recent decisions over the last few years from the Ontario courts have provided employers with a cautionary warning regarding how termination clauses in employment contracts should be drafted.
The ESA requires employers to continue benefits during the ESA notice period when terminating employment without cause, whether or not working notice is provided. Where an employer fails to expressly state in a contract that an employee's benefits will continue throughout the ESA notice period, the termination clause may be unenforceable.
In Wright v The Young and Rubicam Group of Companies (2011, ONSC) ("Wright"), the Court found that the termination clause in the employment contract was unenforceable. In this case, the contract included a specific termination clause that provided a formula for payments to be made to the plaintiff in lieu of notice. Depending on years of service, the plaintiff would be entitled to the payment of a certain number of weeks of base salary. The contract stated that the termination payment was inclusive of all other compensation entitlements. On termination, the employer also continued benefits as required by the ESA. The Court held that the wording of the termination provisions were intended to be inclusive of "all... entitlements to compensation". Benefits were held to be part of compensation. The Court held that the termination provision in the contract referred to payment of base salary only and meant that there would be no other compensation provided to the plaintiff, including benefits. The fact that the employer continued the benefits for the ESA period did not change the meaning of the termination provisions.
In Stevens v Sifton Properties Limited (2012, ONSC) ("Stevens"), the termination clause stated that payment in lieu of notice in accordance with the ESA would be provided where the employer terminates the relationship without cause. The termination clause stipulated that such payment satisfied all future claims against the employer. The Court determined that the clause, in addressing benefits implicitly, did so in a way that "purports to take those [rights of benefits] away upon mere payment of the required pay in lieu of notice." The Court held that this was contrary to the ESA, as the language denied benefit continuation during the ESA notice period and the termination clause was therefore void.
The Court provided further guidance to employers in its most recent decision in Howard v Benson Group. (2015, ONSC) ("Howard") In this case, the Court grappled with the wording of a termination clause that stated that the employer could terminate the employment relationship at any time and that "any amounts paid" would be in accordance with the ESA. The plaintiff argued that the wording "amounts paid" was not clearly explained in the contract, and given its ambiguity, it was unclear as to whether or not "amounts paid" referred to base salary alone or was inclusive of benefits. The Court agreed with the plaintiff and held that the word "paid" was not inclusive of benefits, as it is not a defined term under the ESA. The continuation of benefits under the ESA was held to be a separate requirement from the payment of notice. The Court, echoing other cases, noted that a termination provision that might be ambiguous will be interpreted against the employer and in favour of the employee.
(See also our recent communiqué regarding the decision in Luney v Day & Ross Inc. (2015, ONSC) where the Court addressed a termination clause in the context of the Canada Labour Code.)
The Wright, Stevens, and Howard cases confirm that employers must be cautious when drafting termination clauses to limit liability upon termination. Any ambiguity will be interpreted against the employer, which will result in the clause not being enforceable and reasonable notice at common law will apply. Moreover, these recent cases make it clear that any termination clause should expressly state that benefits will be continued for the ESA notice period. We recommend that all employers review any employment contract templates to ensure that the termination clauses comply with the minimum standards of notice, severance pay, and benefit continuation required by the ESA.
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