Say what you mean in employment contracts

When it comes to the wording in employment contracts, the plain language meaning will likely prevail in court, regardless of the intentions

A matter of wording

Written employment contracts are widely recommended for employers to have employees read and sign when they’re hired. Having written contracts can reduce the amount of headaches that could come later if one of the parties ends the employment relationship — whether it’s the employer dismissing the employee or the employee resigning.Having terms and conditions such as notice of termination and vacation entitlement set out in writing makes everything clear and difficult for anyone to contest later on.

However, the advantages of having a written employment contract could disappear if the language isn’t clear or says something different than what was intended. Employment lawyer Nikolay Chsherbinin explains what can happen if an employment contract’s language can be left open to interpretation.

Many experienced employment lawyers and human resource professionals recognize the importance of written employment contracts. The purpose of a written contract is to clearly define the terms and conditions that represent the actual intentions of the contracting parties at the time of its execution. However, written words, taken in isolation, have an inherent ambiguity that often finds its way into a courtroom, requiring a judge to determine the meaning of the written contract.

A case in point is a recent decision, Freudenberg Household Products Inc. v. DiGiammarino, where Justice Geoffrey Morawetz of the Ontario Superior Court was requested to interpret the meaning of the severance provision of the employment contract.

In November 2010, Franca DiGiammarino entered into a written employment contract with Freudenberg Household Products, which contained the following words:

“In the case that the company would decide to terminate the contract with the employee in the first four years after the signature, the company will pay to the employee an indemnity compensation of two years’ salary including the bonuses. After these four years, this indemnity compensation will be no more applicable.”

In the summer of 2011, Freudenberg made the decision to terminate DiGiammarino’s employment. However, by its own choice, it chose not to inform the employee of its decision until the four-year contractual term had run its course. By delaying the communication of its decision to the employee, the employer sought to avoid paying a lump-sum severance equal to two years’ compensation. When the severance was not forthcoming, DiGiammarino took issue with the employer’s interpretation of the contract.

Relying on the words “would decide to,” DiGiammarino argued the company’s obligation to pay severance was triggered on the date it made the decision to terminate the contract, and not on the date of actual termination. Justice Geoffrey Morawetz agreed that DiGiammarino’s interpretation of the written words was consistent with a plain reading of the contract. He explained that to hold otherwise would require a reading out of the words “would decide to” from the impugned paragraph and endorse a situation where the employer, having made the decision to terminate, could unilaterally delay the communication of such a decision so as to avoid its contractual obligations.

What the words say outweighs what may have been intended

Justice Morawetz’s interpretation folds perfectly into Ontario Superior Court Justice Alison Harvison Young’s 2009 interpretation of the contractual provision in Tavares v. Cargill Ltd., where, as in DiGiammarino, the only issue was the interpretation of the severance provision of the employment contract.

In Tavares, the employee argued that on the clear wording of the employment contract, the common law severance compensation negotiated was to be “in addition to” the statutory severance described in the contract. In response, the employer argued that on a plain reading that takes the “factual matrix” into account, a plain construction of the employment contract leads to the conclusion that the benefits and salary negotiated was, in effect, to include those described in the earlier paragraph.

The court preferred the employee’s interpretation. Justice Harvison Young explained that while the employer’s interpretation of the contract would have made sense, it “was not what the words actually said.” Relying on the Ontario Court of Appeal decision in Plan Group v. Bell Canada, she observed that contracts are to be interpreted by determining the intention of the parties in accordance with the language they have used in the written document and based upon the “cardinal presumption” that they have intended what they have said.

The cardinal presumption also played a significant role in DiGiammarino, where Justice Morawetz concluded: “If the (employer) intended for the indemnity provision to apply based on the date of termination as opposed to the date of the decision to terminate, then (it) should have said so in the employment contract. It did not. Rather, the provision clearly states that it is engaged when the company decided to terminate the contract.”

As a consequence, DiGiammarino was awarded two years’ severance that was not subject to mitigation. Describing the Ontario Court of Appeal decision in Bowes v. Goss Powers Products Ltd. as the “controlling authority” on the issue of mitigation, Justice Morawetz explained that where the employment contract contains a stipulated entitlement on termination without cause and is silent as to the obligation to mitigate, the employee will not be required to mitigate.

Employers can’t sidestep written contract

DiGiammarino, Tavares, Plan Group and other cases of a similar nature serve as useful reminders to employers that courts are not simply going to permit them to use any, however ingenious, argument to sidestep a written contract of employment. These decisions underscore the importance of clear and precise language in an employment contract. No doubt, the dictionary and grammatical meaning of the words, sometimes called the “plain meaning,” used by contracting parties will be important and often decisive in determining the meaning of an employment contract. Properly drafted employment contracts, and particularly severance clauses, may substantially eliminate misunderstandings and reduce employers’ liability for damages.

For more information see:

Freudenberg Household Products Inc. v. DiGiammarino, 2012 CarswellOnt 12818 (Ont. S.C.J.).
Tavares v. Cargill Ltd., 2009 CarswellOnt 6183 (Ont. S.C.J.).
Plan Group v. Bell Canada, 2009 CarswellOnt 3807 (Ont. C.A.).
Bowes v. Goss Powers Products Ltd., 2012 CarswellOnt 7721 (Ont. C.A.).

Nikolay Y. Chsherbinin is an employment lawyer at Chsherbinin Litigation. He can be reached at (416) 907-2587, [email protected] or by visiting www.nclaw.ca.

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The decision to terminate versus the action

The employment contract between Freudenberg Household Products and Franca DiGiammarino contained the following termination provision:

“7. In the case that the Company would decide to terminate the contract with the employee in the first 4 years after the signature, the Company will pay to the employee an indemnity compensation of two (2) years salary including the bonuses. In the case the Company terminates the contract following employee's behaviour that could put the company in financial/commercial danger as a result of illegal or dangerous act, this compensation will not be payable any more. This indemnity will include any other compensation arising from normal labour regulations.

“After these 4 years, this indemnity compensation will be no more applicable and the potential separation will be regulated by normal Canadian labour regulations.”

Justice Morawetz of the Ontario Superior Court of Justice said:

“A plain reading of paragraph 7 of the Employment Contract is such that, in my view, the indemnification obligation is triggered if the company decides to terminate the contract with the employee in the first four years after the signature.

“The contract was entered into in November 201o. The decision to terminate the Respondent's employment was made in the summer of 2011. Freudenberg, by its own choice, chose not to inform the Respondent of the decision to terminate her until the four-year term referred to in the Employment Contract had run its course.

“However, by delaying the communication of the termination to the Respondent, this does not, in my view, alter the fact that the indemnity provision in paragraph 7 had been engaged. The decision to terminate had clearly been made within the four-year term of the contract. It is this step — the decision to terminate — that engages the indemnity obligation.”

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