Ontario Court of Appeal Update on Termination Clause Enforceability

The compensation which employees are entitled to upon the termination of their employment is a regular and major source of conflict.  Generally, employers in Ontario are required to provide employees with “reasonable” notice of the termination of their employment.  Employers can choose to forego the notice (meaning the employer does not have to continue to employ the worker), but they must still provide sufficient compensation in place of the notice.

The law can require employers to provide employees with significant payments.  Further, because the assessment of any amounts owed are determined on a case-by-case basis, this can be a highly unpredictable liability (and associated business expense) for employers.  For this reason, many employers choose (either at the time of hiring or promotion) to reach a contractual agreement with employees which is intended to both fix and limit the amount due to an employee upon the termination of their employment.

Because these contracts can significantly reduce the amount owed to an employee upon the termination of their employment (as compared to the common law), employees often later argue – for a variety of reasons – that they are unenforceable.  Because of this, courts are regularly asked to make rulings on whether a clause is enforceable or not.  There are accordingly many written decisions on this issue and the law is regularly evolving to address the changing realities of the Canadian workforce.

A recent decision from the Ontario Court of Appeal – Wood v. Fred Deeley Imports Ltd. – adds to the list of important cases on this issue, specifically with respect to the language of employment contracts and, by extension, the enforceability of termination clauses.

The plaintiff in this case was employed with the employer for about eight years when her employment was terminated. The employer then offered her a “package” equal to 13 weeks’ working notice, a pro-rated bonus payment, benefits coverage, outplacement services and an additional lump sum payment if she agreed to release the employer from any further liability.  The former employee refused the offer and brought a law suit in which she claimed payments equal to 12 months’ notice.

In defending the case, the employer argued that the employee’s entitlement was limited to the amounts provided for in her employment contract (essentially a payment equal to two weeks’ income per year of service).  The clause specifically stated the following:

[The Company] is entitled to terminate your employment at any time without cause by providing you with 2 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, except for any amounts which may be due and remaining unpaid at the time of termination of your employment. 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 court agreed with the employer, stating that the contract was enforceable and that the employee was therefore not entitled to more than what was provided for under the contract.

The employee appealed the decision to the Ontario Court of Appeal (the “Appeal Court”).  At the Appeal Court, the former employee argued that the clause was not enforceable, in part because the clause appeared to suggest that compensation on termination did not include the continuation of her benefits which is a violation of the minimum standards on termination described in the Ontario Employment Standards Act (the “Act”).

The Appeal Court agreed with the former employee.  In differentiating from previous decisions that ruled in favour of employers on the enforceability of termination clauses, the Appeal Court stated that the termination clause here was not enforceable because it unequivocally denied the employee’s right to benefits (as opposed to other cases in which the termination clause did not say one way or the other).

What does this mean for the law on employment contracts?

The law is still clear that employers and employees have the right to decide what compensation an employee will receive in the event of a termination of their employment.  This latest case is however a reminder that such agreements will be carefully reviewed by courts on a case-by-case basis and that if it is determined that there is sufficient ambiguity, it will almost certainly be read in the favour of an employee.  By extension, this means that termination clauses that, in the opinion of the court, either do or could violate the Act (implicitly or explicitly) will be found to be unenforceable.

In short, employment contracts can limit an employee’s entitlement to termination payments, but there is no guarantee that a contract will be deemed enforceable by the courts.  It is therefore critical that these clauses be carefully drafted in order to improve the chances that they will be respected by the court.