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Courts Will Not Make Your Illegal Termination Clause Valid for You

Courts Will Not Make Your Illegal Termination Clause Valid for You

By October 11, 2019March 4th, 2022No Comments

In order for a termination clause in an employment contract to be considered valid, it must adhere to the minimum standards under the Ontario Employment Standards Act (“ESA”). Many employers include termination clauses to reflect their intention to limit entitlements owed to a dismissed employee to those required by the ESA. In order for courts to consider the termination provisions in an employment contract valid, the clause must be drafted in a manner that clearly reflects the parties’ intentions to abide by the ESA’s statutory minimums. This includes addressing issues such as continued payment of employee benefits, severance, and providing reasonable notice of termination or payment in lieu of notice.

The Ontario Court of Appeal decision in North v. Metaswitch Networks Corporation is an example of a termination provision being interpreted in favour of an employee. In North, the Court concluded that an otherwise enforceable termination provision in an employment contract was invalid on the basis that it failed to fully address the concept of “wages” under the ESA. The offending provision in the contract stated that “[i]n the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.” This entire provision was deemed invalid because payments “based on your Base Salary” failed to contemplate commissions owed to the employee, and thus contravened the ESA.

The Court reinforced its decision by interpreting a severability clause in the contract to require the entire termination clause to be voided. A severability clause allows for the removal of an illegal or offending portion of a contract where the contract would be legally valid had the offending portion not been included. Here, the severability clause stated that “[i]f any part of the Agreement is found to be illegal or otherwise unenforceable by any court of competent jurisdiction, that part shall be severed from this Agreement and the rest of the Agreement’s provisions shall remain in full force and effect.” The employer argued that only the offending portion of the termination clause should be severed. The Court relied on Wood v. Fred Deeley Imports Ltd. in rejecting that argument. The rule set out in Wood was that where a termination clause contracts out of one employment standard, the entire clause is to be found void. The Court held that according to the rule the entire termination clause was what a court would find to be illegal, and the severability clause required removal of the entire illegal portion – that
is, the entire clause.

Employers need to be extremely cautious in drafting termination provisions to ensure that statutory minimums under the ESA are met. As shown in North, the Court is steadfast in guaranteeing employee rights under the ESA. Invalid termination provisions will be rejected in their entirety and severability clauses will be interpreted to reflect this – requiring removal of the entire clause, rather than just the portion that renders it invalid.

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