Avoid future costs with clearly written employment agreements

I have often noted the value of having a clearly written employment agreement, with termination provisions, in every employment relationship. Simply put, it allows both the employer and the employee to understand their rights and obligations and avoid the unnecessary expenditure of time and money at the end of the relationship.

Our courts will enforce termination provisions if the contract was properly entered into (see, for example, this post) and if the provision is properly worded.

Unfortunately, I often come across situations where an employer intended to have a binding termination clause in place, but chose to cut costs by either drafting it themselves or using a precedent that was not specifically drafted for the situation in question.

In many of those cases, they ultimately find they may not be able to enforce the termination provision they put in place, and their liability to the dismissed employee is far greater than they anticipated.

Inevitably, the additional costs, both in terms of severance pay and legal fees, will greatly exceed the amount they would have paid an employment lawyer at the outset to draft a clause properly.

A recent decision of the Ontario Superior Court provides another example of this, and also confirms that ambiguous termination provisions will not be saved by the courts.

Employment standards

Employment Standards legislation sets out the absolute minimum amount of notice, pay in lieu of notice, and severance pay (if applicable) an employee will be entitled to in the event of dismissal without cause. If there is no enforceable termination provision in place, then the common law will apply, and the employee will be entitled to reasonable notice of dismissal.

As discussed at length elsewhere, reasonable notice is often difficult to predict with certainty but will almost always be substantially greater than the statutory minimum amounts. If the common law governs, then at the time of dismissal, a wise employer will consult an employment lawyer and seek an opinion as to the employee's entitlement to notice of termination or pay in lieu thereof.

Due to the lack of hard and fast rules with respect to the calculation of reasonable notice, prudent employment lawyers will suggest a range within which the notice period should fall. The employer will then present a severance package, and a wise employee will consult an employment lawyer and ask them, effectively, the same question.

Unfortunately, lawyers may have different opinions, and the parties will then have to attempt to negotiate a resolution. If they are unable to, then litigation may be required. All of this uncertainty, time and expense can be avoided with a clearly worded termination provision.

Quebec case looks at entitlement to severance pay

Unfortunately, many termination provisions are anything but clearly worded. In the recent case of Paquette c. Quadraspec Inc., several important issues were addressed by the court, including how the entitlement to severance pay is determined (see Ontario ruling could alter severance pay landscape).

In addition, the court was faced with a termination provision that, according to the plaintiff, was ambiguous and unenforceable. In particular, it did not address the continuation of employment related benefits, which must continue in accordance with the Employment Standards Act, 2000.

The decision was rendered in French, which means it will likely fly below the radar since few employment lawyers in Ontario are bilingual. I grew up in Montreal, and have managed to retain at least some of my ability to understand French despite living in Toronto for two decades, and I have had a chance to review the lengthy decision of Justice Kane. Loosely translated, the relevant portion of the termination clause reads as follows:

12.4 The employer may terminate the employee's employment for any other reason upon written notice of two (2) weeks per completed year of service, up to a maximum of six (6) months.

If the employer does not provide written notice or provides insufficient notice, it must pay the employee an indemnity equal to the base salary of the employee (excluding commissions) for a period equal to the period or remaining period of notice to which the employee was entitled. The compensation, if any, will be paid from the termination of employment from week to week, until the period has elapsed or until the employee finds another job to his own account or for another employer, according to the first two (2) events.

In response to the employee's submissions, the employer relied upon the 1999 decision in MacDonald v. ADGA Systems International Ltd., which is often relied upon in support of the argument that the wording of a termination provision need not be perfect in order to displace the presumption that the common law will apply.

Justice Kane rejected that argument, preferring the approach adopted in many other cases, the net result of which is that while the courts will enforce termination clauses, they will only do so where the wording is clear and unambiguous.

In a post entitled How dusty are your employment contracts?, I discussed the relatively recent case of Stevens v. Sifton, a decision that surprised many. Briefly stated, the termination clause at issue in that case explicitly provided for payment of salary during the notice period, but did not refer to employment-related benefits. There was no dispute that when the plaintiff was dismissed, the employer did continue his salary and benefits. However, the plaintiff took the position that by not explicitly requiring that employment-related benefits continue, the clause provided for a lesser benefit than that required by the Employment Standards Act, 2000, and was therefore a breach of that act and unenforceable. The court agreed, and the employer was ordered to compensate the employee in accordance with the common law.

In Paquette, Justice Kane also referred to decisions including Wright v. Young and Rubicam Group of Companies (Wunderman). Ultimately, the court rejected the employer's argument that the parties' intention could clearly be inferred from the wording, even if the wording itself could have been better, and that the termination provision should be enforced. Essentially, Justice Kane found that an employer should not be able to put a lengthy, detailed employment agreement in place and then ask the court to save a provision by implying certain wording or terms that the employer failed to include when drafting the agreement.

Termination provisions

Before concluding, I want to address an issue that has been raised many times in the past, and recently in a LinkedIn discussion. Termination provisions do not have to be oppressive. Many employers reject the suggestion they include such a provision in their contracts of employment as they fear that it would send a negative message to potential employees.

However, the clause can be fair or even generous; the benefit is not necessarily in limiting the employee's entitlement in the event of dismissal, but in clearly setting out both parties' rights and obligations to avoid the uncertainty discussed above.

For employers, the bottom line is that it is strategic to include termination provisions in every contract of employment, but in order to do so effectively, you should work with an employment lawyer in order to ensure the clause is properly drafted and has the greatest likelihood of being enforceable.

For employees, any offer of employment should be reviewed with an employment lawyer, and in particular, you should ensure that you understand the implications of any termination provision that is included. Unfortunately, I am often consulted by employees who have been dismissed and are shocked by the seemingly minimal severance offer being presented to them. In many cases, they signed off on a contract that limited them to that amount at the time they were hired, usually unknowingly or without having truly considered the implications.