Most employers are aware that when employees are dismissed without cause, they are entitled to notice or pay in lieu of notice. There is a presumption that an employee terminated without cause is entitled to common law reasonable notice, which is an assessment of factors such as age, length of service, availability of similar employment and character of position, and can result in a notice period as long as twenty-four (24) months. However, employers may contract out of the obligation to provide common law reasonable notice by having a termination clause that specifies the employee’s entitlements upon termination so long as the termination clause clearly limits the right to reasonable notice and does not violate the Employment Standards Act, 2000 (the “ESA”). Accordingly, termination clauses can be used to limit an employee’s notice entitlements to the minimum entitlements set out under the ESA. In contrast to common law reasonable notice, an employee’s notice entitlements under the ESA are capped at eight (8) weeks’ notice or pay in lieu of notice.
While an enforceable termination clause is a powerful tool for employers to manage risks involved in terminations, over the years, courts have closely scrutinized the enforceability of such clauses, often frustrating employer’s intentions. Courts have focused on the various technical requirements in the language of termination clauses and, in the absence of the technical requirements in the termination clauses, courts have held such clauses to be unenforceable.
In October, the Ontario Court of Appeal once again considered the enforceability of termination provisions, deciding that a severability clause in an employment agreement will not save a termination provision that provides the employee with less than the minimum ESA entitlements.
In North v Metaswitch Networks Corporation (“North”), the Court of Appeal considered the enforceability of the following termination provision:
- 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 it 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 [emphasis added].
The application judge found that the limiting of entitlements based on the base salary as defined excluded the employee’s commission and therefore, violated the ESA. However, relying on the Court of Appeal’s decision in Oudin v Centre Francophone de Toronto (“Oudin”) (for a discussion of Oudin see our blog on the case last year), the application judge found that paragraph three of the termination clause could be removed because of a severability provision in the employment agreement, which stated:
- 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 Court of Appeal overruled the application judge’s decision. Rather, the Court of Appeal found that a severability clause cannot be used to excise a portion of the termination clause. If a termination clause contracts out of an employment standard, the entire termination clause must be found void, resulting in reasonable notice.
In reaching this finding, the Court of Appeal affirmed its reasoning in its February decision in Wood v Fred Deeley Imports Ltd. (discussed on our blog earlier this year). In Wood, the Court of Appeal summarized the law on termination clauses and cited section 5(1) of the ESA, which prohibits employers and employees from contracting out of any provisions of the ESA. As a result of section 5(1), ESA, the Court of Appeal stated that where the termination clause contains “even one” violation of the ESA, the entire termination clause would be considered void and thus, unenforceable.
Addressing the approach to severability clauses in Oudin, the Court of Appeal found the ability to use a severability clause to “correct” a termination clause that violates the ESA to be problematic. Specifically, employers could be incentivized to contract out of the ESA in termination clauses, but include a severability clause in the event that an employee has the resources to challenge the termination clause through litigation.
North clearly indicates that employers will no longer be permitted to rely on severability clauses to correct deficiencies that are violations of an employment standard. Given the inability to rely on any saving provision, it is imperative for employers to ensure their termination clauses guarantee that employees will at no time receive less than their ESA minimum entitlements.
This blog is provided as information and a summary of workplace legal issues.
This information is not intended as legal advice.