'Termination clauses should be always viewed with a grain of salt': lawyer
An Ontario court has rendered another termination clause unenforceable due to a provision that was too broad in outlining the circumstances where the employee would get nothing if he was fired.
“There’s a new line of case law that essentially renders a whole termination clause, and then after that whole contract, unenforceable just because of the just-cause portion of it,” says Christopher Achkar, an employment lawyer and principal of Achkar Law in Toronto. “The clause in the contract here said that the employee would not be entitled to any compensation for any just cause.”
Storstac is a company that deals in the sale, rental, and modification of storage containers based in Toronto. It hired the worker in June 2015 to be a container controller. After he completed his probationary period, he was promoted to the role of depot manager, which was classified as a managerial position and involved supervising a small number of staff at Storstac’s depot and overseeing the containers stored there.
Before he started working, the worker signed an employment contract that included a termination clause. The clause stated that Storstac could end the employment relationship “at any time without advanced notice and without pay in lieu of such notice for any just cause recognized at law.”
The clause also allowed the company to terminate the worker’s employment at any time “with two weeks of notice, pay in lieu of notice or a combination of both, at the employer’s option, plus one additional week of notice (or pay in lieu) for each year of completed service to a maximum of eight weeks.” It recognized that after five years of service that severance pay may be payable under the Ontario Employment Standards Act, 2000 (ESA).
A termination clause that is broader than the legislative standard of cause warranting no notice or pay is unenforceable, an Ontario court found.
Saving statement in termination clause
The termination clause concluded with the statement, “The provisions of the Employment Standards Act, 2000, as they may from time to time be amended, are deemed to be incorporated herein and shall prevail if greater.”
In addition to a salary, the worker was part of a benefits plan that was 70 per cent paid for by the company. He also received a Christmas bonus every year, although the amount varied widely, ranging from $500 to $3,500.
On May 28, 2020 – shortly before the worker reached five years with the company - Storstac informed the worker that it was terminating his employment due to adverse economic conditions. The company had experienced a large drop in revenue due to the pandemic and supply chain difficulties.
The worker applied to more than 80 comparable positions, but he was unsuccessful. He applied for and received Canada Emergency Response Benefits (CERB) that were available for people laid off because of the pandemic.
The worker sued for wrongful dismissal and claimed damages for common law reasonable notice of eight to 10 months. He argued that the termination clause in his employment contract breached the ESA and was unenforceable.
Significant changes in an executive’s duties and pay were beyond what was contemplated in his contract, rendering the termination clause unenforceable, an Ontario court ruled.
Language inconsistent with ESA
The court noted that the termination clause provided for Storstac to dismiss the worker without notice or pay for “any just cause.” However, this language was inconsistent with the ESA regulation that only permits termination without notice or payment for employees who are “guilty of wilful misconduct, disobedience or wilful neglectful duty that is not trivial and has not been condoned by the employer.” The regulation’s standard was narrower than the common law “just cause” standard, but the termination clause did not differentiate between the two, said the court.
The court referred to a line of cases that began with Waksdale v. Swegon North America, 2020 ONCA 391, in which employers tried to use termination clauses that gave them the right to terminate employment without notice or payment for just cause that fell short of “non-trivial wilful misconduct.” In these cases, the one portion of the clause that breached the ESA made the entire termination clause unenforceable, even if the employee wasn’t fired for cause and didn’t engage the offending provision, said the court.
The court also found that the attempt to incorporate the ESA’s provisions with a single sentence at the end of the “without cause” portion did not change the fact that the company tried to assert a right to terminate without notice for any just cause.
As with the line of previous cases, the court determined that the termination clause was unenforceable and the worker was entitled to common law reasonable notice.
A conflict of interest clause that contemplated termination without notice made the entire employment agreement invalid, according to an Ontario court.
Saving clause no guarantee
Saving clauses generally just don’t work, particularly with the recent line of cases where any part that’s illegal will scrap the entire termination clause, says Achkar.
“As the court said, it's vague to have all these weird requirements that potentially conflict with employment standards and at the end of it still say that, just to sort of save face even though you know that the rest of the termination clause may be less than the ESA [minimums],” he says.
“Normally, a savings clause is at the end of a contract to say that if any clause above could be interpreted to be contrary to the [ESA] then it would not apply and [the clause] would be stricken from it,” adds Achkar. “This savings clause was literally at the end of the very termination clause itself.”
While the worker argued for eight to 10 months’ notice, Storstac countered that four to five months was more appropriate, reflecting the frequently used estimation of about one month per year of service.
The court noted that the worker’s position was classified as managerial – which could lean towards a longer notice period – but the evidence showed that the managerial aspects were limited and the position was not a senior one.
The Ontario Court of Appeal decision in Waksdale put many without-cause provisions in termination clauses in peril.
Difficult economic conditions
The court also considered that the worker was 40 years old at the time of termination and made many unsuccessful efforts to find alternate employment in difficult economic conditions. Given these factors, a notice period that was “modestly higher” than the standard range was appropriate, said the court in determining that the worker was entitled to seven months’ notice.
The court found that the worker was not entitled to a 2020 bonus that would have been received during his notice period, as the amount varied considerably and should not be considered a significant component of the worker’s compensation package. In addition, the company was suffering from difficult economic conditions and there likely would not have been a large bonus in 2020, said the court.
Storstac was ordered to pay the worker seven months’ salary and benefits, minus and amounts already paid at the time of termination.
“Termination clauses should be always viewed with a grain of salt and with some level of doubt, because while we think that we can have the best termination clause that could be watertight, it may, frankly, not be,” says Achkar. “I wonder if the employer had offered the amount [four to five months’ pay in lieu of notice] pre-litigation, it would have avoided litigation - looking at termination clauses with a lens of uncertainty will, I think, help move parties towards negotiation versus litigating these issues, because the line of termination clause cases is still unclear.”
