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New year, new decision on termination clauses

Ontario Court of Appeal considers enforceability of clause in employment agreement
The decision in Nemeth is helpful for employers, as it demonstrates a willingness by the courts to uphold the bargain negotiated by the parties even where the wording may not be perfect.

By Stuart Rudner and Brittany Taylor

It wouldn’t be a new year without a new decision on the enforceability of termination clauses. Earlier this month, the Ontario Court of Appeal released its decision in Nemeth v. Hatch Ltd., which considered whether a termination clause in Joseph Nemeth’s employment agreement was enforceable. In this post, we will review the decision in Nemeth, and consider what impact it has given the wealth of jurisprudence that has come before it.

The enforceability of termination clauses has been a recurring topic of discussion over the past few years. The law in this area appears to be in a near constant state of change, making the outcome of cases addressing challenges to these clauses quite difficult to predict. In 2017 alone, the courts released several decisions dealing with this issue which appeared to have opposing findings, despite the occasional promise of predictability.

On one hand, we had a series of cases which seemed to indicate that termination clauses must be precisely and unambiguously drafted in order to oust an employee’s common law entitlement to reasonable notice. This included requiring an employee’s entitlement to benefit continuation during the notice period, and to severance pay, to be explicitly referenced in the clause. The standard set by these cases was near perfection, failing which the clause would be void.

At the same time, we had a number of decisions which suggested that a more purposive approach should be adopted. This line of cases upheld termination clauses which would be considered “less than perfect”, on the basis that it was still clear that the intent of the parties was to opt out of the employee’s common law entitlements.

The seemingly contradictory lines of decisions caused significant confusion, leading many to believe that drafting or challenging termination clauses was simply a “roll of the dice.” We wrote about this dichotomy in the case law in November, 2017, when the Court of Appeal released its decision in North. In North, the court appeared to champion a hard-line approach to the assessment of termination clauses, noting that “where a termination clause contains ‘even one’ instance of contracting out of an ESA employment standard, the clause is void”.

However, the recent decision of the Ontario Court of Appeal in Nemeth is more closely aligned with the second category of cases. In this case, Nemeth was employed by Hatch Ltd. for over 19 years when his employment was terminated. Relying on the termination provision in his contract of employment, Hatch provided him with his minimum entitlements to notice, severance pay and benefit continuation under the Employment Standards Act, 2000 (ESA).

The termination clause prescribed the following notice period: “one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.”

Nemeth argued that the termination clause did not explicitly limit his entitlements on dismissal and, further, that the clause was void as it failed to mention his statutory entitlement to Severance Pay. In the alternative, Nemeth argued that pursuant to the clause, he was entitled to one week’s notice for every year of his employment (i.e. 19 weeks). The court addressed all three arguments in turn.

Failure to explicitly limit employee’s entitlements

While the court acknowledged that the parties’ intention to displace an employee’s entitlements at common law “must be clearly and unambiguously expressed in the contractual language”, it also stated that this need for clarity “does not mean that the parties must use a specific phrase or particular formula, or state literally that ‘the parties have agreed to limit an employee’s common law rights on termination’”.

In this regard, the court found that it was clear from the termination clause that “some other period of notice” aside from that at common law was intended to apply. As a result, Mr. Nemeth’s first argument failed.

Failure to expressly provide for severance pay

Similarly, the court did not accept that the fact that the termination clause was silent with respect to severance pay denoted an intention on the part of Hatch to contract out of the ESA. The court noted the distinction between a clause which limits an employee’s entitlements to less than that required by law, and a clause which deals only with an employee’s entitlement to notice, and is silent with respect to the employee’s other entitlements (i.e. to severance pay, or continuation of benefits). Nemeth’s second argument, therefore, also failed.

Ambiguous entitlement

The court did agree with Nemeth that he was entitled to receive 19 weeks’ notice pursuant to the termination clause. It was clear to the court that the termination clause did not limit Mr. Nemeth to his minimum entitlements under the ESA, and that even if the clause was ambiguous in this regard, that ambiguity had to be resolved in favour of Nemeth.

Where does that leave us?

The decision in Nemeth is helpful for employers, as it demonstrates a willingness by the courts to uphold the bargain negotiated by the parties even where the wording may not be perfect. It is also helpful to employees, in that it continues to reinforce that there must be a clear and unambiguous intention of the parties to opt out of the common law, and that ambiguity in a termination clause will be resolved in favour of the employee. In this regard, the decision in Nemeth strikes a good balance of satisfying the concerns of both employers and employees who may feel frustrated or confused about the state of the law regarding termination clauses.

That being said, the law can hardly be deemed “settled” at this point. As a result, we continue to believe that the safest course of action for employers is to take the time to ensure termination provisions are clear, unambiguous and in full compliance with the requirements of the applicable employment standards legislation. As we have written previously, a saving provision can often remedy an otherwise unenforceable clause.

We regularly help employers draft employment agreements with termination provisions which address the uncertainties that still abound in this area of the law. Similarly, we also work with employees to negotiate their contracts and to understand the contract they are bound by. We encourage both employers and employees to contact us if they have questions about this complex, and ever-evolving, area of the law.

Brittany Taylor is an associate at Rudner Law in Toronto.

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Stuart Rudner

Stuart Rudner, Employment Lawyer and MediatorStuart Rudner is the founder of Rudner Law (RudnerLaw.ca), a firm specializing in Employment Law and Mediation. He can be reached at stuart@rudnerlaw.ca, (416) 864-8500 or (905) 209-6999, and you can follow on Twitter @RudnerLaw.
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