Being strategic with termination clauses

Recent Ontario case highlights importance of carefully drafted clauses

Being strategic with termination clauses
Stuart Rudner

by Anique Dublin and Stuart Rudner

Termination clauses can dramatically reduce an individual’s entitlement to notice of dismissal or “severance” in the event of dismissal without cause. For that reason, we encourage employers to implement contracts with strategic termination clauses for all employees.

Over the past few years, there have been dozens of court cases in which individuals have sought to avoid the consequences of the contract they signed, and in many of those cases, the courts have found ways to help them.

Lastly, one of the ways in which termination clauses are found to be invalid is where the terms fall below the minimum requirements of the applicable employment standards legislation or have the potential to do so.

The recent case of Rutledge v. Canaan Construction Inc. is a prime example, and the clause in question was found to have the potential to breach the legislation in several ways. The key takeaway: Even if a company does not provide benefits, or have a payroll large enough to require severance pay (over $2.5 million annually), it must include wording that provides for those to be provided if applicable.

Chris Rutledge was employed by Canaan Construction as a construction worker. In the fall of 2017, his employment ended without any notice or payment.

Rutledge’s employment was governed by an employment agreement dated Nov. 10, 2015. The employment contract contained the following termination provisions:

“The employee may be terminated at any time without cause upon being given the minimum periods of notice as set out in the Employment Standards Act, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation. The employee acknowledges that pursuant to the Employment Standards Act they are not entitled to any notice or time in lieu thereof due to the nature of their job and as such they are entitle[d] to absolutely no notice or pay and benefits in lieu thereof upon termination.

The termination provisions set force above, represent all severance pay entitlement, notice of termination or termination in lieu thereof, salary, bonuses, vacation pay and other remuneration and benefits payable or otherwise provided to the employee in relation to the termination of the employee regardless of cause or circumstances.

In June 2018, Rutledge commenced legal action against Canaan in the Small Claims Court, seeking damages for wrongful dismissal. In its defence, Canaan argued that the employment contract absolved it of any requirement to give notice or pay in lieu. Further, it argued that as a construction worker, Rutledge had no entitlement to notice or termination pay under the Employment Standards Act, 2000 (ESA).

Common law obligations
It is well-established law that the common law obligation to provide reasonable notice can only be displaced by clear contractual wording which must provide for at least the minimum entitlements pursuant to the applicable legislation. In some cases, it is easy to see a breach of the legislation, such as a provision that provides for notice of one week regardless of how long the individual is employed, since we know that the legislation requires more notice than that. Providing one week of notice to an employee who worked for five years, for example, would be a breach of the act.

In other cases, the concern is not an actual breach but the possibility that one interpretation of the clause could breach the act. We have seen this in many cases, including the recent Ontario Court of Appeal decision in Waksdale v Swegon North America Inc., which we discussed here. In that case, the court found that if an employment agreement contains a termination-with-cause provision that breaches the ESA, the provision will be rendered unenforceable as well. This is true even if there was no issue of cause.

In the Canaan case, the deputy judge held that the employment contract was void because it purported to contract out of the obligation to pay benefits during the statutory notice period.

The copmany appealed, but the Court of Appeal upheld the initial decision. In their judgment, they identified “at least” two problems with the employment contract that Canaan relied upon:

  • It denied him employment-related benefits during any period of notice.
  • It did not provide for severance pay in any circumstances.

Both of these were theoretical breaches. It is important to bear in mind that as a construction worker, Rutledge did not have all of the rights that most workers enjoy pursuant to the ESA, including notice of dismissal. However, as the court noted, his position over time could have changed, so that his entitlements would be different, but the contract did not reflect this in any way. That is an unusual scenario, as it involves one of the very few categories of workers who are not entitled to notice of dismissal.

The more common problem with this clause is that it does not provide for severance pay. Under the ESA, severance pay is only required where the employer has a payroll over $2.5 million or where it dismisses 50 employees in a short period of time. Employers often tell us that they will “never” be in that category, so there is no reason to include reference to severance pay in a termination clause. However, this case confirms that a clause will be invalid “if a provision of an employment contract potentially violates the ESA at any date after hiring.”

As a result, it is always best to cover off these potential scenarios. We often do so by adding “if applicable.” For example, an employer may tell us that it does not offer benefits, so there is no reason to reference them in a termination clause. To be prudent, we recommend referring to “continuation of benefits (if applicable)” as well as “severance pay (if applicable).”

We also strongly recommend the use of a saving clause, which provides that in the event that the clause breaches the ESA at any time, it is to be interpreted in a manner that is consistent with the ESA and in no circumstances will the employee receive less than their ESA entitlement.

Even a potential future violation of the ESA, no matter how remote, may render a termination provision unenforceable. These clauses must be drafted carefully, with consideration of any current or future issues. Otherwise, they will not provide the protection they are intended to, and your severance costs may be far greater than you think.

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