Termination Clauses – Getting it Done Right

A termination clause in an employment contract details what happens when the parties, most often the employer, wants to end the working relationship. From an employment lawyer’s perspective, this clause is one of the most important, if not the most important, aspects of an employment agreement. Because of its significance and the power imbalance between employers and employees when entering a new workplace, the law has been strict on what needs to be included in a termination clause to be valid. Termination clauses must be done right or else they will not be held enforceable by a court. Without a valid termination clause, employers will be exposed to significant liability that they thought they were covered for.

At a fundamental level, the Employment Standards Act (ESA) requires employers to provide a specific amount of notice to an employee prior to a termination without cause or provide the employee with pay representing that amount of notice instead. During the notice period, the employer must continue to pay the employee their regular wages as well as benefit plan contributions. Clauses that do not adhere to this minimum standard are rendered void by the ESA.

In Miller v. ABM Canada Inc, 2014 ONSC 4062, a two-year executive employee was terminated without cause. According to the termination clause within his employment agreement, he would be provided “the minimum period of notice prescribed by applicable legislation, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation.” Based on the clause,  ABM paid Mr. Miller two-weeks salary. In a subsequent court action brought by Mr. Miller, the court found that the clause was unenforceable as it did not account for payment of benefits mandated (in this case being a car allowance and pension contributions) by the ESA. Instead of two-weeks salary, Mr. Miller was awarded three-months base salary.

Similarly, in Wood v. Fred Deeley Imports Ltd, 2017 ONCA 158, a termination clause was found invalid as it did not provide for payment of benefits or severance pay. In Wood, the clause specifically excluded all other forms of payment other than those explicitly in the clause. Despite the employer’s actual payments (being more than the minimum amount required by the ESA), the court held that it is irrelevant to the interpretation of the clause. Even if an employer were to provide more than they needed to as per the termination clause, it can still be found unenforceable. Instead of the 21 weeks’ salary that the employer offered to pay, the terminated employee received 9 months’ pay. The court in Wood reaffirms the principles held in Miller and Stevens v Sifton Properties Ltd, 2012 ONSC 5508, a similar case regarding the requirement of benefits in a termination clause.

A termination clause must always be in compliance with the ESA. Clauses that have the potential to run afoul of the ESA, even if they do not do so in a specific case, will not be enforceable. In Covenho v. Pendylum Ltd, 2017 ONCA 284, a one-year fixed-term employee was terminated just under 12 weeks into her employment. Pursuant to her employment agreement, she could be terminated without cause without the provision of any notice, regardless of how long the employee had held the position, contrary to the ESA. Despite the ESA’s regulations allowing for the termination of employees who work for under three months without notice, the Court of Appeal held that the clause had the potential to violate the ESA and is therefore invalid. As a fixed term employee, the terminated worker received the remainder of her contract in damages, totalling just over 40 weeks’ pay.

On a review of the above cases and the landscape of employment law in the past year, the courts are cracking down on poorly drafted termination clauses. Clauses that do not clearly adhere to ESA standards are at risk of being held invalid with costly consequences to an employer. It is imperative to any business to have employment agreements professionally drafted to protect against future complications.

Employees who find themselves with older employment agreements may appear to be in a better position than one year ago. However, the law continues to develop and small nuances in a termination clause can have a significant impact on whether the clause can be relied on. Terminated employees who have concerns about their contract should seek assistance as soon as possible.

Employers should make sure to have their employment contracts updated regularly in order to ensure that they remain valid. Contact Monkhouse Law today for a free 30 minute phone consultation regarding your employment contract.

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