Source: http://employmentlaw101.ca/termination-clauses/
Timestamp: 2019-04-24 04:20:09+00:00

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The purpose of a termination clause in an employment contract is to rebut the legal presumption that the employee will be provided with reasonable notice of dismissal and replace that entitlement with another notice period that has been agreed to by the parties.1 The termination clause will typically provide the employee with either a fixed notice period or a formula for calculating the notice period based on the employee’s years of service. The termination clause will also specify what benefits and variable compensation (in addition to base salary) will be continued during the notice period.
It is now common for employers to insert termination clauses into their employment contracts to reduce their cost of terminating the employment of their employees. Typically, the termination clause will allow the employer to terminate the employee’s employment by providing the employee with a severance package that is significantly less than if the employer was required to provide the employee with reasonable notice of dismissal. That said, a termination clause does have the benefit of providing certainty regarding an employee’s entitlements upon dismissal.
A termination clause will not be enforced by a court unless it provides the employee with at least the minimum statutory entitlements upon dismissal as required by the Ontario Employment Standards Act, 2000 (“ESA”) or, for federally regulated employees, the Canada Labour Code (“CLC”). It is illegal for an employer to provide less than the minimum standards of the ESA or Code, even if the employee has voluntarily agreed to accept a lower amount.
In Ontario approximately 30% of employment contracts contain termination clauses that will not be enforced by a court because the clauses have not been properly drafted. Given the significant percentage of void termination clauses, employers are advised to have their termination clauses reviewed by an experienced employment lawyer. It can be a costly mistake to have employees sign employment contracts containing termination clauses that have not been properly drafted.
Employees should also not presume that the termination clause in their employment contract is enforceable.
Wrongful dismissal cases often involve disputes as to whether the employee’s entitlement to notice of dismissal is limited to that set out in the termination clause or if the former employee is entitled to significantly greater entitlements because the termination clause has breached the ESA and therefore the employee is entitled to reasonable notice of dismissal.
It is normally to the employee’s benefit if the employment contract does not contain a termination clause. The exception to this general statement would be employees, such as senior executives, who have the power to negotiate termination provisions that provide superior entitlements to that offered by the common law presumption that the employee is entitled to reasonable notice of dismissal.
A termination clause may also not be enforced by a court if it has been inserted into an existing employee’s contract of employment (discussed in detail below) if the employee has not been given fresh consideration in exchange for the revised contractual terms.
Dismissed employees are often devastated when they learn that they are only entitled to weeks of notice pursuant to the ESA, rather than months or years of reasonable notice. It is not unusual for a dismissed employee to have forgotten that he or she signed an employment contract that limits their notice entitlement upon termination to the minimum standards of the ESA.
The key is for an individual reviewing an offer of employment to carefully review and understand the employment contract before accepting the offer. He or she may be in a position to negotiate a better termination provision with their potential employer (or have the termination provision removed entirely from the employment contract) before agreeing to join the company. Another option is to have the employment contract reviewed by an experienced employment lawyer to determine if the termination clause is enforceable. If the individual decides to accept an offer of employment that contains an enforceable termination clause the individual should at least understand what he or she is signing up for.
Any ambiguity in the language used in the termination clause is likely to be read against the employer.
The court found that the language was at best ambiguous as to whether the parties intended the statutory minimum to apply, or simply whether the applicable notice would be consistent with the legislation. The 2016 decision is noteworthy because it provides a thorough review of previous Canadian decisions that have considered termination clauses in employment contracts.
The Supreme Court of Canada held in Machtinger v. HOJ Industries Ltd5 that if an employment contract contains a termination clause that provides an employee with an entitlement upon termination other than reasonable notice, that entitlement must be at least equal to the employee’s entitlement pursuant to the ESA. If the termination clause provides the employee with less than his or her entitlements pursuant to the ESA, the termination clause will be unenforceable and the court will strike the termination clause from the employment contract and award the employee reasonable notice of dismissal. The court will not rewrite the termination clause to bring it into compliance with the ESA.
In Machtinger, as an example, the termination clause that was found to be void provided the employee with 2 weeks notice of dismissal. However, the employee was entitled to a minimum of 4 weeks notice pursuant to the legislation in force at that time.
The reasoning in ADGA has been applied in several recent decisions of the Ontario Superior Court.7 This line of caselaw defeats the argument that a termination clause that provides for a minimum notice period but not a ceiling is ambiguous and therefore unenforceable.
In 2016 the Ontario Court of Appeal considered a termination clause in Oudin v. Centre Francophone de Toronto.8 that stated the employer could terminate the appellant’s employment with the ESA minimum “notice” but made no mention of “severance”. The employee had argued unsuccessfully at a summary judgment motion that the language of the termination clause was an attempt to contract out of the ESA because it did not specifically provide the employee with “severance” as required by the ESA.
Contracts are to be interpreted in their context and I can find no basis to interpret this employment agreement in a way that neither party reasonably expected it would be interpreted when they entered into it. There was no intent to contract out of the ESA in fact; to the contrary, the intent to apply the ESA is manifest.
The Court of Appeal held that the motion judge was entitled to deference and, on that basis, found no error in his conclusion.
The ESA states that an employer “shall not reduce employee’s wage rate or alter any other term or condition of employment during the statutory notice period.”9 This includes continuing an employees’ benefits.
In Stevens v. Sifton Properties Ltd.10 the Court found that a termination clause that does not provided for a continuation of an employee’s benefits as required by the ESA was void even though the termination clause complied with the statutory minimums regarding payment of wages.
Marrocco A.C.J.S.C.J. went on to note (at para. 15) that “the trial judge found and we agree that the Employment Agreement was not silent and that the wording of the agreement provided that benefits were not to be paid during the notice period, …” The clause was, therefore, contrary to the ESA and was unenforceable.
The termination clause was found to be unlawful and therefore void because the words “any amounts paid” could be read as failing to provide for the continuation of the plaintiff’s benefits during the plaintiff’s statutory (ESA) notice period.
In the event the [sic] termination of employment, except where such termination is for just cause, the company will provide you with notice (or salary in lieu thereof), and severance pay [if applicable] pursuant to its obligations as an employer and successor employer to NexInnovations Inc. under Employment Standards legislation, as amended. You will also be paid all salary amounts that may have accrued to you to the date of termination. This includes all your entitlements to both termination pay and severance pay under the applicable Employment legislation [sic] as well as any outstanding vacation or statutory holiday pay.
You agree and acknowledge that you will not be entitled to any other compensation, under common law or equity, by reason of the termination of your employment by the Company. At all times, should the requirements under statutory law, or successor legislation be amended, the Company will provide you with your entitlements under such legislation in lieu of your entitlements under this Agreement.
Stinson J. held that the termination was an attempt to contract out of the minimum standards of the ESA because in the employment contract remuneration and benefits were discussed separately. The termination clause referenced salary in lieu of notice, without any mention of benefits being paid, should notice not be provided. Indeed, the employment agreement expressly provided that the employee was not entitled to any other compensation by reason of the termination of her employment. In other words, not only did the clause provide the employer with the right to pay salary, without mentioning or obliging it to pay benefits during the notice period, it also expressly exempted the employer from any other obligations.
The policy considerations applied in Machtinger would not be served if the contract were to be interpreted in favour of the employer so as to leave the individual employee responsible for determining, at the point of termination, whether the statutory minimum had risen above the notice period stated in the contract. It is neither reasonable nor practical to leave the individual employee in the position of having to keep an eye on the relationship between the statutory minimum and the contractual term.
There is, in my view, no particular difficulty in fashioning a termination clause that does not violate either the minimum standards imposed by the Employment Standards Act or the prohibition against waiving statutory minimum requirements and there is no compelling reason to uphold a termination clause which the draftsman may reasonably be understood to have known was not enforceable either at all or under certain circumstances.
I respectfully disagree with Low J.’s reasoning in Wright. An employer who prescribes a notice period in a contract of employment must conform to provincial employment standards legislation for the particular employee, in the particular circumstances. The employer who drafts an agreement prescribing a fixed notice period, rather than one that increases with the employee’s years of service, and who does not negotiate a new employment agreement when the employee’s years of service entitles him/her to a longer period of notice, assumes the risk that the clause will become invalid at that point and that the common law will prevail to determine the period of notice required. It is only invalid at that point and not invalidated from when the contract was initially executed.
If the contract is invalidated from the beginning it would unreasonably restrict the parties’ ability to negotiate their own terms of employment to require that the notice period must be of such a length as to satisfy the legislative requirements in every conceivable circumstance. This would require the notice period in a contract of employment for a new employee to meet the minimum notice requirements for an employee of the longest conceivable years of service. This goes beyond what is necessary to provide an employee with the notice period prescribed by provincial legislation and restricts to an unreasonable extent the parties’ right to negotiation their own agreement.
With respect to Justice Price, the reasoning in Shore and Rubicom does not “unreasonably restrict the ability to negotiate their own terms of employment.” The termination clause reviewed by Justice Price was poorly drafted. A termination clause the provides for a fixed notice period can easily be made compliant with the ESA simply by stating that the employee will receive “the greater of the fixed notice period or the minimum notice and severance provided by the ESA”, or words to that effect.
I agree that the reasoning of the court in the Ford case is applicable in this case. I find that as the mitigation clause in the EA does not result in a violation of the Act, in this case, absent the factors present in the Machtinger and Wright case, the mitigation provision is therefore valid.
 I cannot read Machtinger (supra) as creating any sort of hard and fast rule that any time there is an instance of an invalid attempt to contract out of the ESA that nothing short of the entire offending paragraph can be excised. Neither common sense nor the decision of Iacobucci J. lend themselves to such a radical conclusion.
 In Machtinger (supra) it was the “clause” or the “term” that was found to be null and void in that case. The only “clause” or “term” of the present employment contract which has been alleged to breach the ESA is the second sentence of the “Term” paragraph which permitted optional early termination on 30 days notice. That is the only term or clause of the employment agreement that I would find to be null and void in this case. That early termination clause was not in fact relied upon since Sony claims the contract expired in accordance with its terms on March 31, 2015.
 The defendant argues, and I agree, that the “fixed term” and the “early termination” provisions are logically and textually independent of each other. The employment agreement is neither incomplete nor incoherent in the absence of one or the other of those two sentences. Indeed, the drafting history makes it clear that the two termination provisions (fixed term and “early termination” upon 30 days notice) were originally two separate ideas in the drafting instructions conveyed by Mr. Ibbotson to Ms. Bean. They are not a package that must stand or fall together.
In summary, there is currently conflicting decisions in Ontario regarding whether a termination clause that will potential violate the ESA in the future will be enforced by a court.
It is common for employers to attempt limit an employee’s right to continue to collect specific benefits or incentive compensation once the employee has been terminated from his or her employment. In other words, the employer may take the position that the employee is entitled to his or her base salary during the reasonable notice period but is not entitled to continue to collect his or her bonus, stock options or employer pension contributions.
A courts will only limit an employee’s entitlement to continuation of these benefits if the employee’s employment contract (which can include an employee’s policies) contains clear and unambiguous language to the contrary.
Wrongful dismissal litigation involving disputes over entitlements to bonuses, stock options and other forms of variable compensation generally focuses on the specific language used in the employment contract or the stock option or bonus plan.
This was reiterated by the Ontario Court of Appeal in 2016 in Paquette v. TeraGo Networks Inc.24 that found that a term in a bonus policy that requires that the employee be actively employed when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.
If the employer relies upon a corporate policy, it must prove that the policy actually forms part of the employee’s employment contract. The language of the policy must unambiguously alters or removes the employee’s common law rights.
Any attempt to limit an employee’s entitlement to specific benefits or variable compensation must also be compliant with the minimum notice and severance provisions of the ESA.
The Ontario Court of Appeal confirmed in its 2012 decision Bowes v. Goss Power Products Ltd.32 that an employment contract that contains a termination provision that provides the dismissed with a specified amount, whether fixed or readily calculable, is not subject to the duty to mitigate if the employment contract is silent with respect to mitigation. This statement of law applies to contracts that specify payment of a lump sum or payment by way of salary continuance.
The courts will not enforce a termination clause inserted into an existing employment contract unless certain conditions are met.
consideration flowed to the employee in exchange for forfeiting that right.
If the employer does not prove these required elements it is likely that a court will not enforce the termination clause and the employee will be awarded reasonable notice of dismissal.
Employers in Ontario rarely comply with the requirements of the La-Z-Boy test when inserting termination clauses into existing employees’ contract of employment. This oversight the potential of being a very costly mistake.
The La-Z-Boy test has yet to be considered by a lower court. Some have argued that the La-Z-Boy test will not be binding on a lower court because it is only “obiter“. However, the better view is that the La-Z-Boy test is the type of obiter dicta that, as discussed by the Court of Appeal in R. v. Hajivasilis35 at para. 20, will be binding on a lower court.
A contract is an exchange of promises and/or acts, as a result of which each party to the contract receives something from the other. Consideration refers to the exchange of something of value between the parties. For a contract to be binding, consideration must flow between the parties. Absent consideration, there is no contract.
The courts have repeatedly held that a new notice provision in an employment contract is a significant change to the terms of employment. As a result, new consideration is required to support that change.
The requirement of consideration to support a change to the terms of an agreement is especially important in the employment context where, generally, there is inequality of bargaining power be-tween employees and employers. Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment but once they have been hired and are dependent on the remuneration of the job, they become more vulnerable.
…the law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relations as the consideration for the new terms.
Therefore, if an employer is intent on inserting a termination clause into an employee’s employment contract it must do so at a time when it will be supported by consideration such as a promotion, bonus or significant pay raise.
However, as stated above, fresh consideration is not sufficient to support the insertion of a binding termination clause into an employment contract. It is common for employers and lawyers to overlooked the requirement that the employer must also be able to demonstrate that the employee knew that he or she was giving up the right to reasonable notice at the time the new employment contract was signed. This could be done by presenting the employee with a letter that clearly set out the employee’s entitlement to reasonable notice and the impact of the resulting change or by ensuring that the employee received independent legal advice prior to executing the new employment contract.

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