Making sense of termination clauses

To sever or include the minimum entitlements?
By Nathaniel Marshall
|Canadian Employment Law Today|Last Updated: 07/29/2019
Credit: Shutterstock

To avoid paying employees common law reasonable notice upon termination of their employment, employers will often include a termination clause in the employment agreement to limit entitlement to the minimums prescribed under applicable employment standards legislation. In Ontario, for example, employees are only entitled to one week of notice per year of service up to eight weeks and, if applicable, a maximum of up to 26 further weeks of severance pay.  On the other hand, common law reasonable notice awards — determined by the employee’s age, length of service, character of employment, and availability of suitable employment — now range as high as 30 months. 

Determining what makes a termination clause valid and enforceable is an issue that continues to plague counsel and the courts alike. Ontario courts have recently addressed key issues on the enforceability of termination provisions — the importance of all-inclusive language, clarity and severability provisions.

Severing the minimum entitlements

Oudin v. Centre Francophone de Toronto is a 2016 decision of Ontario’s Court of Appeal that seemed to cause a great deal of uncertainty regarding the interpretation and enforceability of termination clauses. The employer (CFT) terminated the employee’s employment without cause after 13 years of service, providing eight weeks’ pay and 13 weeks’ severance pay.

The employee, Oudin, rejected the separation package and commenced an action for wrongful dismissal, arguing the termination clause was unenforceable because it only referred to notice, not benefits continuation and severance pay. The termination clause provided 15 days' notice "or the minimum prescribed by the (ESA)," or pay in lieu thereof.

The clause also stated that if any provisions were invalid, they would be modified or nullified “to the extent necessary to comply” with legal requirements and the rest of the agreement would still be in force.

The motions judge found that the CFT did not attempt to contract out of the ESA. Even though the termination clause did not provide for benefits continuation or severance pay, it specified the ESA would prevail over the employment agreement in the event of any inconsistency. Though some of the minimum entitlements had been severed from the termination clause, the catch-all provision was enough to provide for ESA compliance.

The Ontario Court of Appeal agreed.  

A failed attempt at all-inclusive language

Shortly after Oudin, the Ontario Court of Appeal addressed termination clauses again in Wood v. Fred Deeley Imports Ltd. The employee, Wood, had been employed for eight years and was terminated without cause. She had an employment agreement with a termination clause providing “two weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the company.” It also stipulated “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.”

After receiving 13 weeks’ working notice plus a lump-sum payment of eight weeks’ salary, Wood sued for wrongful dismissal with a motion for summary judgment. She challenged the enforceability of the termination clause on the basis that it violated the ESA, but was unsuccessful.

The Ontario Court of Appeal overturned the motion judge’s decision, finding that the termination clause was unenforceable because the language excluded benefits continuation during the statutory notice period and therefore violated the ESA. The court also found that by using the word “pay,” it was not clear that it included both notice and severance pay. Although the employer had attempted to use all-inclusive language to capture each of the minimum entitlements, there was more than one possible interpretation — one of which violated the ESA.

An improved approach to all-inclusive language

The Ontario Court of Appeal attempted to provide more clarification on termination clauses in Nemeth v. Hatch, where the employer terminated the employee’s employment without cause after 19 years of service. The impugned termination clause allowed for notice of “one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.”

The employee, Nemeth, received eight weeks’ notice and benefits continuation plus 19.42 weeks’ salary as statutory severance pay. He sued for wrongful dismissal claiming the termination clause was unenforceable, but was unsuccessful. Nemeth appealed the decision, arguing the termination clause:

• Did not explicitly displace the common law presumption of reasonable notice

• Was silent on the provision of severance pay, and therefore contracted out of the ESA

• Could be interpreted as providing for 19 weeks’ notice instead of eight weeks’ notice.

The Court of Appeal rejected the first argument on the basis that the language clearly displaced the right to common law reasonable notice. Second, it found that although the clause was silent on severance pay, there was no intention to contract out of it. As a small concession, the court accepted that the clause could be interpreted as providing for 19 weeks’ notice, finding that Nemeth was entitled to this amount.

Severability, inclusion and a way forward

In Movati Athletic (Group) Inc. v. Bergeron, the Ontario Divisional Court affirmed that even where a termination clause refers to all the ESA entitlements, it will be unenforceable if it does not clearly oust the common law. The impugned termination clause allowed for “notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000, and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000” in the event of without-cause termination.

The motions judge held that the termination clause did not clearly state that the employee would not be entitled to reasonable notice at common law. The motions judge stated that if the termination clause had been drafted such that it provided, “upon termination, severance, if applicable will be paid only pursuant to the ESA … only for the minimum required period required by the ESA” the language would be clear enough to exclude common law notice. The Divisional Court agreed the language did not clearly limit the employee’s entitlement to only the ESA minimums.

The law isn’t exactly crystal clear on enforceability of termination clauses. Notwithstanding the apparently piecemeal approach by Ontario courts on what is required to draft an enforceable termination clause, it is clear that caution must be exercised.

For more information see Oudin v. Centre Francophone de Toronto, 2016 ONCA 514 (Ont. C.A.); Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (Ont. C.A.); Nemeth v. Hatch, 2018 ONCA 7 (Ont. C.A.); Movati Athletic (Group) Inc. v. Bergeron, 2018 ONSC 7258 (Ont. Div. Ct.).

Nathaniel Marshall is an associate lawyer with Turnpenney Milne LLP, practicing in all areas of employment and labour law. For more information visit turnpenneymilne.ca.

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