Court weighs in on termination clause

A recent decision is providing some clarity to employers over a particularly contentious issue.

Court weighs in on termination clause

As we all know, there have been a number of court decisions in recent years which have found termination provisions in employment agreements to be unenforceable because those provisions failed to refer to severance requirements or the continuation of benefits. Generally speaking, the absence of these references has been interpreted by courts as an attempt to contract out of the minimum requirements of the Employment Standards Act, 2000 (“ESA”). This has resulted in some astronomical damage awards and corresponding onerous contract drafting obligations on the part of employers.

However, the Ontario Court of Appeal released a decision in 2016, Oudin v. Centre Francophone de Toronto, where a termination provision was upheld despite the fact that it did not specifically set out each and every obligation the employer owed to the plaintiff under the ESA. The plaintiff’s appeal to Canada’s highest court was thereafter denied. The Oudin decision was received with open arms by employers as it signalled a potential shift in the way Ontario courts would assess the enforceability of termination provisions – from an overly technical analysis of the contract language to a focus on the parties’ intentions. CCP blogged on the Oudin decision on June 29, 2016 and February 9, 2017.

Very recently, and for the first time since Oudin, the Ontario Court of Appeal was faced with determining the enforceability of a termination provision. In Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, an employee’s ESA entitlements upon being terminated amounted to two weeks’ pay per year of service, plus benefit continuation for the duration of the ESA notice period. While the termination provision provided for two weeks’ notice or pay in lieu thereof per year of service, it was silent on benefit continuation and went as far as to specifically exclude any additional payments over and above the two weeks’ notice set out therein.

[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. [Emphasis added.]

The Court ruled that by limiting the employee's recovery for anything more than was set out in the contract, the clause effectively excluded the Company’s obligation to contribute to the employee’s benefit plans during the notice period, rendering the provision unenforceable.

The key for employers is that the Court’s finding was not based on the fact that the contract failed to expressly provide for benefits continuation. Instead, it was based on the Court’s interpretation that the provision outright excluded benefits continuation. This difference is crucial as it leaves open the possibility, as was found in Oudin, that a termination provision can be enforceable despite being silent on specific entitlements. Indeed, the Court in Wood went on to suggest just that at paragraphs 52- 59.

So, while the court did not expressly affirm its Oudin decision, the good news for employers is that the Court’s line of reasoning in Wood falls in line with Oudin and does not signal a shift back to the “old way” of interpreting termination provisions.

The lawyers at CCP are experienced in the drafting of enforceable employment agreements that comply with legislative obligations and court decisions. Click here for a list of lawyers that can assist with your employment contract questions.

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