Is a termination provision in an employee contract enforceable?

Over the last few years, the question has received unprecedented attention

Is a termination provision in an employee contract enforceable?
Over the last few years, the question of whether a termination provision in an employment contract is enforceable has received unprecedented attention by the Ontario Court of Appeal. And while practitioners recently seemed to be of one mind on what is necessary to create an enforceable termination provision, a recent Court of Appeal decision has lawyers who practice in this area scratching their heads.

In Nemeth v. Hatch Ltd. the Court of Appeal was asked to interpret the following termination provision:

“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.”

The clause contained no provisions regarding ESA severance pay, benefit continuation or vacation entitlement during the statutory notice period. Based on previous jurisprudence, CCP would have expected this clause to be unenforceable as it failed to explicitly reference other statutory obligations required to be provided by employers in a non-cause dismissal and certainly would be off-side an employee’s minimum statutory obligations after five years of service if the employer had severance pay obligations (as was the case with Hatch and the plaintiff with 19 years’ service).

In a surprise decision, the Court of Appeal upheld the termination clause notwithstanding Supreme Court of Canada jurisprudence that the language used to limit the employee’s common law entitlements must be explicit and unambiguous. The Court of Appeal held:

“The need for clarity does not mean that the parties must use a specific phrase or particular formula, or state literally that “the parties have agreed to limit an employee’s common law rights on termination”. It suffices that the parties’ intention to displace an employee’s common law notice rights can be readily gleaned from the language agreed to by the parties.”

In our respectful opinion, this reasoning goes against previous Appellate authority defining what “clear language” is required to displace common law entitlements and in particular the requirement to ensure, unequivocally, that the clause in question complies with the minimum entitlements under the ESA.

CCP has blogged extensively on the Court of Appeal’s jurisprudence on this issue, as our firm is steadfast in promoting the use of employment agreements in the workplace to create certainty and reduce employer liability at the point of dismissal. What appears clear from the Nemeth decision is that this is an issue that cries out for a final interpretation by the Supreme Court of Canada, which has not meaningfully ruled on the enforceability of termination provisions since the Machtinger decision in 1992.

While this decision appears to be good news for employers, CCP continues to advocate for exactly the language the Court of Appeal asserted was unnecessary in this decision – literally stating an intention to displace common law entitlements with the language in the termination provision and ensuring that language unequivocally meets or exceeds the minimum statutory obligations owed to employees. Any employer who has doubt about the enforceability of its employment precedents is urged to seek legal advice.

And perhaps the silver lining in such muddled jurisprudence is the likelihood that more cases will be settled without litigation as an employer and employee’s respective bargaining power over the enforceability of these provisions appears to be equally diluted at this point in time.

CCP has extensive experience drafting all manner of employment agreements on behalf of employers. Click HERE for the CCP team members who can assist with your contract drafting and interpretation.

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