Canada: A Tale Of The Perils Of Termination Provisions... With A Twist

Since the Supreme Court of Canada's endorsement in Machtinger, employers and their counsel have endeavoured to design termination provisions that can specify an employee's termination entitlements while standing up to judicial scrutiny.

Despite how straightforward the Supreme Court made it seem, drafting termination provisions that are acceptable has proven exceptionally challenging. In fact, when faced with a wrongful dismissal claim, many unwary employers have quickly found themselves on unsure footing.

In Carpenter v Brains II, Canada Inc., the Ontario Superior Court has provided yet another cautionary tale. However, this time, the tale comes with a bit of a twist ending.

In this case, Ms. Carpenter was employed by NexInnovations Inc. (Nex) for almost 11 years. Unfortunately, Nex encountered some severe financial difficulties that eventually led it to file for protection under the Companies' Creditors Arrangement Act (CCAA). During the CCAA proceedings, a portion of Nex's business relating to its Services Division was purchased by Brains II, Canada Inc. (Brains II).

After the purchase, Ms. Carpenter remained employed by Brains II at the same location, earning the same salary, and doing the same job until she was dismissed nearly 7 years later. For her dismissal, Ms. Carpenter received 8 weeks of working notice and then an additional 17.9 weeks of statutory severance pay.

Evidently displeased, Ms. Carpenter brought a claim seeking wrongful dismissal damages.Brains II responded that, as evidenced by Ms. Carpenter's employment agreement, she had contracted away any common law entitlement to reasonable notice.

The Termination Clause

In addition to accrued salary, vacation and holiday pay, the termination provision of Ms. Carpenter's employment agreement sought to limit her termination entitlements to:

Ms. Carpenter argued that the termination clause was unenforceable since, on its face, it appeared to violate Ontario's Employment Standards Act, 2000 (ESA).

Relying on the Divisional Court's judgment in Miller v A.B.M. Canada Inc., Justice Stinson agreed with Ms. Carpenter. Although Justice Stinson noted that Brains II was technically compliant with its statutory obligations (since it gave Ms. Carpenter eight weeks of working notice, during which her benefits were presumably continued) the key issue when scrutinizing termination clauses is not whether an employer actually complies with the statute, but whether the language of the termination provision complies.

Looking at Ms. Carpenter's employment agreement, Justice Stinson found that Ms. Carpenter's salary and benefits were each discussed separately. As such, the parties must have intended that the word "salary" would not include benefits. Unfortunately for Brains II, continuation of employer contributions for benefits is an express requirement under section 61(1)(b) of the ESA. Consequently, without any express mention of benefit continuation, the termination clause amounted to an attempt to contract out of the ESA and was therefore null and void. For that reason, Justice Stinson held that Ms. Carpenter was, in fact, entitled to common law reasonable notice.

The Appropriate Notice Period

Nevertheless, this case does offer some uplifting news for employers.

Having found that Ms. Carpenter was entitled to reasonable notice, Justice Stinson turned his analysis towards the appropriate amount of reasonable notice. Ms. Carpenter asserted that the length of her service should be measured from 1996 when she joined Nex. Alternatively, Brains II submitted that the length of service should be calculated from 2007, when it purchased the assets of Nex.

Generally speaking, when a purchaser acquires a business as a "going concern", there is an implied term in the contracts of employment between it and those employees continuing in the service of the business that the employees will be given credit for their years of past service. Nonetheless, for common law reasonable notice purposes, this implied term can be rebutted by a purchaser who expressly advises the continuing employees that it does not intend to give them credit for past service.

As was highlighted by Justice Stinson, this was not a "simple asset sale" or a "mere change of ownership". Evidence revealed that the transition of Ms. Carpenter's employment involved a number of steps, which culminated in Brains II offering her employment on the basis that it would not be honouring any prior severance entitlements, save for purposes of calculating ESA rights. Remarkably, although Justice Stinson found the termination provision to be null and void, it appears to have been used as evidence of the fact that the parties did not intend for Brains II to honour Ms. Carpenter's prior service for common law purposes.

In addition, Justice Stinson found that, although Ms. Carpenter continued to perform many of the same functions in the same location, she was clearly aware that the circumstances of her employment had changed.

Consequently, Ms. Carpenter was only credited with uninterrupted service for 6.5 years and not from the date of her original employment with Nex. Given Ms. Carpenter's age and the character of her employment, Justice Stinson found that the proper period of notice was 8 months.

Employer Takeaways

1. Regularly review employment agreements. Employment law is constantly developing. In order to keep up with these (sometimes subtle) variations, employers should be regularly reviewing their employment documents. As cases like this one show, an employer who fails to periodically review its employment agreements may find them unenforceable when faced with a court that is all too willing to strike down imperfect language. Unfortunately, even making sure an employee receives all of his or her statutory entitlements will not save an otherwise deficient termination clause.
2. In asset purchases, purchasers are not required to recognize service for non-statutory purposes. For statutory purposes, an asset purchaser usually cannot simply re-employ the vendor's employees and ignore their service history. At the federal and provincial levels, statutory "successor employer" provisions ensure that the sale of a business does not interrupt the employment of employees. However, an asset purchaser is under no obligation to recognize prior service for common law notice purposes. If an asset purchaser wants to exclude recognition of an employee's prior service, the purchaser should speak to a professional about how this would be best handled.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.