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What are the Consequences of a Termination Clause that Breaches the ESA?
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What are the Consequences of a Termination Clause that Breaches the ESA?

By November 25, 2019 March 4th, 2022 No Comments

Most employment contracts contain a termination clause that defines an employee’s rights to noticeseverance, or termination pay in lieu of notice. Termination clauses are almost always drafted in favor of the employer by limiting notice periods to statutory minimums contained in the Employment Standards Act (“ESA”). In the absence of such a clause, or where the clause is present yet unenforceable, the employee is owed more generous common law notice, which is approximately one month for every year of service. Accordingly, the validity of a termination clause can have significant financial ramifications on both the employer and the employee. 

Enforceability of termination clauses can become a convoluted issue, mostly because making such a determination is an exercise in contractual interpretation. For brevity’s sake, a majority of unenforceable termination clauses suffer from a common pathology: they violate the minimum statutory requirements laid out in the ESA. Section 5(1) of the ESA states: 

5 (1) Subject to subsection (2), no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.  2000, c. 41, s. 5 (1).

Therefore, where a clause attempts to contract out of the ESA, the clause – and by extension, the entire agreement – will be deemed unenforceable, and common law notice periods will apply. This is the case even where the clause could potentially allow the employer to violate minimum ESA entitlements at a future date, years after the employee’s hiring. Some infringing clauses will inconspicuously exempt the employer from their statutory obligation to pay benefits, commissions, vacation, and pension contributions during the notice period. If any of these payment types are excluded, whether directly or indirectly, the clause is void. Indirect exclusions could appear where the clause speaks exclusively to “base pay” during the notice period, and where the employment contract specifically distinguishes between different kinds of pay. 

Courts have repeatedly held that a termination clause will rebut the presumption of common law reasonable notice only if its wording is clear. Further, given the imbalance of power found in the employer-employee relationship, Courts interpret ambiguity in favour of the employee. As the Court of Appeal of Ontario stated in a landmark decision on this issue: “Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee.” Therefore, where one interpretation of the clause violates the ESA, courts will probably render the clause unenforceable, which would leave the common law presumption of reasonable notice unperturbed.

Groves v. UTS Consultants Inc., 2019 ONSC 5605 (CanLii) is a recent Ontario case that speaks to the foregoing principles. The issue before the Court was the enforceability of a termination provision in the employment agreement between Mr. Groves and UTS and whether the provision displaced Mr. Groves’ common law reasonable notice entitlements.

Wayne Groves founded UTS in 1992 and served as its President until his termination in 2017. In 2012, the company was bought out through a share purchase agreement. Pursuant to the takeover, Mr. Groves artificially resigned, and then entered into an employment agreement with the purchasers which contained the following clause:

This agreement may be terminated in the following manner in the specified circumstances:

  1. c) By the Company at any time without cause provided that the Company provides you with notice in writing or pay in lieu of notice …with a guaranteed minimum notice or pay in lieu of notice equal to three (3) months base salary; provided that the maximum notice period or pay in lieu of notice that you will receive shall in no circumstances exceed twelve (12) months… For greater certainty, you agree that for purposes of calculating any entitlement which you may have arising from the termination, without cause, of your employment with the Company, any prior service with the Company is excluded and you hereby waive and release any prior service entitlements.

The Court found that the clause violated section 9(1) of the ESA, which states:  

If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

The Court held that it was unlawful for UTS to waive Mr. Groves’ pre-takeover employment service when calculating what he was owed under the ESA. Accordingly, the clause was deemed unenforceable, and Mr. Groves’ common law notice entitlement was not displaced. After weighing what are known as the Bardal factors (character of the employment, the length of service, age, and the availability of alternative employment), the Judge determined that Mr. Groves was owed 24 months of notice.

The Court also found the clause to violate the ESA because it stated that pay in lieu of notice would be calculated using “base salary.” Since “base salary” excluded variable pay, pension contributions, or vacation pay, which all constitute forms of wages that must be maintained during the notice period, it breached sections 1(1), 57, 60, and 61 of the ESA

Takeaways

Courts are bullish on protecting employees’ minimum statutory rights.  While employers may be tempted to craft clever termination clauses that limit entitlement, such an endeavor should be performed with the utmost caution, especially when the clause encroaches on legislative standards. Further, in a takeover situation, an employer cannot preclude the former owner/employee’s prior years of service in determining the employee’s entitlements.

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