Canada: Much Ado About Benefits: The Enforceability Of Termination Clauses

Ontario's Court of Appeal recently released its decision in Wood v. Fred Deeley Imports Ltd., which focused on the enforceability of a termination clause in the employee's employment contract.  The decision seems to bring much-needed clarity to an issue that appeared to be growing increasingly uncertain: Is a contractual termination clause unenforceable in Ontario for failing to explicitly reference benefit continuation during the period of statutory notice?

During her employment, Julia Wood was entitled to a base salary, an incentive bonus and employer contributions to both group health and dental insurance and a registered retirement savings plan.  At the outset of her employment, she also signed a written employment agreement that contained the following termination provisions:

[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. [Court's emphasis.]

Due to a buyout of her employer, Fred Deeley Imports ("Deeley"), Wood and her fellow co-workers were released from their employment.  She had accumulated 8 years and 4 months of service at that time.  Upon her termination, Wood was provided 13 weeks' working notice.  During that time, Deeley continued payment of her salary and maintained her group insurance benefits.  At the end of the 13-week working notice period, Deeley paid Wood further amounts, including her statutory severance pay, pro-rated incentive bonus, accrued vacation and an amount for outplacement services.  Deeley also offered to pay Wood an additional amount in exchange for a full and final release.  In total, the amounts paid and offered exceeded Wood's entitlements under the Employment Standards Act, 2000 ("ESA"). 

Nonetheless, Wood sued for wrongful dismissal.  She claimed that the termination clause, which restricted her entitlements upon termination, was unenforceable because it excluded Deeley's obligation under the ESA to continue payment of her benefit plan premiums throughout her statutory notice period.

On summary judgment, the Court agreed with the employer that the reference to "payment of notice" was broad enough to include the ESA requirement to continue to provide benefits during statutory notice.  The Court of Appeal, however, disagreed.  Instead, it found that the termination provision was unenforceable, and Wood was entitled to her full termination entitlements under the common law.

The underlying law is well-established.  Employers and employees are allowed to contract out of common law reasonable notice entitlements, but doing so requires clear and unambiguous language in the employment contract.  The new bargain must also at least satisfy the requirements of the ESA, otherwise the term will be invalid and unenforceable.

In Wood, the Court refused to "read in" the obligation to continue contributions to Wood's benefit plans, which would have permitted the clause to comply with ESA requirements.  The wording of the agreement only referenced payment of notice, which was interpreted more restrictively as including only wages.  Therefore, the termination clause did not implicitly provide that benefits would be continued during the statutory notice period.  The fact that Deeley continued Wood's benefits did not, apparently, change that reality.  In essence, the Court found that the wording created a waiver of Wood's benefit entitlements during the ESA notice period, contrary to minimum employment standards.

In reaching this conclusion, the Court considered its decision in Roden v. Toronto Humane Society (2005) in which it upheld a termination clause that was silent with respect to benefit contributions during the statutory notice period – but did not explicitly exclude that obligation.  The contract wording in Wood, on the other hand, was silent in respect of benefits and contained additional language restricting termination entitlements to only the payments set out in the agreement which were intended to be inclusive of her full entitlements under the ESA.

Additionally, the termination clause contained a further deficiency in respect of ESA severance pay. As drafted, the wording permitted Deeley to pay Wood less severance pay than required under the ESA.

Although not cited in Wood, the Court of Appeal's decision in Oudin v. Centre Francophone de Toronto (leave to appeal to the Supreme Court of Canada recently refused) should be read alongside this decision.  The termination language in Oudin, similar to Roden, was silent with respect to the continuation of benefits during the ESA notice period, but did not contain an explicit exclusion.  The provision therefore did not include a waiver of benefits, and the Court upheld the termination clause.  The approach in Oudin is consistent with the analysis in Wood, and emphasizes that the Court's role is to seek out the objective intention of the parties, and that the lack of specificity does not necessarily detract from the clause's legality.

The Court of Appeal's decision in Wood reaffirms that employers and employees must be careful when drafting termination provisions to not explicitly waive termination entitlements required by the ESA.  The decision, however, does not suggest that courts should seek out a most implausible interpretation that would render a term unenforceable, in order to allow an employee to escape the limitations initially agreed upon.  Termination clauses must still be interpreted in a manner that discloses the intention of the parties, and the bargain agreed upon must be clear and at least satisfy the minimum requirements of the ESA.

Specifically, failure to include reference to "benefits" will only invalidate a termination clause where there is a true waiver of benefits during the ESA notice period.  In other words, unless the termination clause clearly states that the listed entitlements are the only entitlements to be received ("that's it, that's all"), failure to specify benefit continuation will not necessarily invalidate a termination clause.  When reviewing termination clauses, courts are still required to determine which entitlements were intended by the parties. 

Moving forward, employers and employees will need to be especially careful to state their intention that termination entitlements at least satisfy ESA requirements.  Employers should also continue to include properly drafted saving provisions to ensure that technical deficiencies do not overpower the parties' intentions.  The Wood decision illustrates the importance of regularly reviewing and updating the terms of existing employment agreements with a lawyer to ensure up-to-date compliance with statutory requirements.   

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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