A look at the various pitfalls of specifying notice periods in contracts

It's important to carefully draft contract, review periodically
By Tim Mitchell
|Canadian HR Reporter|Last Updated: 10/06/2014

Question: If an employee signs an employment agreement with a termination provision stipulating specific notice periods and severance payments that are greater than legislative minimums, are there any circumstances where the employee could legally challenge that provision?

Answer: There are definitely pitfalls in stipulating specific notice and severance pay entitlements in employment contracts.

Employment standards legislation varies from province to province. However, provisions stipulating minimum periods of notice, pay in lieu and severance pay are common, as are provisions disallowing attempts to contract out of statutory minimums.

Generally speaking, the combined effect of these provisions is to allow the parties to an employment contract to stipulate any notice period/severance pay that is equal to or greater than the corresponding minimums set out in the applicable legislation. The effect of a failure to do so was addressed by the Supreme Court of Canada in Machtinger v. HOJ Industries Ltd.

In Machtinger, the employment contracts allowed termination of one Ontario employee with no notice and the other on two weeks’ notice. These provisions did not meet the Ontario Employment Standards Act

requirements, which entitled each employee to a minimum of four weeks’ notice based on years of service.

The court held that the insufficient notice provided for in the employment contracts rendered the termination provisions in those contracts void. As a result, the employees’ presumptive entitlement to reasonable notice of their terminations was not rebutted. Reasonable notice was seven and seven-and-one-half months for the two employees.

The employer had argued the appropriate remedy for a failure to comply with the minimum notice requirements was an order for payment to the employees of the four weeks’ salary that would have met those requirements. The court rejected this interpretation as incompatible with the purpose of the legislation, which encouraged compliance with its minimum requirements and thus extended its protection to as many employees as possible.

If the only potential sanction for failure to respect the minimum notice periods was an order to provide the statutory minimums, employers would have little incentive to make compliant contracts with their employees.

The reasoning in Machtinger

has been extended in a number of subsequent challenges of employment agreements that contain notice provisions that meet or exceed the statutory requirements at the time of dismissal but would have offended the legislation at some point in the future had the employment relationship continued.

In Shore v. Ladner Downs, the employment contract provided for 30 days’ notice of termination from either party. The employee had been employed for nine months when terminated with the stipulated notice. Under the governing employment standards legislation, the employee would have been entitled to only two weeks’ notice. Despite the fact that the employee was entitled to and received more than twice the employment standards notice requirement, the notice provisions in the employment agreement were found to be void.

The court rejected the employer’s argument that the agreement would not become void until such time as the statutory requirement for notice exceeded the 30 days provided for in the contract. According to the court, the plain language of the legislation — "a requirement under this act or the regulations is a minimum requirement, and an agreement to waive that requirement is void" — supported an interpretation under which the contractual term was void

from the outset. The court noted that the policy considerations identified in Machtinger

would not be served if the individual employee was left with the responsibility for determining, at the point of termination, whether the statutory minimum had risen above the notice period stated in the contract.

In Slepenkova v. Ivanov, the two weeks’ notice provided would have been sufficient if the employment contract had been for a fixed one-year term of employment as contended by the employer. However, the court found that the language of the agreement was insufficiently clear to create a fixed-term contract. It was found to be a contract for an indefinite term and the two weeks’ notice did not comply with the act as a result.

In Roden v. The Toronto Humane Society, the employees argued that their contractual notice provisions — "the employer may terminate the employee’s employment at any other time, without cause, upon providing the employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation" — did not comply with the statutory requirements because the provisions failed to expressly provide for continuation of benefits during the notice period as required by the Ontario legislation. The court rejected that argument, holding that the provisions were precisely the type of provisions contemplated as being valid in Machtinger

provisions that referentially incorporated the minimum notice periods or otherwise took into account later changes to the act or to the employees’ notice entitlement under the act. They did not attempt to contract out of the employer’s requirement to make benefit plan contributions. Instead, because they were silent about the employer’s obligations in respect of benefit plan contributions, the employer was obliged to — and did — comply with the requirements of the act.

A similar employer argument did not fly in Wright v. The Young and Rubicam Group of Companies (Wunderman), where the employment contract was not silent on benefits in the sense that the contract language excluded them.

The contract entitled the employee to 13 weeks of "base salary" on termination after five years of employment. It also stated that the payments of base salary were to be inclusive of "all... entitlements to compensation." On terminating the employee, the employer actually paid him 13 weeks of base salary plus RRSP contributions, car allowance payments, parking allowance payments and continued group benefits coverage. Disability and life insurance were discontinued at the end of his statutory notice period.

It was undisputed at trial that the employer had complied with its obligations to the employee under the Employment Standards Act. The employee’s statutory entitlement was five weeks’ termination pay and five weeks’ severance pay. Despite this, the employee was found entitled to 12 months’ reasonable notice on the basis that the contract’s termination provisions were void.

The court held that the express confinement of the employee’s compensation entitlement during the notice period to his "base salary" breached the provisions of the act that required continuation of benefits during the notice period. Payment of base salary, if treated as inclusive of all entitlements to compensation, meant no other compensation was flowing to the employee. The fact that the employer had continued to provide the benefits did not prevent s. 5(1) of the Employment Standards Act

from applying. The contractual exclusion of benefits violated the act and rendered the notice provisions void.

In Waddell v. Cintas Corp., the employment contract provided for termination on the notice prescribed by the Ontario Employment Standards Act, or four weeks — whichever was greater. The employee had commenced his employment in Ontario but had transferred to Vancouver and his termination had occurred while he was working in Vancouver. Because he was employed in British Columbia at the time of his termination, it was the B.C. Employment Standards Act that governed.

The court held that it was enough to nullify the termination clause that there was a possibility it could fail to meet the requirements of the B.C. act. It found that possibility in the method of calculating pay in lieu of notice in the two statutes. Although the number of weeks of notice was the same in both provinces, the B.C. legislation used a different formula for calculating compensation.

The difference could have been significant if the compensation of the employee included commissions in addition to regular salary, as it did for the employee who was a sales manager. Accordingly, the employee was entitled to seek reasonable notice.

In Kosowan v. Concept Electric Ltd., a contract provision set out the employee’s entitlement on termination without cause as follows: "You will be entitled to advance notice or severance pay thereof in accordance with the Employment Standards Act of Alberta." The employee was terminated and given four weeks’ pay in lieu of notice as provided for in the legislation.

The Alberta Court of Appeal held that he was entitled to claim reasonable notice if wrongfully dismissed as the language of the employment contract did not confine the employee’s entitlement to statutory minimum notice; it merely entitled him to it.

Another common provision of employment standards legislation — one that preserved any civil remedy an employee might have apart from the legislation — allowed him to claim reasonable notice in addition to the statutory notice.

A sloppily drafted policies and procedures reference manual was found equally ineffective to limit an employee’s entitlement in Gillespie v. 1200333 Alberta Ltd. The notice provision stated that "notice of termination for regular full- or part-time employees will for (sic) the guidelines as set out by Albert (sic) Labour - Employment Standards." The court found that the reference to "guidelines" was not specific enough to put the employee on notice that her rights were limited to the statutory minimums specified in the code or to exclude the employee’s common law right for reasonable notice.

A contractual provision that termination notice would accord with legislated provincial standards was to be interpreted as an agreement regarding minimal notice, not an agreement to exclude the presumptive entitlement to reasonable notice. Although employers were free to make contracts that limited an employee’s notice entitlement to the statutory minimums, any such agreement had to be clear and unambiguous.

These examples illustrate the importance of careful drafting in an employment contract and the importance of reviewing the contract periodically, particularly where some change has occurred. The provision of a specific notice entitlement is a dangerous practice based on the jurisprudence.

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, 2009 CarswellOnt 3749 (Ont. C.A.).

Roden v. The Toronto Humane Society, 2005 CarswellOnt 4479 (Ont. C.A.).

Wright v. The Young and Rubicam Group of Companies (Wunderman),

2011

CarswellOnt 10754 (Ont. S.C.J.).

Waddell v. Cintas Corp., 2001 CarswellBC 2798 (B.C. C.A.).

Kosowan v. Concept Electric Ltd., 2007 CarswellAlta 310 (Alta. C.A.).

Gillespie v. 1200333 Alberta Ltd.,

2012

CarswellAlta 206 (Alta. Q.B.).

Tim Mitchell is a partner at Norton Rose Fulbright in Calgary. He can be reached at (403) 267-8225 or tim.mitchell@nortonrosefulbright.com.

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