Mutually agreeable termination clauses

Clauses can also be used to bring certainty to employee's post-termination entitlements

Mutually agreeable termination clauses

As most HR professionals know, many employment issues that end up in court could have been avoided if proper contracts were entered into at the commencement of employment. While some employers don’t wish to involve lawyers in their hiring processes, doing so can help prevent lengthy and costly litigation down the road.

One way of limiting possible litigation is by including legally enforceable termination clauses in employment agreements. What is “legally enforceable” can change over time, as was the case with the Ontario Court of Appeal’s 2020 decision in Waksdale v. Swegon North America Inc., which has had a dramatic impact on the enforceability of termination clauses. My colleagues have written about the impact of this decision in 2020 and in 2021. Employment law continues to evolve, and employment contracts must evolve with it.

While termination clauses are often used to limit an employee’s entitlements upon termination, this does not always need to be the case. Termination clauses can also be used to bring certainty to the employee’s post-termination entitlements, rather than trying to ascertain these entitlements through common law principles, which can be difficult, time consuming, and often adversarial in nature. Termination clauses can avoid these issues by specifying a fixed amount of notice or damages to pay upon termination, or by containing a formula to easily determine these amounts.

While some employees may be unwilling to sign a contract that limits their post-termination entitlements to the minimum statutory requirements of the Employment Standards Act, 2000, a termination clause that provides for fair and reasonable compensation upon termination may be mutually beneficial to both the employee and the employer. Provided that the termination clause is properly drafted and enforceable, it could bring certainty and finality to the employee’s entitlements, and save both parties the time and expense of litigating the issues through their lawyers. For that reason, certain termination clauses can be attractive to employees as well as employers.

Employers should also be aware that unless the termination clause contains specific language that says otherwise, the employee will not have any duty to mitigate their damages by seeking replacement employment during the contractual period of notice. Similarly, any income earned during the contractual notice period would not be deducted from the amounts payable to the employee pursuant to the termination clause.

That principle was found by the Ontario Court of Appeal in Bowes v. Goss Power Products Ltd. and Howard v. Benson Group Inc. Last month, the Superior Court of Justice relied on the same principle in Ratigan and Bouttier v. Premier Conferencing. In this way, contractual notice is different from common law notice, as an employee has a duty to mitigate damages related to common law notice, and any income earned during the common law notice period would be deducted from the amounts payable by their former employer.

This is a further reason why a properly drafted termination clause can be beneficial to employees. Even if the termination clause provides for reduced payment upon termination than would otherwise be owing under common law, the employee has the advantage of knowing that their post-termination entitlements are fixed, and would not be reduced based on what happens in their job search.

We recommend speaking to a lawyer to ensure that your termination clauses are properly drafted and enforceable. You may be doing everyone a favour.

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