Signed for now and the future?

Should a termination provision be valid if it starts out legal but could later violate employment standards?

By Jeffrey R. Smith

“That was a right-pretty speech, sir. But I ask you, what is a contract? Webster's defines it as ‘an agreement under the law which is unbreakable.’ Which is unbreakable!” — Lionel Hutz, “The Devil and Homer Simpson” from The Simpsons Halloween Special IV.

Canadian employment law provides many protections for employees and it sometimes seems employers have to jump through hoops to terminate someone’s employment. It’s a common recommendation that employers should include termination provisions in their employment contracts with sets out the terms of dismissal including the employee’s entitlement to notice or pay in lieu of notice in the case of dismissal without cause.

Though these terms must comply with employment standards minimums, there is no legal requirement to offer any more. So, even though there is established case law that determines notice entitlement for dismissed employees based on factors such as age, length of service, position, and the job market for similar work, if an employee signs a contract limited notice to less than the common-law precedents, the employer isn’t obligated to shell out any more than that.

Care still has to be made when drawing up termination provisions, but can such provisions comply or not comply with employment standards at different times? Recently, an Ontario court upheld a termination provision in an employment contract that a dismissed employee challenged due to questions over its compliance with employment standards. The provision provided for two weeks’ notice at any time if the employee was dismissed without cause. The employee was fired after two years of service.

Though two weeks’ notice was the employee’s minimum entitlement under Ontario’s Employment Standards Act, 2000 (ESA), the employee argued the provision wasn’t valid because it wouldn’t comply if he was fired with a longer service time. The court found since the employee received his legal entitlement and suffered no loss at the time of his dismissal, it didn’t matter if the provision breached employment standards minimums in a “hypothetical set of facts” that created the “potential” for non-compliance: see Shapka v. Interbase Consultants Ltd. (2014), (Ont. S.C.J. Sm. Cl. Ct.).

However, an Ontario court took a different view about three years ago. An employee was dismissed after five years of employment and a termination provision in his contract stipulated employees with five to 10 years of service were entitled to “13 weeks' base salary, plus one additional week of base salary for every year from six to 10 years of service up to a maximum of 18 weeks.” The ESA provided for five weeks’ notice and five weeks of severance pay for five years of service, so the employee received more than legislated minimums.

However, the court found the amounts in the provision were less than ESA minimums with longer service. The amount stipulated stayed the same until 10 years of service, while ESA minimums went up each year -- statutory severance pay in Ontario is one week’s pay for every completed year of service plus each additional month of service divided by 12. By 8.5 and 9.5 years of service – as well as later on – the employee’s entitlement in the contract would be less than the ESA minimums.

The court found that as long as the termination provision did not follow employment standards legislation at any point, it was void.  It then awarded the employee a common-law notice entitlement of 12 months: see Wright v. Young & Rubicam Group of Cos., 2011 CarswellOnt 10754 (Ont. S.C.J.).

These are two different takes on a similar issue – when a termination provision meets employment standards minimums at the time of termination, but potentially violates them in the future. It can be argued the employee agreed to the contract, but it’s also established that parties to an employment contract can’t contract out of the employment law minimums. Should such provisions be considered void, or should they be upheld as long as the employee isn’t disadvantaged at the time of termination? 

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