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The Ontario Court of Appeal (“ONCA”) recently provided further guidance on the enforceability of termination clauses and wrongfully dismissed employees’ entitlement to damages for the lost opportunity to earn a bonus during the reasonable notice period in Andros v Colliers Macaulay Nicolls Inc. [Andros]. In last week’s blog we discussed the bonus-entitlement aspects of the Andros decision. This week we discuss Andros’s implications for the continued debate on the enforceability of termination clauses.

Under the common law, employees are entitled to reasonable notice of termination of their employment, or pay in lieu thereof, unless the employer and employee agree to a lesser notice entitlement that complies with the minimum standards under the Employment Standards Act, 2000 [ESA]. However, termination clauses that contract out of the minimum standards prescribed by the ESA are void, resulting in an employee becoming entitled to reasonable notice at common law, which is generally higher than the minimum entitlements under the ESA and is thus often more costly for employers. To prevent issues with enforceability and minimize uncertainty at the end of an employment relationship, termination clauses must be drafted with great care and precision because any ambiguity will be interpreted in the way that benefits employees. The case law interpreting the type of contractual language that will be enforced is constantly in flux, as exemplified by the court in Andros striking down a termination clause that many employment lawyers may have considered enforceable.

The ONCA struck down the termination clause in Andros that provided an employee with “the greater of” his or her entitlements under the ESA or one of two other options, because the Court found that it was ambiguous and contracted out of minimum statutory standards, despite the clause seemingly containing a “failsafe provision”, discussed in further detail below. Although Ontario courts in the last few years have been moving toward a more common-sense approach for determining whether termination clauses are enforceable, they are still willing to strike down termination clauses for highly technical reasons, to the detriment of employers.

The Summary Judgment Decision

In Andros, the employee brought a wrongful dismissal action against his employer, after it terminated his employment without cause, and argued that the termination clause in his employment agreement was unenforceable, such that he was entitled to damages in lieu of reasonable notice at common law.

The termination clause in his employment agreement provided that he would receive “the greater of”:

  1. his entitlements under the ESA (“Option One”), or
  2. at the employer’s “sole discretion”, either:
    1. two months of working notice with benefits (“Option Two”), or
    2. payment equal to two months’ salary in lieu of notice (“Option Three”).

On a motion for summary judgment, the motion judge held that the termination clause was unenforceable and that the employee was therefore entitled to eight months’ reasonable notice, based on his age, length of service, the character of his employment, and the availability of similar employment. She found that the clause was void for attempting to contract out of the ESA because Option Two did not provide for severance pay and Option Three failed to provide for benefits continuation during the notice period. Further, she stated that, taken “at its very ‘best’”, the termination clause was ambiguous as to whether it satisfied the employee’s statutory severance and benefits continuation entitlements under the ESA, which would have resulted in the employee not knowing the nature of his entitlements with certainty when signing the employment agreement, and would have still rendered it unenforceable.

The employer appealed, arguing that the motion judge erred in finding the termination clause to be unenforceable because it ensured that the employee would always get at least what he was entitled to under the ESA when the clause was interpreted as a whole, among other grounds.

The ONCA’s Decision

The ONCA upheld the motion judge’s finding that the termination clause was unenforceable for attempting to contract out of the ESA, such that the employee was entitled to eight months of reasonable notice under the common law. In particular, the ONCA found that it was reasonable for the motion judge to interpret the clause as improperly allowing the employer to terminate the employee’s employment without providing him with severance pay under Option Two or without providing him with benefits continuation under Option Three.

Although in our view neither the motion judge nor the ONCA were clear on why the termination clause provided for less than an employee’s minimum entitlements under the ESA, it seems their analysis was premised on a finding that the employee’s entitlement under Option Two or Option Three may be greater than Option One in certain situations, however would still be deficient by not providing for severance pay (where applicable) and/or the minimum statutory amount of benefits continuation. For example, under Option One, a short service employee with between three and twelve months of service would only be entitled to one week of notice, or pay in lieu of notice, with benefits continuation (pursuant to the ESA). This same short service employee would be entitled to a greater two months of working notice with benefits under Option Two, or pay in lieu of notice under Option Three, however, as the Court determined, would be excluded from receiving the required benefits continuation under Option Three. Ultimately, the ONCA found that the termination clause was void for attempting to limit or contract out of the ESA requirement to provide benefits continuation during the notice period and severance pay (where applicable).

Key Takeaways

Although courts in Ontario have been moving towards a more common-sense approach to interpreting and determining the enforceability of termination clauses, Andros shows that they will still strictly scrutinize such clauses and strike them down for highly technical reasons.

Andros affirms the importance of drafting termination clauses so that there is no ambiguity as to whether the employee will receive at least his or her minimum entitlements under the ESA, because any such ambiguity will render the clause unenforceable and entitle the employee to reasonable notice under the common law.

In particular, Andros makes it clear that failsafe provisions in employment agreements continue to be imperative for employers. For language in a termination clause to function as a “failsafe provision”, and thereby ensure that the clause is enforceable against any deficiencies, it must expressly indicate that the employee will receive at least his or her minimum ESA entitlements in all circumstances. In Andros, this requirement had not been satisfied by inclusion of only the term “the greater of” to qualify an employee’s termination entitlements. For further guidance on how “failsafe provisions” must be drafted, please refer to our blog post on another ONCA decision, Amberber.

It is also not uncommon for termination clauses to provide for a few “options” to dismissed employees, like the clause in Andros, to provide the employer with some flexibility at dismissal. However, employers who choose to structure termination clauses in this way must carefully draft options that clearly provide for no less than employees’ ESA entitlements. Otherwise, employers face the risk that one of the options may inadvertently violate the ESA and render the entire clause void. Consequently, where an employer wants a termination clause to include multiple “options”, we generally advise clients to include a “failsafe provision” at the end of the clause that clearly and unambiguously provides that in no case will the employee receive less than his or her statutory entitlements under the ESA.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.