Recent Ontario court decisions have not been kind to employers seeking to limit employees' termination entitlements through use of contractual language. Seemingly any imperfection in drafting, no matter how slight, has been relied on to hold the clauses invalid.
In March, for example, the Ontario Court of Appeal confirmed that where a termination clause provides less than any one of the minimum entitlements on termination called for in the Employment Standards Act, 2000 ("ESA"), it is unenforceable and the employee is entitled to full common law reasonable notice (read our update on that decision, Wood v Deeley Imports, here).
A recent Court of Appeal decision confirmed that this is true even when there is a valid "severability clause". In general, a severability clause purports to automatically sever provisions in a contract which a court finds legally invalid while permitting the inoffensive provisions to remain unscathed.
In North v Metaswitch Networks Corporation, the question before the application judge was simply whether a termination clause was enforceable. The termination clause read as follows:
9. Termination of Employment
(c) Without Cause – The Company may terminate your employment at any time in its sole discretion for any reason, without cause, upon by [sic] providing you with notice and severance, if applicable, in accordance with the provisions of the Ontario Employment Standards Act (the "Act"). In addition, the Company will continue to pay its share all [sic] of your employee benefits, if any, and only for that period required by the Act.
The reference to notice in paragraphs 9(b) and (c) can, at the Company's option, be satisfied by our provision to you of pay in lieu of such notice. The decision to provide actual notice or pay in lieu, or any combination thereof, shall be in the sole discretion of the Company. All pay in lieu of notice will be subject to all required tax withholdings and statutory deductions.
In the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.
At first blush, the clause appeared to be compliant with the ESA. However, the definition of "wages" in the ESA includes more than just base salary (ie. commission and non-discretionary bonuses etc. must also be included). Thus, because the third paragraph excluded non-salary wage components, the result was that the employee's termination entitlements would be less than those set out in the ESA.
This was not the end of the story. The contract also had a severability clause, which provided that:
17. General Provisions
(a) If any part of the Agreement is found to be illegal or otherwise unenforceable by any court of competent jurisdiction, that part shall be severed from this Agreement and the rest of the Agreement's provisions shall remain in full force and effect.
The employer argued that the severability clause served to automatically revise the contract by expunging the language restricting entitlements to base salary. Once the third paragraph of the clause was severed, the employer argued, the remainder of the termination clause was valid and limited the employee's entitlements to ESA minimums.
The application judge agreed and dismissed the employee's claim for reasonable notice.
The Court of Appeal reversed that decision and determined that the severability clause could not be used to save the termination provision.
The Court of Appeal commented that the analytical approach to be used is straightforward.
The termination clause must be evaluated as a whole to see whether it provides an entitlement equal to or greater than that set out in the ESA. If the entitlement falls below ESA minimum entitlements the clause is void. In other words, the termination clause is a single, unitary clause that succeeds or fails as a single entity and cannot be subdivided, regardless of over how many paragraphs those termination entitlements are expressed.
There was, therefore, nothing to sever. The termination clause was simply unenforceable. Moreover, because no enforceable clause remained in force to limit the employee's entitlements on termination, he was entitled to full common law notice.
What Employers Should Know
The North decision underscores the risks of using complex termination clauses. A simple clause, limiting entitlements to Employment Standards Act minimums will suffice for most employees.
Other employees, particularly executives or employees with atypical compensation structures, may require additional language. However, such language should be very carefully considered, and only implemented with legal advice.
In most cases, if your goal is to provide nothing but the ESA minimums, the closer your language is to saying so concisely and with minimal words of limitation, the more likely your language will be deemed enforceable.
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.