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Is Your Termination Clause Enforceable?
Employment Law

Is Your Termination Clause Enforceable?

At common law, employers are free to terminate employees without cause at any time. However, employers must provide employees with reasonable notice or pay in lieu of notice. Reasonable notice is advance notice intended to provide an employee with the opportunity to find alternate employment. One of the main reasons employers draft employment agreements is to limit the amount of reasonable notice owed to an employee upon their termination without cause. This is often the raison d’etre for these contracts, from a legal standpoint. Employers do this by including termination clauses in employment contracts that rebut the presumption of common law notice, often by limiting the notice period to the statutory minimum provided for under the Employment Standards Act, 2000 (the “Act”). For example, a termination clause may read as follows:

The Employer may terminate the Employee’s employment at any other time, without cause, upon providing the Employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation.

These clauses are often heavily scrutinized when an employee is terminated because, if the clause is invalid or suffers from some form of a legal pathology, the employee is owed their common law notice entitlements, which are often far greater than the statutory minimum. Common law notice periods depend on a judge’s consideration of various factors called the Bardal factors, which were articulated in a famous case called Bardal v Globe and Mail Ltd. The Bardal factors include an employee’s age, job responsibilities, and level of pay.

The Most Common Pathology Suffered by Termination Clauses

One of the most common ways a clause is deemed to be unenforceable is if it attempts to contract out of the employee’s statutory rights to other benefits and payments upon termination, including severance pay and benefit continuation during the notice period. Section 5(1) of the Act makes it unlawful for employers to contract out of or waive an employment standard, and any clauses that attempt to do so are void.

Over the last two decades, several cases have proceeded to trial in Ontario where the only triable issue was the enforceability of the termination clause, and, specifically, whether there was a pathology in the clause that related to anther employment standard. Two of these cases decided by the Court of Appeal for Ontario encapsulate the nature of the ongoing considerations.

The first major case is called Roden v. Toronto Humane Society[1], where the court ruled that, though the clause in question did not address the employer’s obligations in respect of benefit plan contributions during the notice period, the clause did not attempt to limit the employer’s obligations. In other words, silence regarding an employment standard entitlement did not amount to contracting out of that standard. Accordingly, the court held that the clause was enforceable and that the employee was only entitled to the minimum statutory notice.

The second major case is Wood v. Fred Deeley Imports Ltd.,[2] where the Court of Appeal circumscribed the rule it set in Roden. The wording of the termination clause in this case was slightly more malignant. The relevant portion of the clause stated:

If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph.

In view of the ambiguous nature of the word “payments,” in tandem with the restrictive nature of the clause, the Court found that the clause’s language restricted the employer’s right to benefit continuation during the notice period and violated section 5 of the Act. In its reasoning, the Court provided an often cited maxim: “Where the language of a termination clause is unclear or can be interpreted in more than one way, the court should adopt the interpretation most favourable to the employee: Ceccol.”[3] While this was seen as a big win for employees, it has aged relatively well since then in that regard. The case does not stand for the fact that any ambiguous clause will be unenforceable. Rather, where a clause can be read as limiting the employee’s right to an employment standard, that interpretation should be chosen and the clause should be found to be void.

What this all means is that a court will be reluctant to strike down or invalidate a termination clause simply for being silent on other standards provided for by the Act. For instance, some clauses are drafted with a keen eye to statutory notice requirements, but without consideration for severance. Silence regarding the employee’s right to severance pay is not enough to find that the employer is offending the Act. The language of the contract needs to be exclusionary to other standards, implicitly or explicitly, as in Wood.

What this also means is that simplicity is often the best practice for legal counsel or human resource professionals who are drafting termination clauses that intend to rebut the presumption of common law notice. Cumbersome and sloppy language may create windows of opportunity for arguing invalidity when inevitably, these clauses face reasonable levels of scrutiny.

[1] 2005 CanLII 33578 (ON CA)

[2] 2017 ONCA 158 (CanLII)

[3] Wood at para 40

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