Canada: Yet another reminder for employers to proceed with caution when drafting termination provisions

Last Updated: September 24 2014
Article by Elisa Scali

It is safe to say that most every employer understands that a termination provision in an employment contract must provide for no less than minimum employment standards.  With this understanding, employers and their counsel draft termination provisions with the full intention of complying with these minimum standards.  However, it seems that despite these good intentions, the courts have sent a very clear message that a termination provision that falls short and does not expressly include all of the minimum requirements of employment standards will be null and void in its entirety.

The Ontario courts have delivered this message now for the third time in the recent decision in Miller v. A.B.M. Canada Inc.  [2014] ONSC 4062, having previously conveyed this cautionary tale in the case of Wright v. Young and Rubicam Group of Companies (Wunderman), [2011] O.S..J. No. 4960 (S.C.J.) and then again in Stevens v. Sifton Properties Ltd., [2012] O.J. No. 6244 (S.C.J.).  For a previous article discussing the Siftoncase,  click here.

Mr. Miller had been employed with A.B.M. Canada Inc. as the Director of Finance and Business Process Improvement earning $135,000 per annum, plus pension contributions up to 6% of his base salary and a monthly car allowance in the amount of $680.00.  After only 17 months with A.B.M, Mr. Miller's employment was terminated without cause.  Prior to commencing his employment with A.B.M., Mr. Miller signed an employment agreement (drafted by A.B.M.'s President using precedents he had obtained from a former employer and its legal department) which contained the following termination provision: 

"Regular employees may be terminated at any time without cause upon being given the minimum period of notice prescribed by applicable legislation, or being paid salary in lieu of such notice or as may otherwise be required by applicable legislation."

On termination, A.B.M. advised Mr. Miller that he would be provided with 2 weeks' of salary in lieu of notice in the amount of $5,532.21, which was inclusive of car allowance. Ultimately, Mr. Miller received payment equal to 2 weeks' base salary plus vacation but no payment was made in respect of the car allowance or pension. 

Based on Mr. Miller's length of service with A.B.M., his minimum statutory entitlement pursuant to the Employment Standards Act 2000 (the "ESA") was 2 weeks' notice.  However, A.B.M. opted to provide payment in lieu of ESA notice.  Pursuant to sections  61(1)(a) and (b)of the ESA, such payment ought to have included payment for the car allowance and pension contributions during the notice period.

At trial, Mr. Miller took the position that he was entitled to common law reasonable notice on the basis that the termination provision in his employment agreement was not enforceable.  Mr. Miller suggested that the termination provision was not enforceable  because the pay in lieu of notice period only provided for the payment of salary  and failed to include any payment in respect of the car allowance and pension contributions, which was contrary to the ESA.

As noted above, the courts have previously examined similar termination provisions in theSifton  and Wunderman  cases.  In the Sifton case, a similar situation occurred where although the termination provision specified minimum statutory notice, it only provided for payment of salary in lieu of notice and made no reference to payment of benefits for the  notice period.  The court found the entire termination provision to be null and void because it failed to provide any entitlement to benefits for the notice period contrary to the minimum requirements of the ESA.    Similarly in Wunderman, the court was asked to examine a termination provision which provided for payment of salary in lieu of notice but did not expressly provide for the continuation of any benefits for the minimum statutory notice period.  In this case, the employer had continued the benefits post termination but the court held because the contract terms violated the ESA requirements, the entire termination provision was null and void. 

In the Miller case, the court held that the reference to "salary" in lieu of notice was not intended to include amounts for the pension contributions and car allowance which was contrary to minimum employment standards.   Accordingly, the court held that the termination provision was in breach of the ESA by failing to expressly provide for the payment of these benefits during the period of notice. 

What is interesting and troubling for employers is the fact that the court did not comment on the language in the termination provision "or as may otherwise be required by applicable legislation".    Employers will often include similar "saving" language in a termination provision for the purpose of  expressing the general intention of the parties that the employee would receive the minimum entitlements pursuant to employment standards.   It appears that in this case, the language was not sufficient to save A.B.M.  Ultimately, the entire termination provision was held to be null and void and the court assessed Mr. Miller's reasonable notice entitlement to be 3 months.  Mr. Miller was awarded a total of $32,425.39 in damages, an amount substantially greater than his ESA entitlements.

What does this mean for employers?

  • Proceed with caution when drafting termination provisions. This decision is yet another reminder to employers that extreme care must be taken in drafting termination provision to ensure that they are clear, concise and include all of the minimum requirements under employment standards.  If there is any doubt that the termination provision fully complies with the minimum requirements of employment standards, the termination provision will not stand up to the court's scrutiny and may not be enforceable.
  • It is all or nothing.  If any term of a termination provision is contrary to minimum employment standards, then the entire termination provision will be rendered null and void, even if the other terms are lawful.  If the entire termination provision is struck down, the employee will be entitled to common law reasonable notice which almost always far exceeds minimum statutory notice.
  • Have your employment contracts reviewed regularly with assistance of counsel. Using old precedents can be risky as it proved to be in the Miller case.  Employers should update their employment contracts and termination provisions regularly and most importantly, after any significant change in the law.

61(1) An employer may terminate the employment of an employee without notice or with less notice than is required under section 57 or 58 if the employer,

(a) pays to the employee termination pay in a lump sum equal to the amount the employee would have been entitled to receive under section 60 had notice been given in accordance with that section; and

(b) continues to make whatever benefit plan contributions would be required to be made in order to maintain the benefits to which the employee would have been entitled had he or she continued to be employed during the period of notice that he or she would otherwise have been entitled to receive.

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.

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