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Ontario Court of Appeal offers Clarity on Termination Clauses

On February 23, 2017, the Ontario Court of Appeal released its first major employment law decision of the year. In Wood v. Fred Deeley Imports Ltd., the Court was asked, among other things, to determine whether a termination clause contained in Ms. Wood’s employment contract was enforceable. In determining that the termination clause was unenforceable, the Court provided some much needed guidance on the issue of the enforceability of termination clauses.

Overview

In Ontario, an employer can terminate any employee who is hired for an indefinite duration, at any time, for any reason, provided that the reason is not in relation to one of the prohibited grounds contained in the Human Rights Code. This is referred to as a termination without cause. There is a rebuttable presumption at common law that if an employee’s employment is terminated without cause, that they are entitled to reasonable notice.

The presumption of entitlement to reasonable notice can be rebutted if the employer and the employee agree to a different notice period. This type of agreement can be very beneficial to employers as it can limit their obligations to employees who are dismissed without cause. This agreement however, will only be enforceable if it complies with the minimum employment standards contained in the Employment Standards Act, 2000. (“ESA”)

If the termination provision does not provide for the minimum required by the ESA, it will be unenforceable and the employee will be entitled to reasonable notice of termination in accordance with common law principles.

The Decision

Ms. Wood was employed by Fred Deely Imports Ltd. (“Deely”) for a little over 8 years. Her employment contract was for an indefinite period. In April of 2015, Deely was sold and all employees, including Ms. Wood were told that their employment would terminate on August 4, 2015.

Ms. Wood had signed a written contract of employment shortly after beginning her employment with Deely. One of the terms of the employment contract was a termination clause which read as follows:

[The Company] is entitled to terminate your employment at any time without cause by providing you with 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminated your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph…. The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

Deely paid Ms. Wood her salary as well as her benefits for the 13 weeks between the end of April and August 4, 2015. Ms. Wood was provided with an additional lump sum payment equal to eight weeks’ pay. Deely offered a further lump sum payment in exchange for Ms. Wood signing a Release. Ms. Wood refused the additional lump sum and commenced a claim for wrongful dismissal. Her claim was dismissed on a motion for summary judgment and she appealed that decision.

Ms. Wood argued that since the termination clause excluded the requirement to contribute to the employee’s benefits plan during the notice period and that it did not satisfy the statutory obligation to pay severance pay, that it was void and unenforceable.

The Court of Appeal went through the relevant statutory requirements in relation to an employee who is terminated without cause. While each case will be decided on its particular facts, some of the statutory requirements in the case of a termination without cause are:

• To provide the minimum notice of termination as set out in the ESA or to provide a lump sum payment equal to that amount;
• To continue contributions to a benefit plan for the duration of the notice period. This is applicable even where a lump sum payment is being made;
• In certain cases, it may be necessary to provide severance pay in accordance with the ESA;
• The employer cannot contract out of these standards and to do so will render the termination clause void;
• The employer can provide the employee with a greater benefit than any employment standard.

The Court of Appeal found that the termination clause failed to provide for the continuation of benefits and was therefore unenforceable. While the Court indicated that this was sufficient to find that Ms. Wood was entitled to reasonable notice in accordance with the common law, the Court went on to find that the termination clause did not clearly satisfy the obligation to pay severance pay. As the termination clause did not provide all of the minimum standards in the ESA, it was void and unenforceable.

This case is important for other reasons. First of all, the contract was signed the day after Ms. Wood commenced her employment. She attempted to argue that the entire contract was unenforceable. She argued that since she had begun her employment, no new consideration had been offered for the signing of the contract.

The Court of Appeal rejected this argument on the grounds that prior to commencing her employment, Ms. Wood was provided with a job description by email. The contract which was signed did not materially change the description that was previously provided. As the signing of the contract after the commencement of employment was done for administrative convenience and was not imposing a material change, the Court found that fresh consideration was not required.

The Court further discussed whether contributing to a benefit plan after termination would affect the enforceability of the termination clause. The Court ruled that the actions of the employer after termination cannot save an otherwise unenforceable termination clause. In this case, Deely provided Ms. Wood with more than they were required to provide under the ESA by way of payment and notice, and it continued her benefits for more than the required period. The Court held that the employer’s conduct on termination or during the notice period cannot remedy an otherwise unenforceable termination clause.

What Does it Mean for Employers and Employees

For employers, the message is that you must carefully draft your employment contracts especially when it comes to termination clauses. If the termination clause falls short of even one of the requirements of the ESA, it will be void and unenforceable. You will not be able to save the clause by providing a termination package which provides for or exceeds the statutory minimum requirements. If you require assistance drafting your employment contracts, contact one of our experienced employment lawyers for advice.

For employees, it is important that you fully read and understand the terms which are contained in any employment contract that you sign. Your employment contract may contain wording which can limit your entitlements in the event that you are terminated on a without cause basis. Even if what your employer is offering you exceeds the minimum requirements of the ESA, you may be entitled to a greater amount of reasonable notice if the termination clause is unenforceable. If you are terminated, and your employer is relying on a termination clause to limit your payment, be sure to have one of our experienced employment lawyers review both the termination package and your employment contract to ensure that you are not leaving money on the table.

Blog post written by Associate Lawyer Brent Harasym.

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