Is the termination clause in my employment agreement enforceable?

One of the issues we commonly encounter, when speaking with both individuals and employers, is whether the language in their employment contract addressing termination is enforceable.

For employees, where a termination provision is unenforceable, it can mean they have an entitlement to increased severance. Whereas for employers, if the clause does not hold, it can create uncertainty and result in unintended liability.

The default rules for severance in Ontario

In Ontario, there is a default framework referred to as “common law reasonable notice”, which governs entitlements in the event of a dismissal from work.

Its intended purpose is to provide individuals with reasonable notice of their future dismissal, or pay in lieu thereof. The courts in Ontario determine what is ‘reasonable’ by considering a number of factors including (but not limited to): a person’s age, their tenure with the employer, the nature of their job and the availability of comparable employment.

Common law reasonable notice tends to be quite generous to individuals. The flip side of this coin, however, is that for employers, it can prove costly. As such, to provide certainty for both employees and employers about what amounts will be owed should the employment relationship end, it is prudent to agree terms in writing.

In order to be enforceable, any written agreement of this nature must:

• comply in all circumstances with the minimum legislated employment standards; and

• clearly displace the presumption that the common law applies.

In the remainder of this article, we consider some of the circumstances that can result in a termination clause being found unenforceable.

1.    Unambiguously rebutting the common law

To be enforceable at law, a termination clause in an employment agreement must contain language to clearly displace the default presumption that common law rights apply between the parties upon any dismissal from employment. Where this issue most frequently arises is in situations where employers attempt to adopt minimum legislated employment standards (such as with respect to severance) by mere reference to statute. Think of the situation where an employment agreement specifies rights upon dismissal from employment will be as “per applicable employment legislation”.

In a recent decision on point, the Ontario Divisional Court determined that the following termination clause was inoperative to displace the default presumption of common law notice:

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.

The court acknowledged that the above clause could be read to mean that the parties were limiting termination entitlements to the minimum amounts required under the Employment Standards Act (“ESA”). It could, however, also be interpreted to reflect merely a statement of the obvious: that the employer will comply with minimum provincial standards without being a clear limit on common law entitlements.

In this case, the individual employee, who would have been entitled to 2 weeks’ pay and benefits under the ESA, instead she received 3 months’ pay and benefits.

2.    The unlawful termination clause

If a termination clause fails to comply in all circumstances with the minimum requirements of the ESA (or other applicable employment standards legislation) it will be automatically void and unenforceable to displace the default presumption of common law notice: Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158.

A termination clause may be found unlawful for any number of reasons, including:

1. Failing to provide for benefits continuation for the duration of the statutory notice period;

2. Limiting pay in lieu of notice to base salary (while the ESA calculates this entitlement on the broader concept of wages);

3. Creating circumstances where an employer has discretion to provide statutory termination pay or statutory severance pay where both apply;

4. Making mandatory statutory entitlements contingent on the execution of a release;

5. Limiting regular recurring bonus payments during the statutory notice period; and

6. Including, within one global termination provision, language that purports to allow an employer to dismiss without any notice for “cause” rather than the statutory standard of “wilful misconduct”.

It is also worth noting that the courts have found that even a hypothetical breach is sufficient to render a termination clause unenforceable in all circumstances.

3.    Failing to provide fresh consideration (i.e. new value)

Sometimes, an employer may decide to update its employment agreements for existing employees to include a termination clause. While this can successfully be done, in order for an employer to be able to rely on the new termination clause, it must ensure that the employee either receives:

1. Reasonable advance notice of the proposed change to the terms of employment; and/or

2. Fresh consideration for agreeing to the proposed changes (i.e. the employee must receive something new of value such as a lump sum payment or a salary increase).  Without this requirement, the contract will likely be found unenforceable.

For an example where an employment agreement was held unenforceable for lack of consideration, see: Kohler Canada Co. v. Porter, 2002 CanLII 49614 (ON SC).

4.    Enforcing a clause with which you have failed to comply

Employers in Ontario may struggle to enforce a termination clause against an individual (even if its language displaces the common law), where the employer itself has failed to comply with its obligations pursuant to the same clause: Dwyer v. Advanis Inc., 2009 CanLII 23869 (ON SC).

For example, if an employer dismissed a worker and then, while acknowledging its obligation to maintain benefits coverage, simply refuses to do so, the worker may successfully argue that the employer should be denied the protection of a clause with which it refused to comply.

As such, it is important for employers to make sure they are diligent in meeting their contractual commitments at the time of termination.

5.    The contract no longer fits the job

Another issue that can prevent a contractual termination clause from being enforceable is where the contract fails to provide for obsolescence: MacGregor v. National Home Services, 2012 ONSC 2042.

For example, if an employee starts work for a company in a junior role (signing a written agreement in the process) but over a period of a decade rises through the ranks, changing roles many times, and is then dismissed, the original contract may no longer apply.

The Ontario courts have found that a contract will not be upheld unless it actually reflects the reality of the employment relationship. As such, it is necessary to periodically review employment agreements and to consider whether a new contract should be put in place upon any major change to the relationship between the parties.

Takeaways for Ontario Employees and Employers

If you are an employee in Ontario that is dismissed from your employment meet with an employment lawyer to have your severance package reviewed before signing to accept it. It is possible that, for any number of reasons (including those set out in this article) that you may have a basis to seek additional severance.

As an Ontario employer, it is best practice institute and regularly review your employment agreements. By taking these proactive steps, with the assistance of an experienced employment lawyer, you can both provide certainty and limit the risk of unintended liability down the road.  

This article was originally published on November 21, 2019 on First Reference Talks.

Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.