On February 23, 2017, the Ontario Court of Appeal (the “Court of Appeal”) released its much anticipated decision, Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (“Wood”). The decision brings needed clarity to the interplay between contractual termination of employment provisions and the minimum standards established in the Ontario Employment Standards Act, 2000 (the “ESA”).
Wood arose out of the dismissal of Julia Wood (“Ms. Wood”), an eight (8) year employee who was employed pursuant to a contract of employment. The contract included a termination clause, which limited Ms. Wood’s entitlements upon termination without cause to two (2) weeks’ of pay per full or part year of service. The termination entitlement was meant to include her ESA rights to notice of termination, pay in lieu and severance pay. Although the contract entitled the employee to eighteen (18) weeks of notice of termination or pay in lieu thereof, the employer provided her with a combined twenty-one (21) weeks’ notice. The employee nonetheless sought to enforce her right to common law reasonable notice on the basis that the termination clause was void for not referencing benefits, in contravention of the ESA. While the employee was initially unsuccessful, the Court of Appeal ultimately found in her favour.
Wood is significant in two rights. The decision is a clear pronouncement that termination clauses that contravene the ESA will be unenforceable regardless of whether the employee receives at least their minimum ESA entitlements upon termination. Wood also demonstrates that unless there has been a material change to a contract from the time it was first agreed to, courts will be unlikely to find that an employment contract signed after employment commences will be void.
Ms. Wood started working for Fred Deeley Imports (“FDI”) in April 2007 as a Sales & Event Planner. She signed an employment agreement the day after she started working for FDI. The employment agreement purported to abrogate Ms. Wood’s common law rights upon the termination of her employment with the following language:
[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…. 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.
By 2015, Ms. Wood’s annual compensation totaled over $100,000. It included an incentive bonus and contributions by FDI to both a health and dental plan and a registered retirement savings plan (“RRSP”). Ms. Wood also received a clothing allowance and was eligible for 19 days of paid vacation.
In April 2015, FDI agreed to the sale of its assets and instructed its employees that, because of the asset sale, their employment would terminate on August 4, 2015. Thereafter, FDI paid Ms. Wood her salary and benefits for thirteen (13) weeks of working notice, from May 1 to August 4, 2015. On August 4, 2015, FDI paid Ms. Deeley an additional lump sum equivalent to eight (8) weeks’ pay.
Although Ms. Wood received a combined twenty-one (21) weeks’ notice and pay in lieu of notice, her contract with FDI only entitled her to eighteen (18) weeks of notice or pay in lieu thereof. Ms. Wood nonetheless commenced an action against her former employer, seeking 12 months’ notice.
At First Instance
Ms. Wood brought a motion for summary judgment and argued two points. First, the entirety of her employment agreement was unenforceable because it was not signed until after she commenced working for FDI. Because she did not receive fresh consideration for entering into the employment agreement, it was an unenforceable contract at law. Alternatively, the termination clause violated the ESA and was therefore unenforceable.
Ms. Wood’s motion for summary judgment was dismissed. The motion judge found both the contract generally and the termination clause specifically to be enforceable. Ms. Wood received more notice under the contract than she was entitled to pursuant to the ESA and her benefits were continued throughout the working notice period despite the fact that the termination clause did not provide for the continuation of benefits. However, if he was wrong, the motion judge also undertook an assessment of the Bardal factors that are traditionally used to assess reasonable notice. He found that a notice period of nine (9) months would have been appropriate in Ms. Wood’s circumstances.
Ms. Wood appealed the decision of the motion judge to the Court of Appeal, which considered the following issues:
- Was Ms. Wood’s employment contract unenforceable because she signed it after she began working for FDI and in the absence of fresh consideration?
- Was the termination clause in Ms. Wood’s employment contract void for breaching the ESA?
- Did the motion judge err in finding that nine (9) months was a reasonable notice period?
The Enforceability of the Employment Contract
Ms. Wood argued that she while she verbally accepted an offer of employment from FDI over the phone on April 17, 2007, she did not sign her contract of employment until April 24, 2007, a full day after she commenced working. She did not receive anything of value when she signed the contract, as she had already commenced her employment. FDI argued that the contract should be upheld as enforceable because by signing her employment agreement after the commencement of her job, Ms. Wood was merely fulfilling an administrative step that in no way altered the terms and conditions of her employment.
The Court of Appeal agreed with FDI. Ms. Wood was not entitled to receive fresh consideration upon signing the contract, as it merely codified the pre-existing terms and conditions of her employment with FDI. Those terms and conditions were previously communicated to Ms. Wood by FDI in an email which she received prior to her start date on April 23, 2007, and had not been changed by FDI since being communicated. Signing the contract did not require fresh consideration as FDI did not add new material terms to the agreement.
The Enforceability of the Termination clause
Ms. Wood contended that the termination clause was void because it contravenes the ESA. She argued that the termination clause excludes FDI’s statutory obligation to make benefits contributions during the notice period and it does not satisfy FDI’s statutory obligation to pay severance pay. Ms. Wood argued that the enforceability of the clause was to stand or fall on its own wording, and that FDI could not remedy an otherwise illegal and unenforceable termination clause by its conduct.
The Court of Appeal sided with Ms. Wood and found the termination clause to be unenforceable. The Court of Appeal explained that sections 60 and 61 of the ESA obligated FDI to continue making its contributions to the benefit plans that Ms. Wood participated in throughout her notice period. It found that the termination clause explicitly excluded benefits continuation which amounted to an unlawful contracting out of the ESA. This was especially apparent to the Court of Appeal because the termination clause also stated that “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph”, and “the payments and notice provided for in this paragraph are inclusive of your entitlement to notice, pay in lieu of notice and severance pay pursuant to the [ESA].”
The Court of Appeal disposed of FDI’s suggestion that the word “pay” was inclusive of Ms. Wood’s entitlement to benefits. Rather, to the Court of Appeal, the word “pay” as used in the contract was not clearly inclusive of salary, wages and benefits, and was at best ambiguous. The Court of Appeal acknowledged its obligation to interpret a termination provision in the manner most favourable to the employee, where the contractual language is unclear or can be interpreted in more than one way. The Court of Appeal also disagreed with FDI’s assertion that the enforceability of the termination clause became an effective non-issue as it paid Ms. Wood’s entitlement to benefits post-termination. The Court of Appeal ruled that the wording of the contract alone must be considered to decide whether it complies with the ESA. FDI’s assertion ran counter to the public policy goal of having employers draft termination clauses that are compliant with minimum employment standards.
As the termination clause was found to be enforceable, Ms. Wood was entitled to common law reasonable notice of termination. The Court of Appeal maintained the motion judge’s assessment of the Bardal factors as it found no reason to interfere with his decision in this regard. Ms. Wood was therefore entitled to nine (9) months’ notice of termination.
Significance for Employers
Wood is a notable case in several regards. First, although courts for a time appeared to be taking a less restrictive approach to enforcing termination clauses, the decision suggests that going forward, each termination clause will stand and fall on its own wording and not on extrinsic factors, including post-termination payments to employees. Wood puts to rest for now the notion that the intention of the parties to a contract of employment to agree to meet or exceed the minimum standards established by the ESA is no justification for technically failing to do so.
Wood is also notable because the decision helped clarify the circumstances wherein fresh consideration would be necessary to make an employment agreement entered into after the commencement of a worker’s employment enforceable. By ruling that Ms. Wood’s contract was enforceable because it did not warrant fresh consideration in the circumstances, the Court of Appeal dismissed an argument that could have set a highly onerous precedent for employers.
While the ruling in Wood is not a clear “win” for employers, it is helpful in that Ontario employers now have much needed guidance on the language necessary to draft enforceable termination clauses. While careful drafting may involve additional front-end effort, such drafting can also help avoid protracted litigation. Employers should therefore consult their human resources law advisors to determine if their contractual termination provisions are in need of revision.