Clarity is key when it comes to drafting and enforcing termination clauses in employment contracts
Employment standards legislation in all Canadian jurisdictions sets out a minimum amount of notice or pay in lieu of notice to which an employee is entitled when their employment is terminated. Most employees will be entitled to more than this minimum at common law, which provides for much more extensive notice entitlements. The difference between the statutory and common law notice can be substantial, depending on several factors including the employee's age, position with the employer, tenure and the availability of similar alternative employment.
Termination clauses are a tool that employers can use to limit lengthy common law notice entitlements. Such clauses are provisions in written employment contracts that specify the length of notice to which an employee is entitled or the amount of severance pay upon termination. The benefit of termination clauses for employers is that they allow the employer to limit the amount of severance payable to an employee and provide a known cost when dismissing them.
Termination clauses in employment contracts can be very useful for employers, but there are some basic and important parameters to consider when drafting them.
Termination clauses cannot provide for less than the statutory minimum. The Supreme Court of Canada in Machtinger v. HOJ Industries Ltd. ruled that if an employment contract contains a termination clause, the entitlement under that clause must be at least equal to the employee’s entitlement pursuant to employment standards legislation. A termination clause will be struck down if it provides for less than the statutory minimum and the employee will be entitled to common law notice instead.
Termination clauses must be clear and unequivocal. Termination clauses must be clearly and unequivocally expressed. An ambiguous termination clause will be interpreted in favour of the employee, ultimately defeating the limiting function of the clause: see Dodich v. Leisure Care Canada.
As a common example, a termination clause will be void where it does not explicitly preclude the employee from an entitlement to common law notice. For example, if the clause states only that "the employer will follow employment standards," it could be interpreted to mean that the employee is entitled to at least the statutory minimum per employment standards legislation. Since it does not say that the employee is limited to the employment standards amount, it cannot rebut the presumption that the employee is entitled to the higher common law amount.
Termination clauses cannot be unilaterally inserted into existing contracts. Courts have held that the addition of a termination clause to an employment contract is a significant change to the terms of employment. Contract law dictates that contracts are not binding unless there is consideration. Consideration refers to an exchange of something of value between parties. At the start of an employment relationship, the consideration exchanged between employer and employee can be as simple as the provision of the employee's services in exchange for a wage.
However, if an employer wishes to change the terms of the employment contract with an existing employee, some additional benefit must flow to the employee from signing on to the new terms, beyond continued employment for an unknown period. As the B.C. Supreme Court said in Krieser v. Active Chemicals Ltd., adequate consideration requires something more than the bald promise of "we won't fire you right now.”
Therefore, if an employer wishes to add a termination clause to an existing employment contract, it has two options: The employer can terminate the existing employment contract and rehire the employee on new terms or it can offer consideration sufficient to motivate the employee to agree to the revised terms. The employer may offer "fresh" consideration in the form of a promotion, a bonus or a pay raise in order to give effect to the changed terms.
As a final note, remember that courts will always endeavour to give effect to parties' intentions when interpreting a contract. Above all, it is always good practice to be clear with employees about what termination clauses mean and how the clauses affect their rights.
For more information see:
- Machtinger v. HOJ Industries Ltd.,  1 SCR 986 (S.C.C.).
- Dodich v. Leisure Care Canada, 2006 BCSC 93 (B.C. S.C.).
- Krieser v. Active Chemicals Ltd., 2005 BCSC 1370 (B.C. S.C.).
Melanie Samuels is a partner with Singleton Reynolds in Vancouver and is co-chairperson of the firm’s Employment and Labour Group. She can be reached at (604) 673-7405 or [email protected] Makaela Peters is an associate in the Commercial Litigation, Insurance, Workplace Law and Professional Liability Practice Groups at Singleton Reynolds in Vancouver. She can be reached at (604) 682-7474, ext. 2280 or [email protected]