Canada: Guidance From The Ontario Court Of Appeal On The Enforceability Of Termination Provisions

Last Updated: March 10 2017
Article by Caitlin Russell and Pamela J. Hinman

In our overview of significant cases and trends in 2016, we reported on a series of decisions signalling a move away from the overly technical interpretation of termination clauses in employment contracts, and a return to a more employer-friendly, common sense approach focusing on the intentions of the parties.

In early 2017, the good news continued for employers in Cook v. Hatch, a decision of the Ontario Superior Court of Justice, where the Court upheld a less than perfect termination provision, again applying an approach that focused on the intentions of the parties. A few weeks later, however, the decision of the Ontario Court of Appeal in Wood v. Fred Deeley Imports indicated that there are limits to this approach. The Court of Appeal's decision has provided guidance on the issue of when a less than perfect termination provision will be upheld, and when it will not.

Cook v. Hatch, 2017 ONSC 47

In Cook v. Hatch the Ontario Superior Court of Justice considered the enforceability of the following termination provision in an employment contract:

The Company's policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

In arguing that the termination provision was unenforceable, counsel for the employee advanced two common arguments in support of striking out the termination provision:

  1. First, the employee argued that the use of the phrase "applicable labour legislation" was ambiguous as it failed to specifically identify the Ontario Employment Standards Act, 2000 (the ESA) as the legislation applying to the termination; and
  2. Second, by failing to specifically reference the employee's entitlements to severance pay and benefit continuance under the ESA, the clause attempted to contract out of the minimum statutory entitlements and was therefore void.

Adopting the same common sense approach followed in Oudin v. Centre Francophone de Toronto, 2016 ONCA 514 (of which leave to appeal to the Supreme Court of Canada was recently denied), the Court rejected both arguments and upheld the enforceability of the termination provision on the basis that the intention of the parties was clear.

With respect to the first argument, the Court held that it is not necessary to refer to specific legislation in order to correctly and validly limit termination entitlements to the applicable legislation. In particular, the Court rejected the employee's argument that the use of the word "labour" in the provision was ambiguous on the basis that the term refers to unionized environments. The Court found that, as there no evidence that the employee had ever belonged to a union, the clause was clearly a reference to the ESA and was not ambiguous. In this respect, the Court criticized the employee's argument as an attempt to seek out a technical "ambiguity" in order to set aside the clear common intention of the parties.

With respect to the second argument, the Court held that it is a "peculiar idea" that a contract that is silent as to statutory requirements can be said to show an intention to contract out of what the legislation directs and re-affirmed that "silence" with respect to severance pay or benefit continuation is not fatal to the enforcement of a termination provision.

Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158

We previously reported on the Ontario Superior Court of Justice's decision in Wood v. Fred Deeley Imports Ltd., 2016 ONSC 1412, wherein the Court held that the following termination clause was enforceable:

[The Company] is entitled to terminate your employment at any time without cause by providing you with 2 weeks' notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph, except for any amounts which may be due and remaining unpaid at the time of termination of your employment. The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

On appeal, similar to the employee's second argument in Cook as noted above, the employee in Wood again argued that the termination clause contravened the ESA because it failed to satisfy the employer's obligation to continue benefits during the notice period. In addition, the employee argued the provision failed to satisfy the employer's obligation to provide severance pay.

The Court of Appeal began its analysis by noting that the importance of employment in a person's life and the vulnerability of employees on termination give rise to a number of considerations relevant to the interpretation and enforceability of a termination clause, as follows:

  • Employees usually have less bargaining power than employers when employment agreements are made;
  • Many employees are likely unfamiliar with the employment standards in the ESA;
  • The ESA is remedial legislation, intended to protect the interests of employees;
  • Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA;
  • A termination clause will rebut the presumption of reasonable notice only if its wording is clear; and
  • Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee.

In a lengthy analysis, the Court proceeded to apply these considerations to its interpretation of the termination clause before it. The Court of Appeal found that while the termination clause gave the employee more than her statutory notice entitlements, the plain wording of the clause excluded the employer's obligation to contribute to the employee's benefit plans. In so finding, the Court relied on the absence of any reference to benefits and the "all inclusive" language of the clause providing that "the Company shall not be obliged to make any payments to you other than those provided for in this paragraph" and "[t]he payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000."

The employer argued that the requirement to continue benefit plan contributions could be read into the clause: the word "pay" was broad enough to include both base salary and benefits. The Court of Appeal rejected this argument, noting that at best the language was ambiguous and, as such, the language should be interpreted in favour of the employee. 

The employer also argued that what it paid the employee on termination was relevant to the enforceability of the termination clause. The Court of Appeal dismissed this argument as well. Among other reasons, the Court noted that if employers could always remedy illegal termination clauses by making payments to employees on termination of employment, employers would have little incentive to draft legal and enforceable termination clauses at the beginning of the employment relationship.

While it did not address its earlier decision in Oudin, the Court of Appeal distinguished its earlier decision in Roden v Toronto Humane Society (2005), 202 OAC 351, wherein it upheld a termination clause even though the clause did not refer to the employer's obligation to continue benefits during the notice period. The Court distinguished the clause in Roden on the basis that it dealt only with the obligation to give notice of termination, and it did not contain "all inclusive" language which plainly excluded benefits.

Despite having found that the termination clause was unenforceable on the basis that it excluded the employer's obligation to continue benefits during the notice period, the Court proceeded to consider the argument that the clause contravened the ESA because it did not satisfy the employer's statutory obligations to pay severance pay. The Court found that because the clause was drafted to provide that the notice entitlement (which provided for more than the minimum standard for notice) was inclusive of the employee's notice and severance entitlements, the clause could be interpreted in a way that would permit the employer to give the employee working notice only, and not severance. In the Court's view, it would not be clear to the employee at the time she signed her employment agreement whether or not she would receive her statutory severance pay if her employment ended. Accordingly, the termination clause was also unenforceable on the basis that it did not clearly satisfy the employer's obligation to provide severance pay.

Commentary

The Court of Appeal's decision appears to confirm that a clause will be held unenforceable for contracting out of the ESA where that clause is both silent on a minimum standard and includes "all inclusive" language that limits entitlements on termination to those specifically provided for in the clause. This is not inconsistent with earlier decisions upholding less than perfect termination provisions, such as in Cook, Roden, and Oudin; in those cases, the termination provisions were silent on the issue of benefit continuation but did not include such "all inclusive" language purporting to limit the termination entitlements to only those addressed in the clauses.

This decision is yet another reminder of the importance of a properly drafted termination provision. Employers remain well-advised to have their employment contracts reviewed by an expert familiar with this evolving area of law.

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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