Drafting an effective termination clause

Employers should be as clear and unambiguous as possible

Stuart Rudner

By Stuart Rudner

In recent years, there have been several examples of courts striking out termination provisions in employment agreements. In some cases, the logic has been tenuous at best, and has left many with the impression that courts will engage in an exercise of legal gymnastics in order to find any way to help a dismissed employee avoid the consequences of the employment agreement that they previously entered into. As a result, additional uncertainty has been introduced into the law, as many employers and employment lawyers have been left uncertain as to whether previously sound termination clauses could be relied upon.

A recent decision of the Ontario Divisional Court seems to be an example of a case where the courts will uphold language where the meaning and intent is clear, even if it purports to limit the employee to their statutory minimum entitlements. In Luney v. Day & Ross Inc., the plaintiff was employed by an interprovincial trucking company and was therefore governed by the Canada Labour Code. He was one of several employees dismissed as a result of downsizing, and the employer relied upon the termination provision in this contract, which provided as follows:

"If your employment is terminated for other than a 'just cause', or if a competent tribunal should rule that your termination was “unjust", you would be entitled to two weeks [sic] notice or pay in lieu of notice and severance of one week’s regular pay for each full year of service, less statutory deductions. The payments are not to exceed the equivalent of 15 weeks [sic] pay.

It is understood and agreed that in the event the aforesaid notice and severance entitlements are not in conformity with the notice and severance provisions prescribed by the [Code] or other similar legislation, the statutory minimum's [sic] shall apply and be considered reasonable notice and severance. Discussion of individual salaries may be grounds of dismissal. [emphasis added]

The foregoing notice and severance payments will satisfy any and all obligations to you by Day & Ross Inc. or any affiliated company arising out of or in any way connected with the termination of your employment, including any obligations arising under the [Code] and similar legislation for notice, severance pay or reinstatement."

The plaintiff, like many other dismissed employees in recent years, sought to have the termination clause in his contract deemed to be null and void, on two specific grounds:

  1. It was ambiguous; and
  2. It violated the Code on the basis that it did not provide for benefits.

The second prong of attack has become extremely common lately as a result of the court's decision in Stevens v. Sifton Properties Ltd. In that case, the termination clause provided for pay in lieu of notice, but did not explicitly reference benefits. Although the employer clearly had every intention of continuing the employee's benefits during the period of notice, the court found that this was irrelevant, as the wording of the contract must be judged on its own merit. Since the agreement breached the applicable legislation on its face, it was not enforceable according to the court.

In the Luney case, the court explicitly referenced the “saving provision", which is bolded in the above quote. Given that this provision operated to ensure that the termination clause would not fall below the requirements of the standard, it could not be deemed to have contravened the statute.

With respect to the allegation that the clause was ambiguous, the court confirmed that:

"There is no issue that there is a common-law presumption of entitlement to reasonable notice in the event that an employee is terminated without cause. There is also no issue that any agreement that purports to rebut that presumption must do so in clear language."

In assessing the language in the termination clause in question, the court found that it was clear and unambiguous, and rejected this argument.

Every case must be assessed upon its own particular factual basis and the specific wording of the contract in question. However, this decision seems a logical approach and provides some assurance that parties will be held to the agreements that they entered into where those agreements are clear and do not breach any applicable legislation.

When drafting termination clauses, employers should ensure that they are as clear and unambiguous as possible. Furthermore, employers should ensure that they make every effort to comply with applicable legislation, and also include a saving provision, as Day & Ross did, in order to have a fallback" in the event that they either failed to comply with the existing legislation, or in the event that the legislation changes over time.

It is also critical that employers have contracts of employment signed before the individual starts working, rather than follow the unfortunately common practice of having the employee sign when they arrived for their first day of work. I have written about this issue in previous posts (here and here).

Employees must be cautious whenever they are asked to sign an employment agreement, and make sure that they understand the consequences of the document. While termination may not be on their minds when they are offered a job, termination clauses are like prenuptial agreements, and can have dramatic consequences when the relationship comes to an end.

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