Termination clauses can be shocking

By Stuart Rudner

Imagine working for a company for 20 years, learning that the company is downsizing and your job will be eliminated — and then being advised that despite your expectation of a substantial severance package, you are only entitled to eight weeks of termination pay. 

Believe it or not, I encounter situations like this all the time, and people are shocked to learn they signed an employment contract that dramatically limited their entitlement to notice of dismissal. While we can help these individuals in some circumstances, in many cases they have no remedy and are stuck with what they signed. Of course, they paid little or no attention to the termination clause when they agreed to be bound by it. 

Week in and week out, our firm meets with individuals who signed employment contracts with termination clauses that displace their common law entitlement to reasonable notice with far less attractive rights, many of which limit them to the absolute minimum amount of notice required by the applicable employment standards legislation. 

When we point out the clause in question, reactions range from shock to confusion as in most cases, the individual did not even bother to read the contract or if she did so, she did not really take the time to think about what the termination clause would mean. 

Sometimes, during an initial consultation with an individual who has been dismissed and is outraged by the minimal amount of severance the employer is going to provide, we ask if he recalls signing an employment contract with a clause that set out what would happen if he was dismissed without notice, he either denies it or seem uncertain. 

In many cases, he then goes through his records and finds the contract or we contact the company and it provides a copy. Either way, we must then explain to the individual he may have signed away substantial rights. 

As has been discussed in many previous posts (Clearly worded termination provisions, Wording of contract makes all the difference), there is a presumption at law that an individual is entitled to "reasonable notice" of dismissal without cause. However, this presumption can be displaced by clear and unambiguous language in an enforceable contract. 

While there has been an increase in litigation over recent years where courts have been asked to determine whether contracts and termination clauses are enforceable, the bottom line is that if the contract is entered into properly and the clause is appropriately worded, then it will establish the individual's entitlement to notice of dismissal and replace the common law. 

While “reasonable notice" is a somewhat ambiguous concept that takes many factors into account — and is not simply based upon length of service as the mythical “one month per year of service rule of thumb” would suggest — it can be extensive.

A 20-year employee could expect to receive something in the range of 20 months of severance, depending upon her age, position and other factors. However, a termination clause might limit her to the absolute minimum amount of notice required by employment standards legislation. 

In Ontario, that would be eight weeks if the employer's payroll is under $2.5 million. Obviously, that is a huge “discount.” And, of course, the individual will only realize the implications of what she signed at the worst possible time: When she is dismissed and must contemplate supporting herself and her family while looking for new employment. 

Nobody wants to think about termination when they are being recruited or considered for a new job. However, just like a prenuptial agreement, there are benefits to entering into an employment contract, but all parties need to take the time to properly and fully understand what they are agreeing to. 

Unfortunately, many individuals are so happy to have a new job that they don't bother to read the contract. Others may take a cursory glance, but do not really consider what it means. When they are dismissed, they are outraged and convinced they are being treated unfairly, only to be advised by an employment lawyer that they are being treated in accordance with the agreement they signed. 

Of course, as I have discussed on many occasions (including here and here)., many organizations fail to implement contracts and termination clauses properly, with the result being they are not enforceable. However, it is certainly not a strong position to be in when a newly unemployed individual is told he may be entitled to more compensation — he will have to fight for it. 

Most employers will not simply “roll over" and agree a termination clause is unenforceable and they have to pay more. In many cases, the individual will have to file a claim and commence legal action. 

While the vast majority of legal actions settle before trial, it is impossible to predict the point at which settlement will occur, or how much time and money will be spent leading up to that time. And if the matter does proceed to trial, it is often difficult to predict with certainty what the outcome will be, as judicial consideration of termination clauses has been quite unpredictable in recent years. 

The only situation worse than receiving minimal notice in accordance with a harsh termination clause is suing for more, losing, and having not only to pay your own legal fees, but having to reimburse the company for a portion of theirs as well. 

The bottom line is simple: If you are given an offer of employment, it is critical to review it carefully and seek advice from a lawyer who specializes in employment law. That way, you can attempt to negotiate better terms and, at the very least, know what you are getting into so you won’t be shocked at the time of dismissal.