Saving provision in termination clause fails to save employer

Clauses may not be binding, which can expose employers to significant risks under common law

Saving provision in termination clause fails to save employer
Nadia Zaman

Exclusive to Canadian HR Reporter from Rudner Law.

In the employment law world, termination clauses are often treated as the “black sheep” - employees don’t like them because they purport to limit their entitlements upon termination and employers don’t like them because it seems like they can never get it right!

In a recent decision, Tan v Stostac Inc, 2023 ONSC 2121, the court found another termination clause to be unenforceable. The termination clause included the following wording:

“The Employer may 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 provisions of the Ontario Employment Standards Act, 2000, as they may from time to time be amended, are deemed to be incorporated herein and shall prevail if greater.”

Why did the court find this clause to be invalid?

To begin with, remember the infamous Waksdale case that rendered the majority of termination clauses in employment contracts unenforceable, leaving employers exposed to significant liability under the common law? In Waksdale, the Ontario Court of Appeal held that a termination clause must be looked at in its entirety, and thus, despite the fact that the termination was without cause and the without cause provision standing alone was fine, the “for cause” provision invalidated the entire termination clause as it breached the Ontario Employment Standards Act, 2000 (ESA).

As a result, the employee was entitled to common law reasonable notice, and significantly more compensation.

The termination clause in Tan v Stostac Inc was found to be faulty for similar reasons. In particular, the termination for cause provision states that the employer may dismiss without notice or pay in lieu thereof for just cause.

However, this wording breaches the ESA since an employer is only allowed to dismiss for cause without notice or pay in lieu of notice if the employee is guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.

Importantly, the termination clause in this case had a saving provision. However, the court still found it to be unenforceable:

“In my view, the termination clause in this case suffers from the same flaw identified in the line of cases cited above by giving the defendant the right to terminate the plaintiff’s employment without notice or payment for just cause that might fall short of non-trivial willful misconduct. I do not accept that the attempt to incorporate the ESA’s provisions in the final sentence of the clause’s “without cause” portion detracts from the clear assertion of a right to terminate without notice for any just cause.” [Emphasis added]

Key takeaways

This decision serves as a stark reminder for employers: a saving clause will not save an otherwise invalid termination clause. The termination clause in itself must not violate the ESA.

While termination clauses are upheld from time to time, and it is certainly possible to draft and implement a strong, enforceable termination clause to limit an employee’s entitlements upon termination, employers must approach this with caution and seek legal advice from an employment lawyer prior to hiring to ensure the contract and termination clause are enforceable as well as prior to dismissal to ensure the dismissal is being carried out properly.

The termination clauses in your existing contracts may not be binding, which can expose you to significant liability under the common law. For example, you might think your obligation is to pay eight weeks of pay, only to realize it is up to 24 months of pay instead.

For an employee making $50,000 a year who signed a legally binding contract, your obligations upon dismissal could be limited to less than $8,000, whereas if the termination clause is unenforceable, your obligation could be up to $100,000. Why would you want to take that risk?

Don’t treat termination clauses as black sheep. Treat them as an important tool you can strategically use to minimize your liability.

Nadia Zaman is a senior associate at Rudner Law in Toronto. She can be reached at (416) 864-8500 or [email protected]

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