Employment contracts and termination clauses

In trying to draft the 'perfect clause,' employers and their counsel must not lose sight of the big picture

Employment contracts and termination clauses
Stuart Rudner

By Richa Sandill and Stuart Rudner

Regular readers will recall several cases such as Garreton and the initial trial court decision in Oudin, where clauses have been struck down due to seemingly minor or technical imperfections.

As a result, employers and employment lawyers continue to adapt their contracts to eliminate any potential issues and ensure that every possible statutory requirement (including severance pay and benefits) is addressed.

However, in trying to draft the “perfect clause,” employers and their counsel must not lose sight of the big picture. Even if the termination clause is perfect, the contract itself may be unenforceable if it was not entered into in a legally sufficient manner, as the recent case of Krishnamoorthy v. Olympus Canada Inc. confirms.

Krishnamoorthy involved the enforceability of a termination clause that was added to the plaintiff’s contract after the sale of the business for which he worked. The plaintiff had been employed with the defendant company’s predecessor for five years when the defendant company became his employer in 2005. He was provided with a new offer of employment that largely preserved his original terms of employment, except for adding a few new ones, including this termination clause:

“Termination without cause will pay the greater of Employment Standards Act severance pay or four weeks' pay per year up to a maximum of 10 months if a release is signed for service with Olympus or Carsen Group Inc. (with pay defined as annual salary divided by 52).”

It is important to note that the plaintiff’s original employment agreement had no such clause limiting his entitlements at dismissal.

Over the years, the plaintiff progressed to higher pay scales and ranks within the company. Notably, his years of service with the predecessor company were recognized when he was awarded a plaque for 10 years of service, as well as on a compensation statement that listed his hire date as being May 30, 2000 – i.e., the date he had joined his original employer.

The plaintiff was eventually dismissed without cause as a result of restructuring. At the time, he had a total of 15 years of service between both companies. When the defendant relied upon the termination clause in the 2005 employment agreement, the plaintiff sued for wrongful dismissal, contending that this clause was not valid and he was entitled to reasonable notice pursuant to common law.

The plaintiff argued that there was no valid consideration offered to him for waiving his right to reasonable notice upon termination without cause. The defendant submitted, in response, that the offer of employment was sufficient consideration. The court, however, agreed with the plaintiff.

As we have written in the past, consideration is the difference between a binding contract and a mere “gratuitous promise.” In order to create a binding contract, both parties must receive something of value in exchange for their promise of performance of their duties or obligations under the contract.

The court found that the only difference of significance between the two contracts was that the second contract purported to displace the plaintiff’s right to reasonable notice of dismissal. He had not received anything of value in exchange for giving up that right. At paragraph 9, the court outlined the importance of consideration when a contract of employment changes when it quoted Justice Juriansz’s decision in Hobbs v. TDI Canada Ltd.:

“The requirement of consideration to support an amended agreement is especially important in the employment context where, generally, there is inequality of bargaining power between employees and employers.”

On this basis, the plaintiff was held to be entitled to common law reasonable notice damages for the termination of his employment.

This is, of course, not to discourage employers from using termination clauses in their employment contracts. A well-drafted termination clause can be an invaluable tool in creating certainty and reducing termination costs. This is particularly true for longer-service, senior-level employees who can have extensive common law entitlements. It is also particularly important when an individual is recruited away from another job, since their common law entitlement will be greater as a result.

Employers must always remember that the employment relationship is a legal one. Every employee has a contract, though many are verbal. If employers want to implement written contracts, especially with termination clauses that displace the common law, they must ensure that they create a legally binding agreement. This is always easiest when done at the time of the offer, when the consideration is the opportunity of employment. If it is to be done later, there must be some form of consideration, or the contract will not be worth the paper it is printed on.

Richa Sandill is an associate lawyer at Rudner MacDonald in Toronto.

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