Timing is everything

Differing case law raises debate over validity of termination clauses that may or may not comply with legislation, depending on the timing of the termination
By Anthony Lungu
|Canadian Employment Law Today|Last Updated: 06/18/2015

Contractual termination clauses allow employers to limit the amount of notice owing upon termination, and therefore provide protection against potentially costly notice claims by departed employees. Yet, while termination clauses allow employers to exercise a measure of control over an employee’s entitlements upon dismissal, the law is clear that such clauses cannot be used to defeat the statutory minimums mandated under provincial or federal employment standards legislation. More simply put, an employer cannot “contract out” of the statutory minimum standards. Therefore, if a termination clause provides for something less than the minimum standards, that clause will be void and the employee free to seek additional notice at common law. What is perhaps less clear, and subject to continued debate, is whether such clauses must meet the statutory minimum at all times or simply at the time of termination?

Although this issue may seem like a discrete question of law, it in fact directly engages the purposes served by employment standards legislation more broadly. In Machtinger v. HOJ Industries Ltd., the Supreme Court of Canada stated that the purpose of employment standards legislation is to protect employees, by mitigating the “power imbalance” inherent to the employer-employee relationship. Therefore, such legislation ought to be given a broad and liberal interpretation, so as to “extend its protection to as many employees as possible.” The Supreme Court’s point was that society is ultimately better served when employment standards legislation is broadly applied in employees favour – and stringently enforced as against employers – as this accords better “protection” from policies that might otherwise compromise their statutory entitlements.

In Shore v. Ladner Downs, the British Columbia Court of Appeal applied Machtinger for the proposition that a termination clause must comply with statutory minimum standards at all times or it will be held void and unenforceable. In that case, the termination clause provided for an amount of notice that actually met the applicable statutory minimum, but would have provided for an amount less than the minimum amount in certain circumstances. Following the principles set-out in Machtinger, the Court of Appeal held that employees should not be required to “keep an eye on the relationship between the statutory minimum and the contractual term.” In other words, it would not be keeping with the purpose of employment standards legislation to put employees in the precarious position of having to determine whether the statutory minimums are being complied with upon dismissal.

The reasoning in Shore was subsequently approved by the Ontario Superior Court of Justice in Slepenkova v. Ivanov, which similarly dealt with a termination clause that provided for an amount of notice that met the statutory minimum in the instance, but would have provided for less under certain circumstances. More recently, in Wright v. Young & Rubicam Group of Cos., the Ontario Superior Court not only again cited Shore approvingly, but further added that “there is no compelling reason to uphold a termination clause which the draftsman may reasonably be understood to have known was not enforceable either at all or under certain circumstances.”

The decision in Wright continues to generate considerable debate, both within the employment bar and amongst human resources professionals. Yet, as can be seen from the above, it hardly introduces any novel point of law. Rather, it simply applies and further refines established principles enunciated by higher courts before it — that statutory minimum standards must be strictly enforced, so as to better serve the purpose of employment standards legislation in protecting employees. Plainly put, the decision in Wright builds upon established employment law principles in order to send a clear message to employers: if you wish to include a termination clause in the contract of employment, then you better make sure it complies with the statutory minimums at all times and under all circumstances. Period!

Although there are certainly cases where courts took a differing view, there are good reasons to suggest that these decisions ought not to be relied upon. Most notably, in John A. Ford & Associates Inc. v. Keegan and in Shapka v. Interbase Consultants Ltd., the termination clause issue was framed as a matter of freedom of contract – that the parties are free to agree between themselves upon an appropriate amount of notice upon dismissal. Yet, in Keegan, the court did not specifically address s. 5.(1) of Ontario’s Employment Standards Act, 2000, which states that any attempt to contract out of or waive an employment standard is void. Meanwhile, in Shapka, the Deputy Judge did not place proper emphasis on the fact that employees are inherently disadvantaged when negotiating the terms of work with their employers. This is exactly the type of relative imbalance of power that employment standards legislation seeks to address. It is also notable that the court in Keegan held that the plaintiff was not an employee, which ought itself to have determined his entitlement to additional notice. Furthermore, Shapka is a decision of the Small Claims Court, and therefore is of little precedential value.

Ultimately, employers and their counsel may chafe against the notion that an otherwise enforceable termination clause might be held unenforceable on the basis that, one day, and under a different set of circumstances, it may run afoul of the statutory minimums. Yet, employers are best served to remember that provincial employment standards legislation will be broadly applied, so as to better serve their remedial purpose in protecting the rights of employees. Indeed, all aspects of the employer-employee relationship governed by employment standards legislation ought to be understood in this light. When placed in its proper context, the issue of whether termination clauses must meet the statutory minimum standards, at all times and under all circumstances, is therefore perhaps not as significant as it appears. Nevertheless, debate in this regard will likely continue apace, at least until such time as there is a definitive ruling from a higher court.

For more information see:

• Machtinger v. HOJ Industries Ltd., 1992 CarswellOnt 892 (S.C.C.).
• Shore v. Ladner Downs, 1998 CarswellBC 973 (B.C. C.A.).
• Slepenkova v. Ivanov, 2007 CarswellOnt 9912 (Ont. S.C.J.).
• Wright v. Young & Rubicam Group of Cos., 2011 CarswellOnt 10754 (Ont. S.C.J.).
• John A. Ford & Associates Inc. v. Keegan, 2015 CarswellOnt 4418 (Ont. S.C.J.).
• Shapka v. Interbase Consultants Ltd. (2014), (Ont. S.C.J. Sm. Cl.)

Anthony Lungu is an associate lawyer at Marvin A. Gorodensky Professional Corporation. Anthony practices all areas of employment law, with a focus on wrongful/unjust dismissal, human rights, workplace harassment, occupational health and safety, and employment standards issues. He can be reached at Anthony@dismissed.ca.

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