Making a termination clause legit

In recent years, the enforceability of termination clauses has been a hot topic in employment law circles as some courts have appeared to take a closer look at them and displayed a greater willingness to strike down clauses that potentially violated the employment standards legislation. Despite the growing body of case law in which termination clauses were found to be unenforceable for various reasons — such as the failure to provide for continued benefits during the employee’s notice period — there were also enough cases demonstrating a more lenient approach that it could be fairly said that the state of the law was uncertain.

In the recent case of Wood v. Fred Deeley Imports Ltd., the Ontario Court of Appeal provided some much-needed clarity about the proper interpretation of termination clauses, demonstrating the strict approach that courts must take in rejecting clauses which contain even potential violations of legislation like the Ontario Employment Standards Act, 2000 (ESA).

Julia Wood commenced employment with Fred Deeley Imports in April 2007.  In April 2015, she was provided with 13 weeks of working notice that her employment would end on Aug. 4, 2015. At the time of the termination of her employment, Wood earned a base salary of $81,041.48. She was also entitled to an annual bonus of up to 14 percent of base salary, a clothing allowance, and was entitled to participate in Fred Deeley’s health, dental and RRSP plans.

Wood’s employment was governed by a written contract of employment, which contained the following termination clause:

“The company is entitled to terminate your employment at any time without cause by providing you with two weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the company. If the company terminates your employment without cause, the company shall not be obliged to make any payments for 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.”

At the conclusion of the 13-week working notice period, Fred Deeley paid Wood an additional lump-sum payment of eight weeks’ pay, which they classified as her entitlement to statutory severance.

In all, Wood received 21 weeks’ salary, which was more than both her contractual entitlement (18 weeks) and her entitlement under the ESA (16.3 weeks — eight weeks of notice and 8.3 weeks of severance).  Her employee benefits were also continued for her 13-week working notice period.

Nevertheless, Wood started an action and brought a motion for summary judgment, arguing that the employment contract was not enforceable for various reasons, including that it violated the ESA because it excluded Fred Deeley’s statutory obligation to make benefit contributions during Wood's statutory notice period and it did not satisfy the company’s obligation to pay statutory severance pay.

While the motion judge found against Wood’s arguments and upheld the termination clause, the Ontario Court of Appeal saw differently and overturned that decision in both respects.

Failure to provide benefits over the notice period

According to ss. 60 and 61 of Ontario’s ESA, an employer is required to continue to make benefit contributions during an employee’s ESA notice period. While Fred Deeley had, in fact, continued Wood’s benefits during her 13-week working notice period, satisfying its obligations under the ESA, the Court of Appeal, relying on the 1992 Supreme Court of Canada decision in Machtinger, confirmed that the enforceability of a termination clause depends only on the wording of the clause itself and not what the employer may have done on termination.

With respect to the specific clause in this case, Fred Deeley’s argument that the word “pay” was broad enough to include both salary and benefits was rejected, with the court holding that “pay” did not clearly and unambiguously include both salary and benefits.

The court went further and found that the clause was not silent with respect to Wood’s entitlement to benefits, but in fact expressly excluded it, due to the contractual language which stated that “the company shall not be obliged to make any payments for you other than those provided for in this paragraph” and “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.”

Statutory severance pay

While the court’s ruling about the failure to provide benefits was sufficient to resolve the appeal, the court also considered Wood’s argument that the clause was void for potentially violating Fred Deeley’s obligation to pay severance pay.

As Wood worked for Fred Deeley for eight years and four months, she was entitled to eight weeks of notice and 8.3 weeks of severance under the ESA. According to her termination clause, Wood was entitled to “two weeks’ notice of termination for each year or partial year of employment,” which at the time of her termination would equal 18 weeks. 

While the clause would always provide Wood with a greater number of weeks than her entitlement to notice and severance under the ESA, where Fred Deeley erred was in combining these two separate obligations into one. This created potential scenarios in which Fred Deeley could fulfil its obligations under the clause in a manner that would deprive Wood of her entitlement to statutory severance pay:

• If Fred Deeley paid the 18 weeks as a lump sum, it would comply with the ESA, since her ESA entitlement was 16.3 weeks.

• If Fred Deeley gave 18 weeks’ working notice, it would not comply with the ESA, since Wood would not receive her entitlement to statutory severance.

• If Fred Deeley gave a combination of working notice and severance, it would comply with the ESA depending on the amount of working notice given. For instance, nine weeks of working notice and a lump sum of nine weeks would comply with the ESA but 13 weeks of working notice and 5 weeks’ lump sum would not.

Given the potential violation of the ESA, the court held that the termination clause should also be struck down on this ground.

The Ontario Court of Appeal’s decision that potential ESA violations are sufficient to void a termination clause and that post-termination conduct is irrelevant to the analysis will have important implications for future cases. This decision illustrates the importance of carefully drafting termination clauses to ensure they are fully compliant with employment standards legislation. Now that the Ontario Court of Appeal has provided clarity to this area of law, employers and employees should expect termination clauses to be interpreted strictly, with any potential breach of the ESA likely to invalidate the clause. Given that the consequence of such a finding is that the employee would be entitled to reasonable notice at common law, it is important for employers to review their existing termination clauses to avoid unpleasant and potentially costly surprises upon termination.

For more information see:

•Wood v. Fred Deeley Imports Ltd., 2017 CarswellOnt 2408 (Ont. C.A.).

•Machtinger v. HOJ Industries Ltd., 1992 CarswellOnt 892 (S.C.C.).