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Challenges to termination clauses

Recent decision highlights saga of judicial consideration

By Stuart Rudner

The ongoing saga of judicial consideration of termination clauses in employment contracts continued most recently with a decision from the Court of Appeal for Ontario in Oudin v. Centre Francophone de Toronto. This decision is good news for employers, as it adopts the approach of contractual certainty as opposed to the other common approach, which will invalidate clauses for any apparent or actual technical deficiencies. As I wrote in a blog post a few months ago, As I’ve discussed in several blog posts (including here and here), recent years have seen frequent challenges to termination clauses with somewhat unpredictable results. While many cases have found in favour of the employee, we have seen some, such as the York-Med Systems decision, which have ruled in favour of the employer and “contractual certainty".

The bottom line is that somewhat surprisingly, although we are now in 2016, the law regarding employment contracts and termination clauses in particular remains unsettled and unpredictable. This causes significant frustration for employers, who attempt to create certainty through the use of contracts, as well as for employees, who may be uncertain of their rights.

The employment agreement in Oudin was written in French. Section 9.2 of the agreement reads, in part:

"…Le CFT peut également résilier la présente entente pour tout autre motif en donnant à l’employé(e) un préavis de quinze (15) jours ou le préavis minimum prescrit par la Loi sur les normes d’emploi, ou en lui versant une indemnité salariale égale au salaire qu’elle aurait droit de recevoir pendant la période de préavis…"

According to the Court of Appeal, the motion judge translated the clause to read that the respondent could terminate the appellant on providing “the minimum” required by the ESA. The words “ou le préavis minimum prescrit par la Loi sur les normes d’emploi” should have been translated to “or the minimum notice required under the Employment Standards Act” and not “or the minimum prescribed by the Employment Standards Act.” The original agreement therefore provided that the respondent could terminate the appellant’s employment with ESA minimum notice and made no mention of severance. It was acknowledged the translation was inaccurate but the parties disagreed on the impact of this.

In its decision, the Court of Appeal held as follows:

"[7] The motion judge clearly understood that section 9.2 referred only to minimum notice. This is apparent form his conclusion at paragraph 56 where he stated that “the [respondent] agreed to provide only the notice period prescribed by the ESA”. The translation therefore did not factor into his analysis of the clause.

[8] The motion judge’s reasons make it clear that he understood and considered the appellant’s submission that - by referring only to “notice” - the clause ought to be interpreted as an attempt to contract out of all obligations under the ESA. The motion judge rejected this submission and found that there was no attempt to contract out of the ESA and that the parties had agreed that the ESA would be respected.

[9] The motion judge’s decision was based on his interpretation of a contract. He considered the circumstances of parties, the words of the agreement as a whole and the legal obligations between the parties. He concluded at paragraph 54:

Contracts are to be interpreted in their context and I can find no basis to interpret this employment agreement in a way that neither party reasonably expected it would be interpreted when they entered into it. There was no intent to contract out of the ESA in fact; to the contrary, the intent to apply the ESA is manifest. (emphasis added)

[10] The motion judge’s interpretation of the contract is entitled to deference: see Sattva Capital Corp v. Creston Moly Corp, 2014 SCC 633 at para 52. As a result, we see no error in his conclusion that the clause is enforceable."

As regular readers will know, several recent cases, including Stevens v. Sifton Properties Ltd., have found termination clauses to be null and void due to their failure to explicitly referenced the continuation of employment related benefits during the notice period. Other cases have confirmed that even potential breaches of employment standards legislation will render a termination clause unenforceable. For example, in Wright vs. The Young and Rubicam Group of Companies (Wunderman), the plaintiff had signed an employment agreement that had a fairly detailed schedule of notice to be provided in the event of dismissal without cause. He had been employed for slightly over five years, and according to the contract, was entitled to 13 weeks of base salary. As the Court confirmed, pursuant to the Employment Standards Act, 2000, the plaintiff would have been entitled to five weeks of notice and an additional five weeks of severance pay, which was less than his entitlement pursuant to the contract.

However, the Court went on to find that in the future, the contractual clause would have breached the Employment Standards Act, 2000. The judge gave a number of examples, such as if the plaintiff were to have been dismissed after eight and a half years of service. In that case, the contractual entitlement would have been 16 weeks of base salary, but the statutory entitlement would have 16 and a half weeks. The Court found that

As some of the contractual provisions fall short of the statutory minimums, assuming no change in the applicability of severance pay, the agreement is in violation of s. 5(1) of the Act. (emphasis added)

However, the decision of the Court of Appeal in Oudin takes a different approach. For some time now, employers and employment lawyers have been struggling with uncertainty with respect to the law in this area. For employers, the best practice is still to draft a clause that will be compliant with applicable employment standards legislation, and then include a “saving provision” that explicitly states that if the clause currently, or in the future, falls below the requirements of the applicable legislation, it should be interpreted so as to comply with those obligations.

As I wrote previously, the bottom line is that somewhat surprisingly, although we are now in 2016, the law regarding employment contracts and termination clauses in particular remains unsettled and unpredictable. This causes significant frustration for employers, who attempt to create certainty through the use of contracts, as well as for employees, who may be uncertain of their rights. This recent decision, emanating as it does from a Court of Appeal, may provide more certainty, but that remains to be seen.

Stuart Rudner

Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw. He can be reached at srudner@rudnermacdonald.com.
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