Canada: Don't Severance Yourself Just Yet

Last Updated: January 20 2017
Article by Stuart Rudner

As my recent First Reference Talks blog post discusses, it appears that the saga of judicial interpretation and consideration of termination clauses will continue, with predictably unpredictable results.

The Default: Reasonable Notice of Dismissal Without Cause

As regular readers will know, the common law provides that in the event of dismissal without cause, employees are entitled to “reasonable notice”. Every case is to be assessed based upon its own particular factors, but the “core” factors are the employee’s length of service, age, position/character of employment, and the availability of similar employment. If the employee was induced to leave or decline other, secure employment, that inducement will also be taken into account. While there are no hard and fast rules with respect to how an individual’s entitlement will be calculated, that entitlement can be substantial, often in the range of a month of notice for every year of service, and sometimes greater.

You Can Contract out of the Common Law Obligation, but...

Our courts have made it clear, however, that parties can contract out of this common law requirement. Courts will enforce termination clauses that limit an individual’s entitlement to notice of dismissal, but the onus will be on the employer to show that the clause should be enforced.

The Contract Must be Enforceable (the Employee must receive Consideration)...

To begin with, an employer seeking to rely upon a termination clause in a contract of employment should ensure that the employee received consideration for their agreement to be bound by the contract. The fairly common practice of having an employee sign a written contract on their first day of employment, or even later, is a surefire way to render the contract worthless. If the individual has arrived for their first day of work, then it stands to reason that they had some sort of agreement in place, presumably a verbal one based upon the matters that were discussed (typically, position, compensation, and other formatters), as well as a number of obligations implied by law. If the employer wants to replace several agreement with the written one they will have to ensure that the employee receives some consideration (something of value) in exchange for that agreement.

The Clause Must Clearly Displace the Common Law, and...

Even if the contract is enforceable, courts will closely scrutinize the wording of any termination clause. To begin with, it must be clear and unambiguous, and there should be no doubt that the individual is giving up any entitlements beyond those set out in the contract. Ambiguous statements along the lines of “you will be entitled to notice of dismissal in accordance with employment standards legislation” will not suffice, as such wording does not clearly explain that the individual will not have additional entitlements beyond the employment standards legislation. As I often advise employers, if you want to be confident in the clause, make it as clear as possible, in plain English. You do not want the employee to be able to credibly state that they did not understand the consequence of agreeing.

The Clause Cannot Breach Employment Standards Legislation...

The other key factor is whether the termination clause breaches applicable employment standards legislation by providing for less than the individual would be entitled to under that legislation. For example, a termination clause that provides for three days of notice of dismissal will not be enforceable, as every jurisdiction requires more notice than that (at least after the probationary period). In recent years, several cases have rejected termination clauses where they did not provide for continuation of employment related benefits, as most employment standards legislation (such as that in Ontario) requires that all benefits continue during the statutory notice period.

Or Even Potentially Breach Employment Standards Legislation

An ongoing debate exists regarding whether a termination clause should be struck out because it could, potentially, breach employment standards legislation. For example, what if the clause provides for 30 days of notice? That would comply with most legislation, at least in the first few years. However, as the individual gains seniority, at some point they will be entitled to more than 30 days. Most of the case law has held that such a clause will not be enforceable. That seems reasonable, as it is clear that if the contract continues, at some point the clause will not comply with legislation.

However, what about the scenario that is unlikely to occur, ever? A good example in Ontario would be Severance Pay. In Ontario, the applicable legislation provides for notice of dismissal or Termination Pay and also for Severance Pay in certain circumstances. Specifically, Severance Pay will be required if the individual is employed for more than five years and the company payroll exceeds $2.5 million. Realistically, some organizations will never have a payroll anywhere near that level. So is it really necessary that their termination clauses provide for the possibility of Severance Pay? According to the latest court decision assessing termination clause, the answer is yes.

The latest word comes from Justice Pattillo of the Divisional Court of Ontario Superior Court of Justice, a case we recently discussed in our posts in the Latest Chapter in Employment Law, and the "Case of the Tempting Bagel". The decision itself was an appeal from the Small Claims Court decision in Garreton v Complete Innovations Inc. In that case, the relevant clause essentially paralleled the Employment Standards Act, 2000, providing as follows

 

Otherwise Complete Innovations Inc. may at any time terminate this agreement by providing the Employee with (1) one week notice if their duration of continuous employment with the Company is more than 3 months but less than 1 year. (2) weeks prior written notice of intention to terminate if the Employee duration of continuous employment with the Company is more than 1 year but less than (3) years. If the duration of continuous employment with the Company is more than 3 years each additional year will entitle the Employee to (1) one additional week of notice to a maximum of 8 weeks. ... Complete Innovations Inc. shall maintain on your behalf your employee benefits for a period of not less than the period required by applicable statute.

Ms. Garreton was dismissed for cause. The trial Judge found that while there was misconduct, it did not amount to just cause for dismissal. The issue became how much notice she was entitled to and whether the clause above was enforceable. As the Court wrote:

[23] While the termination clause is therefore void and unenforceable for a CI employee of more than 5 years, is it so for Garreton who was an employee of less than 3 years?

[24] Garreton relies on Wright v. The Young and Rubicam Group of Companies (Wunderman)¸ 2011 ONSC 4720 (CanLII). In that case, Low J. found that a notice provision in an employment contract was void for potentially violating the Act.

[25] In that case, as here, the contract provided for the proper notice under the Act given the employee's years of employment but was contrary to the severance provisions in ss.64 and 65.

...

[27] With the greatest of respect, I disagree with Price J.'s conclusion. In my view, the employment contract must be considered at the time it is executed. If the termination provision is not onside with notice provisions and severance provisions (if applicable) of the Act at the outset, then it is void and unenforceable. Potential violation in the future is sufficient. As Low J. states, "It is not that difficult to draft a clause that complies completely with the Act, no matter the circumstance."

[28] Accordingly, for the above reasons, I find the termination provisions of the Agreement respecting notice to be void and unenforceable. (emphasis added)

While it may seem silly that a small shop with one employee should include provisions for Severance Pay in a contract, the reality is that as the Court wrote, it is not hard to draft a clause that is always compliant. In addition to providing for the possibility of Severance Pay, contracts can and should include a saving provision which states that in the event that the provisions provide for less than applicable legislation, the legislation will prevail and the employee will be entitled to everything required by it.

It is for these reasons that we highly recommend any employers drafting employment contracts to seek our counsel to ensure they are compliant. Employees are also well advised contact us to fully understand their rights prior to signing off on something that contains one of these clauses.

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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