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Is It Possible to Predict How Courts Will Treat Your Termination Clause? The Early Aftermath of Nemeth v Hatch
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Is It Possible to Predict How Courts Will Treat Your Termination Clause? The Early Aftermath of Nemeth v Hatch

By December 12, 2019 December 24th, 2019 No Comments

In Nemeth v Hatch Ltd, 2018 ONCA 7, the Ontario Court of Appeal added a lot of uncertainty to the already confusing task of interpreting termination clauses in employment agreements. Employees have both common law and statutory entitlements to notice of termination without cause. Many employers try to limit their employees’ entitlements to the minimum amounts of notice required by the Employment Standards Act (ESA), or to another amount that is less than the reasonable amount of notice at common law. To do so successfully, the employer must clearly specify some other period of notice that meets the minimum entitlements prescribed under the ESA.

Before Nemeth, courts generally required very clear and specific language to rebut common law entitlements. However, in Nemeth, the Court of Appeal held that “the need for clarity does not mean that the parties must use a specific phrase or particular formula, or state literally that ‘the parties have agreed to limit an employee’s common law rights on termination.’ It suffices that the parties’ intention to displace an employee’s common law notice rights can be readily gleaned from the language agreed to by the parties.” Based on these principles, it held that the following clause was enforceable and successfully rebutted common law entitlements: 

The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

Although this makes it easier for employers to limit employees’ entitlements, it also makes it much more difficult to determine which clauses successfully rebut common law notice. Predicting any individual judges’ decision on the matter is arguably more challenging than ever, as evidenced by the cases that have been decided since Nemeth.

Of eight cases that cite Nemeth, four involved termination clauses that were found to be enforceable and to rebut common law entitlements, three involved clauses that were void for violating the ESA, and one involved a clause that was enforceable but failed to rebut common law entitlements. Further evidencing the confusion, one of the cases in which the termination clause successfully rebutted common law entitlements was decided on an appeal that reversed the trial judge’s finding that the clause was void.

The confusion that the decision has created is especially clear when considering two termination clauses that were treated differently from both each other and the clause in Nemeth:

  • In Doucette v Espial Group Inc, 2019 CanLII 45629 (ON SCSM) the Small Claims Court held that the following clause was unenforceable: “Your employment may be terminated for cause at any time without notice or payment in lieu thereof.  Your employment may be terminated for any other reason by the company upon delivery of one week’s notice per year of Espial service or payment in lieu thereof, or such other amount as is required under the Employment Standards Act, whichever is greater.”
  • In Movati Athletic (Group) Inc v Bergeron, 2018 ONSC 7258 the Divisional Court upheld the motion judge’s decision, finding that the following termination clause was valid but did not successfully rebut common law entitlements because language limiting entitlements to statutory minimums elsewhere in the contract was more specific: “Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time.”

Although the three clauses are different, those differences are subtle. That such small discrepancies can result in entirely different decisions shows that Nemeth has created a world of uncertainty when it comes to termination clauses. Until additional case law brings more clarity, employers who seek to limit their employees’ entitlements upon termination are better off sticking to the previous, stricter rules when drafting such clauses – clearly and explicitly ousting common law entitlements while ensuring compliance with the ESA. Meanwhile, employees are left guessing about what their rights are.

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