Could have a wide-ranging impact on how employment agreements and termination provisions are drafted and enforced
By Stuart Rudner and Geoffrey Lowe
Last week, the Court of Appeal for Ontario released its long-awaited ruling in Wood v. Fred Deeley Imports Ltd. The outcome has the potential to have a wide-ranging impact on how employment agreements and termination provisions are drafted and enforced in Ontario.
The plaintiff was hired via telephone call on April 17, 2007, followed on the same day by an email detailing the terms and conditions of her position. Julia Wood’s first day of work was April 23, 2007. On April 24, she signed an employment agreement containing this termination provision:
“(The company) is entitled to terminate your employment at any time without cause by providing you with two weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the company. If the company terminates your employment without cause, the company shall not be obliged to make any payments to you other than those provided for in this paragraph… The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.”
The defendant was bought out in April 2015, and its employees were told that their employment would terminate on August 4, 2015. By her last day of work, Wood had been employed by the defendant for eight years and three months. Her compensation package included RRSP contributions as well as a health and dental plan. The defendant provided her with 13 weeks of working notice, in accordance with the termination provision. During this period, the defendant paid her base salary and contributed to her health and dental plan. At the end of the 13 weeks, the defendant paid her additional compensation including an additional eight weeks as severance pay.
The plaintiff sued, alleging that the employment contract was unenforceable or alternatively, that the termination provision was unenforceable; she sought 12 months’ compensation.
The plaintiff was unsuccessful on summary judgment. The motion judge held that the employment agreement and termination provision were enforceable.
Wood appealed, arguing (again) that:
- The employment agreement was unenforceable as she had signed it after she began work, without being provided fresh consideration.
- The termination clause violated the Employment Standards Act, 2000 and was unenforceable.
Court of Appeal decision
The Court of Appeal addressed each argument individually.
Was the employment agreement unenforceable without fresh consideration?
The plaintiff argued that because she began work before signing her employment agreement, it was unenforceable in the absence of fresh consideration.
The Court of Appeal confirmed the motion judge’s ruling, noting that if the employment agreement had contained a material change to the terms and conditions of employment, fresh consideration would have been required. Wood did not advance this argument. Nor did she claim that she was seeing her terms and conditions of employment for the first time on April 24, 2007. The Court of Appeal did not give this ground of appeal any effect.
Did the termination clause violate the Employment Standards Act, 2000?
The court reviewed two possible ways this clause could violate the provisions of the ESA:
- Failure to mention the defendant’s obligation to make benefit contributions during the notice period.
- Failure to satisfy the defendant’s obligation to provide severance pay.
The court noted that employment contracts are unique in that they do not represent a bargain between two equal parties. The court also reviewed the role of the ESA and the importance of ensuring that its protections are available to every employee.
Exclusion of benefits
The court reviewed the wording of the termination provision, emphasizing these phrases:
- “[T]he company shall not be obliged to make any payments to you other than those provided for in this paragraph.”
- “[T]he payments and notice provided for in this paragraph are inclusive of your entitlement to notice, pay in lieu of notice and severance pay pursuant to the [ESA]”.
The defendant argued that “pay” included contributions to the plaintiff’s health and dental plan and her RRSP. The court disagreed, holding that “pay” was ambiguous, and that ambiguity in an employment contract had to be resolved in favour of the employee. The court held that “pay” in this context referred only to salary or wages, and not benefits or other compensation.
The defendant also argued that since it had continued paying for the plaintiff’s health and dental plan and offered to contribute to her RRSP during the notice period, there was no breach. The Court of Appeal disagreed, confirming that the enforceability of a termination clause was dependent only on the clause’s wording, and that the employer’s actions at termination were irrelevant. The court noted that this was consistent with previous case law and that if employers can remedy illegal termination clauses by their actions post-termination, they will have little incentive to draft legal and enforceable ones at the outset.
The court also reviewed the 2005 decision Roden v Toronto Humane Society, where a similarly worded termination clause was upheld. The court distinguished this situation, noting that the termination clause in Roden was open-ended in contrast to this termination clause, the all-inclusive language of which limited the defendant’s obligation to the payments specified in the termination clause.
As a result, the court struck out the termination clause in the plaintiff’s employment contract and substituted the period of reasonable notice established by the motions judge, being nine months. The court noted that this was sufficient to decide the matter, but chose to proceed with discussion of the impact of this clause on the plaintiff’s entitlement to severance.
The plaintiff was entitled to eight weeks’ notice or termination pay and 8.3 weeks of severance pay. The termination clause provided that the Plaintiff would be entitled to two weeks per year of service, a figure that combined the plaintiff’s severance and notice entitlements. Had the defendant drafted the termination clause to provide separate entitlements to severance and to notice it would have been enforceable. Instead, by combining them the defendant created the possibility for three different scenarios: one in compliance with the ESA, the second a violation of the ESA, and the third could result in either a violation or compliance. From the plaintiff’s perspective, this meant that when she signed her employment agreement she did not know if she would receive her statutory entitlement to severance pay when her employment ended.
The court held that as this did not clearly satisfy the defendant’s obligation to provide the plaintiff with statutory severance pay, and the clause was therefore unenforceable.
This decision confirms that a breach or potential breach of the ESA will render a termination clause invalid. As we have discussed before, this is relevant where an employer uses language making the clause inclusive of the employee’s entitlement on termination and states that the employee will have no entitlements beyond those set out in the contract.
A better solution, as we have written about before, is to use a “saving provision” that explicitly states that if the clause currently or in the future falls below the requirements of the applicable legislation, it should be interpreted so as to comply with those obligations.
This decision also reinforces that an employment agreement will not automatically be void because the employee signed it after their first day of work. Despite this, as we have previously written, it is optimal to have new employees sign their employment agreement before their first day of work.
Employers are well-advised to reach out to us for our advice when drafting these clauses. As our frequent posts demonstrate, this is an area of the law that is in flux and it is crucial to get it right. Similarly, employees affected by a termination provision are welcome to contact us to understand their rights and the enforceability of the provision.
Geoffrey Lowe is an associate at Rudner MacDonald in Toronto.