Recent Ontario Court of Appeal decision muddies the waters on 'failsafe provisions' for minimum entitlements in termination clauses
A long history of inconsistent and amorphous case law has created significant uncertainty among lawyers attempting to advise their clients about whether a given termination clause is enforceable or unenforceable. An Ontario Court of Appeal decision released in late August, Andros v. Colliers Macaulay Nicolls Inc., may amplify, rather than resolve, some of that uncertainty.
Specifically, Andros considered two primary issues: (1) the effect and application of “failsafe” provisions in termination clauses, and (2) whether a termination clause that is “silent” as to the Ontario Employment Standards Act, 2000 (ESA) minimum entitlements can be characterized as an attempt to illegally contract out of the ESA.
Failsafe provisions in employment contracts
The court’s previous ruling in Amberber v. IBM Canada Ltd. played a significant role in the Andros decision. In Amberber, the termination clause was a single paragraph with a final sentence which provided that if the ESA provided the employee with superior entitlements than the termination clause otherwise did, the employee would get his ESA minimum entitlements instead. The court concluded that this “failsafe provision” saved the otherwise unenforceable termination clause because “it ensures that any portion of the termination clause that falls short of the ESA must be read up so that it complies with the ESA.” In other words, there was no possible scenario in which the termination clause could provide the employee with less than his ESA minimum entitlements. Based on Amberber, it had generally been assumed that similar failsafe provisions will generally be effective in saving otherwise unenforceable termination clauses, so long as they ensure that the employee will never get less than his/her ESA minimum entitlements.
The termination clause in Andros contained a failsafe provision [emphasis added]:
"The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act [the “Failsafe Provision”] or, at the Company’s sole discretion, either of the following:
a. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period [clause “4(a)].
b. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary [clause “4(b)”].
At summary judgment, the employer argued that under the clear terms of the termination clause, the employee was entitled to the greater of either his minimum entitlements under the ESA pursuant to the Failsafe Provision, or either his entitlements under 4(a) or 4(b). In this case, his minimum entitlements under the ESA exceeded his entitlements under 4(a) or 4(b), so he was provided his minimum entitlements under the ESA.
The motions judge concluded that the termination clause was unenforceable. The motions judge did not consider whether there was any scenario in which the employee would receive less than his minimum ESA entitlements pursuant to the termination clause. Rather, the motions judge concluded that if 4(a) applied, the employee would arguably not be entitled to ESA severance and, if 4(b) applied, the employee would arguably not be entitled to benefits continuation as required by the ESA. Either way, some part of the clause violated the ESA and as such, the entire termination clause was void.
On appeal, the employer argued, based on the Court of Appeal's decision in Amberber, that the Failsafe Provision should have the effect of “reading up” 4(a) or 4(b) to be ESA compliant. In other words, the Court of Appeal considered whether the Failsafe Provision applies to 4(a) and/or 4(b), rather than operates as a standalone term guaranteeing ESA minimum entitlements. This argument was rejected by the court because of the disjunctive structure of the termination clause. Specifically, the use of the word “or” after the Failsafe Provision suggests that the Failsafe Provision does not apply to 4(a) or 4(b). As such, the termination clause was distinguished from that in Amberber and neither 4(a) nor 4(b) could be “read up” by the Failsafe Provision.
The Court of Appeal unanimously dismissed the employer’s appeal.
Unfortunately, the Court of Appeal did not consider whether the Failsafe Provision is a standalone term which ensures that, if either 4(a) or 4(b) provide the employee with entitlements that are inferior to the Failsafe Provision, the Failsafe Provisions is triggered and the employee will be contractually entitled to at least his ESA minimum entitlements. Arguably, like in Amberber, there was no scenario in which the employee would be contractually entitled to anything less than his ESA minimum entitlements. As such, it is not clear how the termination clause, read as a whole, constitutes an illegal attempt to contract out of the ESA.
Whether 'silence' on ESA minimums amounts to an attempt to illegally contract out of them
As discussed above, a further issue was whether clauses 4(a) and/or 4(b) of the termination clause constitute illegal attempts to contract out of the ESA. The employee argued that 4(a) excluded ESA severance contrary to the ESA, and 4(b) excluded benefits continuation contrary to the ESA, despite the fact that neither clause mentions severance pay or benefits continuation. The motions judge agreed and held that both 4(a) and 4(b) violate the ESA.
The leading authority on that issue is Roden v. Toronto Humane Society. In Roden, the termination clause provided only that on termination without cause, the employee would receive the minimum amount of notice or pay in lieu required by the ESA. The employee argued that the clause excluded benefits continuation and severance and was accordingly an illegal attempt to contract out of the ESA. The Ontario Court of Appeal concluded that the termination clause’s silence regarding benefits continuation and severance did not constitute an attempt to contract out of the ESA. A similar termination clause was considered, and upheld, by the Court of Appeal in Nemeth v. Hatch Ltd.
On the basis of Roden and Nemeth, it appears that neither 4(a) nor 4(b) should violate the ESA. Like the clauses in Roden and Nemeth, both 4(a) and 4(b) only limit the notice period, and in a manner consistent with ESA minimums. Neither clause, nor any other clause in the agreement, purported to otherwise limit the employee’s entitlements to severance, benefits continuation, or any other minimum employment standard.
However, the motions judge distinguished the termination clause from those in Roden and Nemeth on the basis that Andros’s termination clause did not refer to the ESA. The motions judge concluded that “this omission is problematic” but cited no precedent or legal principles in support of that assertion. The ESA does not require employers and employees to refer to the ESA in termination clauses. As such, it is not clear how a failure to refer to the ESA is sufficient to distinguish the enforceable termination clauses in Roden and Nemeth from that in Andros. Nonetheless, the Court of Appeal again upheld the motions judge’s decision on this issue and dismissed the employer’s appeal.
Takeaways for employers
Unless the Andros decision is appealed further, it will likely inject further uncertainty into the law concerning the enforceability of termination clauses in employment agreements. The decision suggests that even termination clauses which appear to be consistent with former court decisions could be held to be unenforceable, thereby exposing employers to increased liability. Notably, the court did not overturn its earlier decisions about failsafe provisions or silence regarding ESA minimums. As such, Andros should not disturb the law on those issues generally – the court’s conclusions in Andros should be confined to the specific facts of the case.
For more information see:
- Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679 (Ont. C.A.).
- Amberber v. IBM Canada Ltd., 2018 ONCA 571 (Ont. C.A.).
- Roden v. Toronto Humane Society, 2005 CanLII 33578 (Ont. C.A.).
- Nemeth v. HatchLtd., 2018 ONCA 7 (Ont. C.A.).
Liam Ledgerwood is an associate with the labour and employment group for Siskinds Law Firm in London, Ont. He can be reached at (519) 660-7790 or email@example.com.