Article by Martin Smith & Cassandra Khatchikian (Student-At-Work)
Some employers do not see the value in executing employment contracts. However, without termination clauses which limit an employee's entitlements upon termination without cause, damages awarded can be significant. Long gone is the traditional common law "rule of thumb" of one month's notice per year of service.1 The notice period can be dramatically extended by the court when weighing various factors.
Many employers choose to include termination clauses in their employment contracts for non-unionized employees. Termination clauses vary but generally, they include provisions for reserving the right to provide pay in lieu of notice of termination to an employee.
Employers are able to establish a pre-determined contractual notice period in the event the employee is dismissed. This is to rebut the presumption of the common law notice period when an employee is terminated without cause and perhaps limit their entitlement to the statutory minimums.
The statutory minimums are set out in section 57 of the Employment Standards Act as follows:
57. The notice of termination under section 54 shall be given,
- at least one week before the termination, if the employee's period of employment is less than one year;
- at least two weeks before the termination, if the employee's period of employment is one year or more and fewer than three years;
- at least three weeks before the termination, if the employee's period of employment is three years or more and fewer than four years;
- at least four weeks before the termination, if the employee's period of employment is four years or more and fewer than five years;
- at least five weeks before the termination, if the employee's period of employment is five years or more and fewer than six years;
- at least six weeks before the termination, if the employee's period of employment is six years or more and fewer than seven years;
- at least seven weeks before the termination, if the employee's period of employment is seven years or more and fewer than eight years; or
- at least eight weeks before the termination, if the employee's period of employment is eight years or more. 2000, c. 41, s. 57.2
An employer may have acted appropriately in drafting employment contracts. It may have consulted a lawyer, negotiated with employees, had a lawyer draft the contracts, provided it to employees for review, suggested that they obtain independent legal advice, and had it executed before employees started work. However, it is possible that since the execution of these contracts, the laws changed.
Historically, contracts that included language that matched the above-noted statutory minimums or exceeded them were enforceable. However, several recent Ontario court decisions have brought to light the importance of including precise wording in these termination clauses that go beyond setting out the length of the contractual notice period.
The provisions of the Employment Standards Act contain additional statutory entitlements, including a provision that provides for minimum benefits provided to the employee during the notice period:
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,
- 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
- 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. 2000, c. 41, s. 61 (1); 2001, c. 9, Sched. I, s. 1 (14).3
Recent cases have been decided on the basis that failure to include the continuation of benefits as provided for in section 60 of the Employment Standards Act, can render the entire termination clause unenforceable, even when the benefits were provided. Omitting "benefits" in the termination clause opens the possibility for the employer to provide less than what is contractually required by the Employment Standards Act.
Employers may be surprised to learn that their efforts to abide with the Employment Standards Act by continuing benefits through the notice period are fruitless if it is not explicitly reflected in the employment contract. In other words, without the reference to benefits in the contract, the termination clause can be rendered unenforceable even in situations where the employer was providing the benefits they were obliged to under the Employment Standards Act.
Consequently, employers need to turn their minds to what is explicitly stated in the employment contract. If the continuation of benefits during the notice period is not articulated in the termination clause, then the clause could be declared void by the court. A void termination clause could mean that the employer is obliged to abide by the common law notice period, which is typically much greater, especially for long term employees.
The importance of precise wording in termination clauses was highlighted in the Ontario Court of Appeal decisions Wright v. Young and Rubicam Group of Companies and Stevens v Sifton Properties Ltd.
In Wright, the plaintiff was a former employee who had been dismissed without cause.4 He challenged the termination clause in his employment contract for failing to include benefits.5 His action was commenced despite the fact that the employer actually continued to pay his benefits throughout the notice period, fulfilling their obligations under the Employment Standards Act.6
The provision in the termination clause read:
...This payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.
The court determined that the provision only provided for the plaintiff's base salary and did not include benefits. It was, therefore, determined that the termination clause did not meet the minimum requirements set out by the Employment Standards Act.7 Consequently, the clause was unenforceable and Mr. Wright was entitled to the notice period set out by the principles at common law.8 The court determined that in Mr. Wright's case, a reasonable common law notice period was 12 months.
The situation in Stevens was similar to that of Wright. In Stevens, an action for wrongful dismissal was commenced.9 The plaintiff's employment contract included a termination clause that reserved the right for the employer to provide for payment in lieu of a notice period.10
In a motion for summary judgment, the claimant argued that the termination clause in her employment contract violated the Employment Standards Act because it did not address the continuation of benefits during the notice period.11 Similar to Wright, the action was commenced despite her employer voluntarily continuing the benefits through the notice period.12 The plaintiff argued that as a result of the termination clause being unenforceable, she was entitled to reasonable notice at common law.13
The provision in question stated:
13. With respect to termination of employment, the following terms and conditions will apply:
- The Corporation may terminate your employment for what it considers to be just cause without notice or payment in lieu of notice;
- The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the Employment Standards Act of Ontario.
- You agree to accept the notice or payment in lieu of notice and/or severance pay referenced in paragraph 13(b) herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.
The Court took the same position to that in Wright. The judge agreed with the claimant that the disputed provision in the employment contract did not meet the minimum employment standards set out by the Employment Standards Act and was therefore, contrary to law. Consequently, the common law notice period took effect.
Looking at even more recent Ontario decisions, in Miller v A.B.M. Canada Inc., an accountant was terminated without cause.14 Similar to Stevens and Wright, the termination provision in the employment contract provided for a specific pre-determined notice period.15 However, the contract failed to include reference to any pension contributions or car allowance during that notice period.16 The judge followed suit that this omission violated the minimum standards set out by the Employment Standards Act and the clause was, therefore, unenforceable.17
As can be seen by Stevens, Wright and even more recently, Miller, the courts have been consistent in declaring termination provisions unenforceable if they fail to meet the minimum standards set out by the Employment Standards Act for failing to expressly include benefits or other entitlements.
The enforceability of the termination provision is reliant upon the specific wording used in the contract to ensure the employer is held accountable for providing the employee with what he is entitled upon termination. This is especially pertinent given that these recent decisions have demonstrated that it is irrelevant if the employer voluntarily continued benefits through the notice period if they are not explicitly stated in the termination provision.
Recommended steps going forward:
First, in drafting new employment contracts, it is extremely important that employers use explicit language referencing benefits, and continuation of entitlements during the notice period.
Second, it is also important for employers to be proactive with existing employment contracts with their current employees. An existing employment contract that lacks specific words or phrases may be amended in order to meet current employment jurisprudence.
In order to implement an amended contract, there must usually be fresh consideration flowing from the employer to the employee.
This concept is thoroughly illustrated in Techform Products where it was explained that fresh consideration in the employment contract context requires that something new must flow from the employer to the employee, "beyond that to which the employee is entitled under the original contract".18
1. In Minott v. O'Shanter Development Company Ltd, 1999 CanLII 3686 (available on CanLII), the Court of Appeal rejected the rule of thumb approach for overemphasizing the "length of service" factor set out by Bardal v. Globe and Mail Ltd,  OWN 253, 24 DLR (2d) 140.
2. Employment Standards Act, 2000, SO 2000, c 41, s 57.
3. Ibid, s 61.
4. 2011 ONSC 4720, (available on CanLII) [Wright].
9. 2012 ONSC 5508 (available on CanLII) [Sifton].
14. 2012 ONSC 5549 (available on CanLII) [Miller].
18. (2001) 56 OR (3d) 1, 2001 CanLII 8604 (ON CA).
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.