Canada: Drafting An Effective Termination Clause - Basic Pitfalls

In the recent Ontario decision Cook v. Hatch, 2017 ONSC 47, Lederer J. wrote that "if the parties to a contract seek to limit the notice requirements in the event of a termination but understand that they are bound by the minimum requirements of the applicable legislation, such a provision is not difficult to draft."

Nevertheless, drafting effective termination clauses that limit an employee's entitlement on termination to no more than employment standards minimums (or some other amount) is a continuing challenge for employers, and poorly drafted termination clauses often return to haunt employers years later when an employee alleges in a wrongful dismissal action that the employee is entitled to reasonable notice at common law.

In theory, drafting a termination clause limiting notice or pay in lieu of notice on termination should be straightforward. The Supreme Court of Canada has held that a termination clause which seeks to limit liability on termination to no more than employment standards minimums will be valid where it referentially incorporates, expressly or impliedly, the minimum requirements of employment standards legislation. But despite the ostensible simplicity, termination clauses continue to present difficulties for employers.

Under employment standards legislation, employees and employers cannot contract out of the minimum statutory guarantees of notice or compensation in lieu of notice on termination without cause. Any termination provision that provides for less than the employment standards minimum is void, and the employer will be liable to provide the employee with reasonable notice or pay in lieu of reasonable notice at common law, an amount often far in excess of the contractual severance amount to which the employer believed its liability was limited.

Difficulty arises where a termination clause purports to provide an employee with minimum employment standards entitlements, but could also be interpreted as providing an employee with less than employment standards minimums. Recognizing the typical power imbalance between employers and employees with respect to negotiating the terms of an employment agreement, courts typically interpret contractual provisions strictly against the employer. As a result, genuine ambiguities are resolved in favour of the employee - including, in many cases, by finding a termination clause invalid and assessing an employee's entitlement to termination damages at common law. As a result, termination clauses must be crystal clear about an employee's entitlement to avoid potential liability.

Employers with operations in Ontario should take particular note that the Employment Standards Act, 2000 requires, in addition to minimum notice, that employers continue benefits for the notice period, and, in certain circumstances, may require additional severance pay. For a termination clause in Ontario to be valid, it must contemplate all of these statutory requirements (for a cautionary example of what happens where the termination clause does not contemplate the additional requirements, see Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158). 

A more subtle pitfall may arise in jurisdictions, including Alberta and Ontario, where employment standards legislation guarantees employees "at least" the minimum amount of notice or pay in lieu prescribed by statute. Employees in those jurisdictions may still be entitled to common law reasonable notice where a termination clause confirms its compliance with employment standards minimums, but does not clearly evince an intention to limit an employee's maximum entitlement on termination without cause to only employment standards minimums.

Such was the case in the recent Alberta Court of Appeal decision of Holm v. AGAT Laboratories Ltd., 2018 ABCA 23. In that decision, the employer had what appeared on first blush to be a fulsome termination clause, which provided notice or pay in lieu of notice "in accordance with the provincial legislation for the province of employment." Three additional paragraphs emphasized that, apart from the foregoing notice or pay in lieu, an employee would "not be entitled to any further compensation or notice arising out of the termination" of employment.

Despite the lengths to which the employer went to confirm that the employee accepted contractual limits on notice, the Court concluded the clause did not oust the presumption that the employee is entitled on termination without cause to common law notice.

The Court of Appeal upheld the finding of the chambers judge that "at best, the wording is not clear." In particular, the Court found that, while the wording of the termination clause confirmed its compliance with employment standards requirements, the stipulation that severance pay "will be in accordance with" employment standards legislation did not clearly oust the presumption of the employee's entitlement to common law reasonable notice, as employment standards legislation establishes a floor and not a ceiling.

To limit an employee's entitlement on termination without cause to employment standards minimums, the termination clause should clearly refer to the provincial employment standards statute and explicitly state that the employee is entitled on termination to only the amounts required by said statute. It also doesn't hurt to add, for greater certainty, that the employee agrees that, except for the amount of notice or compensation in lieu of notice required as a minimum by employment standards legislation, the employee shall have no further entitlement on termination of employment for any reason, including without limitation any reasonable notice or pay in lieu thereof at common law.

Similarly, if employers seek to limit an employee's entitlement on termination to an amount greater than the employment standards minimums but less than common law reasonable notice, the clause should be carefully worded to make it clear that the employee is entitled to no more than the notice or pay in lieu of notice contemplated by the termination clause.

The bottom line is that, although seemingly straightforward, the devil is in the details of termination clauses. Ensuring adequate legal advice with respect to the drafting of a termination clause prior to executing an employment agreement can insulate against unpleasant surprises in the event of wrongful dismissal litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.