The enforceability of termination clauses

By Stuart Rudner

Last fall, I wrote about the Superior Court Ontario's decision in the case of Mlotek v. York-Med Systems, in which the court had to consider the enforceability of a termination clause. The clause read as follows:

“If your employment is terminated for any reason other than ‘just cause’ in law then you will receive one week’s notice of termination, or pay in lieu, for each complete 12-month period of employment as part of whatever entitlement you have under any applicable statute.”

In that case, the motions judge found the clause was enforceable. The findings of the motion judge were challenged, and the Court of Appeal recently heard argument. Ultimately, the court agreed with the motion judge's interpretation, which it found to be reasonable.

This is interesting in light of the other recent case law finding that termination clauses which do not explicitly provide for continuation of benefits during the statutory notice period are in breach of the applicable legislation and therefore unenforceable. That line of cases includes Stevens v. Sifton Properties Ltd., and had been routinely relied upon by plaintiff's counsel in order to argue that termination clauses are unenforceable.

As I’ve discussed in several blog posts (including here and here), recent years have seen frequent challenges to termination clauses with somewhat unpredictable results. While many cases have found in favour of the employee, we have seen some, such as the York-Med Systems decision, which have ruled in favour of the employer and “contractual certainty".

Another example is Luney v. Day and Ross Inc., in which the court confirmed that a “saving provision" can effectively resuscitate a termination clause that would otherwise be in breach of applicable legislation. In that case, the contract contained the following wording:

“It is understood and agreed that in the event the aforesaid notice and severance entitlements are not in conformity with the notice and severance provisions prescribed by the (code) or other similar legislation, the statutory minimum’s [sic] shall apply and be considered reasonable notice and severance.”

The bottom line is that somewhat surprisingly, although we are now in 2016, the law regarding employment contracts and termination clauses in particular remains unsettled and unpredictable. This causes significant frustration for employers, who attempt to create certainty through the use of contracts, as well as for employees, who may be uncertain of their rights.

The best advice that we can offer at this point is to ensure that any termination clause is as clear and precise as possible, and that every effort is made to ensure that it is compliant with applicable employment standards legislation and contains a saving clause for that purpose.

Of course, the other challenge that can often be mounted to defeat termination clauses is a lack of consideration. I have discussed this on many occasions as well, including this post. Employers that continue to use the practice of making an offer, either verbally or by way of a short offer letter, and then presenting a more extensive contract on the first day of employment, significantly weaken their position and expose themselves to the risk that the termination clause, as well as the rest of the contract that they spent time and money drafting, will be unenforceable.