Hiring new employees and ending employment relationships are often part of the activity in M&A deals (whether deals are on the rise or the decline). A well-drafted termination clause can provide clarity on the cost of job losses, whenever they occur. A recent change to the law makes employment contracts worth revisiting.
In Bowes v. Goss Power Products, 2012 ONCA 425 ("Bowes"), the Ontario Court of Appeal considered a case where the employer ended the relationship after three years, and offered salary continuance in accordance with the six-month notice period in the contract. The employee found a new job within two weeks of termination. Relying on the common law principle that a dismissed employee must mitigate his or her damages, the employer argued that the employee's salary continuance should end upon his finding new employment (provided, of course, that he had received his minimum statutory entitlement to three weeks' termination pay).
The Court disagreed; by entering into a fixed notice period, the parties had "opted out" of the common law approach that would normally require an employee to mitigate his or her damages. The Court noted that the employer could have specifically included a mitigation provision in the employment contract, but did not do so.
The significant points for employers include:
- Employment contracts remain important. We continue to recommend employment contracts to employers. They provide a certain level of clarity with respect to rights and obligations that govern the employment relationship, including what occurs when the relationship is terminated (whether for just cause, resignation or otherwise). Contracts can include a variety of terms, such as a fixed-term, probationary period, compensation and benefits, and confidentiality clauses.
- Termination clauses remain important. An employment contract could include a termination clause that permits an employer to end salary continuance where a dismissed employee finds new employment, provided the minimums for statutory notice of termination, or pay in lieu thereof, and statutory severance pay (where applicable) had been satisfied.
- Review employment contracts. The Court's decision in Bowes is a reminder that employment contracts should be periodically reviewed and revised to reflect changes in employment law. Employment contracts with notice periods beyond the statutory minimum, whether a fixed amount or a formula, should be revisited.
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