Terminating termination clauses
These clauses can be good for limiting notice of dismissal, but they’re only as good as the words describing those limits
Sep 6, 2017
Employment contracts with termination provisions limiting notice of dismissal can be great to have for employers — as long as the wording actually limits the notice. If not, words will hurt the bottom line.Shutterstock
By Jeffrey R. Smith
Sticks and stones may or may not break bones, but words can hurt employers — at least when it comes to vague ones in termination clauses.
In employment contracts, like all contracts, the wording is extremely important. In employment contracts with termination clauses, the wording can mean the difference between providing the absolute minimum legal requirement notice of termination and dishing out a lot more for a longer-term employee in a high position.
When employees are dismissed from their employment, they can be entitled to a fair bit of notice or pay in lieu of notice. While employment standards legislation provides a minimum amount of notice that must be provided, the reality is that this isn’t the true amount of entitlement. Without any contractual limitations, common law notice is always added on to the minimum requirements.
Common law notice is determined by several factors such as the employee’s age, length of service, the importance of the position, and the likelihood of finding similar employment with similar pay. It’s essentially meant to serve as a bridge to the employee finding new employment.
But employers can limit or eliminate altogether an employee’s common law notice entitlement through a termination clause in the employment contract. They can’t contract out of the legislative minimum notice, but they can cut any notice above and beyond it — which is usually the purpose of termination clauses. But employers have to be careful with such clauses, because they don’t always eliminate common law notice.
This is where the contract’s language is key. If an employer isn’t careful, it could think it has limited an employee’s notice entitlement when it really hasn’t. There have been numerous wrongful dismissal cases where employees have challenged the wording in termination clauses and have won, getting common law notice awards when the employers thought it had protected itself against such payouts.
A common mistake in unsuccessful termination clauses, for example, is saying an employee is entitled to notice in accordance with employment standards legislation instead of specifically limiting it to the minimums. The legislative notice amounts are in accordance with legislation, but so is common law notice and anything above and beyond the minimums.
Contractual language that clearly limits notice entitlement should essentially say exactly that. The Alberta Court of Queen’s Bench found in a recent decision that a clearly worded provision did in fact limit an employee’s notice entitlement but stating that the employee was entitled to the minimum notice requirements “prescribed” by employment standards legislation — less vague than saying “in accordance with” the legislation. The contract also stated that it satisfied all rights and entitlements related to the employee’s employment: see Nutting v. Franklin Templeton Investments Corp., 2016 CarswellAlta 2279 (Alta. Q.B.).
Of course, the most clearly worded termination provisions aren’t any good if they end up breaching those legislative minimums. As I mentioned above, employers and employees can’t contract out of the minimums, so they have to at least provide those. And this is where it can get tricky: when limiting the notice entitlement, the employer has to make sure it doesn’t breach the minimums throughout the term of the contract or the employment — as with common law notice, legislative minimums increase as the employee’s length of service increases.
While the Alberta court decision mentioned above upheld an employment contract’s termination provision, there are many decisions out there where the opposite was the case and such provisions were struck down because of vague language. Many have been victim of that “in accordance with” trap — the provision mentions going along with employment standards legislation but doesn’t specifically exclude common law notice entitlement.
In those circumstances, employers who thought they had limited employees’ notice period found themselves on the hook for what is often a much bigger notice entitlement — which can be around one months’ pay for every year of service (though this “rule of thumb” has been disavowed by courts).
Employment contracts with termination provisions limiting notice of dismissal can be great to have for employers — as long as the wording actually limits the notice. If not, words will hurt the bottom line.
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Jeffrey R. Smith is the editor of Canadian Employment Law Today, a publication that looks at workplace law from a business perspective.