Ontario case looks at clause attempting to contract out of ESA requirements
By Brittany Taylor
We have seen a lot of decisions on termination clauses over the last few years. More recently, we have seen several decisions where the courts have appeared to be more “lenient” when it comes to less-than-perfect clauses, so long as the intention of the clause is clear.
This willingness to give teeth to the agreements reached between an employer and employee, even where the drafting is lacking, has certainly been good news for employers.
However, a recent decision of the Ontario Superior Court of Justice provides us with an important reminder that nothing can save a termination clause that deliberately attempts to contract out of the requirements of the Employment Standards Act, 2000 (ESA) — not even a saving clause.
In Groves v UTS Consultants Inc., Wayne Groves, was the original founder of the employer. When he sold the business in 2014, he resigned from his position as a director and officer but signed a new employment agreement with the employer that would allow him to continue his employment as a senior manager. The termination clause in the agreement provided that Groves could be terminated in the following circumstances:
“b) By the company at any time for cause without notice or pay in lieu; c) By the company at any time without cause provided that the company provides you with notice in writing or pay in lieu of notice (as salary continuation) or some combination thereof equal to four (4) weeks base salary for each year of service that you have with the company calculated from the date of this letter (and, for greater certainty, excluding any period of service you had with the company prior to the date of this letter) with a guaranteed minimum notice or pay in lieu of notice equal to three (3) months base salary; provided that the maximum notice period or pay in lieu of notice that you will receive shall in no circumstances exceed twelve (12) months. Notwithstanding the foregoing, the company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario). In addition, the severance package will also include continuation of medical and dental benefits during the severance period. Any variable pay owing to you will be prorated for the year’s service and paid at the time of termination. For greater certainty, you agree that for purposes of calculating any entitlement which you may have arising from the termination, without cause, of your employment with the company, any prior service with the company is excluded and you hereby waive and release any prior service entitlements.”
When the employer terminated Groves’ employment on a without cause basis in September 2017, it attempted to rely on the termination clause. Groves sued for wrongful dismissal, alleging that the termination clause should be struck as failing to comply with the ESA in four respects:
- The clause purported to waive termination pay and severance pay entitlements under the ESA.
- The clause provided for termination pay and severance pay to be determined based on "base pay" only.
- The clause permitted termination without notice for just cause, as opposed to the ESA standard of wilful misconduct.
- The clause had no provision for severance pay if pay in lieu of notice was provided.
The court agreed with Groves that the termination clause directly attempted to contract out of the requirements of the ESA. Specifically, the court found that the termination provision directly contravened section 9(1) of the ESA, which deems employment to be continuous where an employee accepts employment with the purchaser of the employer. The termination clause attempts to directly contract out of this requirement by stating, twice, that Groves’ prior service would be excluded when considering his entitlements pursuant to the clause.
The employer attempted to argue that Groves’ resignation in 2014 created a break in service that would mean he was no longer entitled to severance pay under the ESA. The court rejected this argument, noting that Groves had resigned from his position as a director and officer only and continued to be an employee of the employer. Further, pursuant to section 65(2) of the ESA, Groves would have been entitled to severance pay in any event, since even non-continuous service must be included when calculating severance pay.
The court went on to note that the termination clause also violated section 60 of the ESA, which prohibits an employer from reducing wages or altering any other term or condition of employment during the statutory notice period, when it stated that pay in lieu of notice would be based on “base salary” only. This specifically excluded all other forms of Groves’ compensation package which, pursuant to the ESA, were required to continue for at least the minimum statutory notice period.
The court declined to consider Groves’ third and fourth arguments, as it had already found the clause to be unenforceable on the grounds above. However, importantly, the court did comment on the saving language contained within the termination clause. In this case, the court found that the saving clause was of no assistance, noting: “When the employer has sought to contract out of the ESA, a saving provision cannot be used to rewrite the express language in an agreement to cause it to comply.”
In other words, the termination clause expressly stated that Groves’ prior service would not be considered in determining his entitlements at law — there was no possible way for the saving clause to repair such a deliberate breach.
As a result, Groves was awarded 24 months of pay in lieu of notice, including his salary, benefits, variable compensation and vehicle allowance during this period. In addition, he was also awarded damages for his lost bonus during the notice period as well as a pro-rata bonus earned up to the date of termination.
This decision reinforces the care that employers need to take when drafting termination clauses, even against a legal backdrop where courts are more open to enforcing these clauses generally.
Although this case should serve as a cautionary tale for all employers, the decision does not necessarily invalidate the effectiveness of a saving clause in all circumstances. In Groves, the fatal flaw in the termination clause was the employer’s very deliberate attempt to contract out of the express requirements of the ESA, which made it impossible to reconcile it with the language of the saving clause.
Where a termination clause could be interpreted to breach the ESA due to a drafting error or future change in legislation — but the intention of the employer was clearly to comply with the requirements of the ESA — previous case law suggests that courts will “read up” a termination clause based on saving language to bring it into compliance with the ESA. As a result, it will be interesting to see how courts interpret Groves going forward.
In the meantime, employers should err on the side of caution and always ensure their termination clauses are compliant with the requirements of the ESA, with a saving clause being relied on as a safety net only.
Brittany Taylor is a senior associate at Rudner Law in Toronto. She can be reached at (416) 864-8502 or firstname.lastname@example.org.