Question about Termination Clause Validity and Severance Entitlement

[Lisa Binns]

#97462

Forum: Private

Good Morning,

I am looking for some guidance on a situation involving an Alberta employee and a termination clause, and I’d appreciate your insight from an employment law perspective.

Background:

-The employee has been with the company for 7.5 years total.

-About 10 months ago,(January 2025) he accepted a promotion to a new internal position with a significant pay increase and signed a new employment contract.

-His previous contract did not include any termination limitations.

The new contract contains the following clause:

“The employee agrees that the maximum amount of pay or notice as prescribed by section 56 of the Alberta Employment Standards Code is the maximum entitlement to severance pay and replaces any common law rights that the employee may have to reasonable notice termination or pay in lieu of reasonable notice.”

-The role includes 10 hours of overtime per week, written directly into the contract and consistently paid for almost a year (about $30,000 annually).

-The employee believes he may soon be terminated without cause, as he’s training another employee to do his job and management has not clarified the reason.

Questions:

1.) Does this termination clause effectively limit the employee to Employment Standards Code minimums, or could it be unenforceable under common law?

2.) The clause refers to section 56 and uses the term “severance pay,” but section 56 deals with termination notice, and Alberta’s Code doesn’t actually provide for severance pay. Could these errors in section reference and terminology make the clause ambiguous or invalid?

3.) If the employer calculates termination pay using only the base salary and excludes the regular overtime earnings, would that breach the Code or strengthen a wrongful dismissal claim?

4.) Given that the new contract came with a significant pay increase and change in duties, could this be viewed as a new employment relationship, resetting his service for termination purposes?

5.) Finally, if the employee is being quietly replaced without explanation, could this situation amount to constructive dismissal or bad faith termination under Alberta law?

Kind regards,

Rebecca

[Haley O’Halloran]

#97463

Hi Rebecca! Excellent, detailed questions — these raise several key issues under Alberta employment law. Here’s a structured breakdown with legal reasoning and commentary relevant to each point.

1. Validity of the Termination Clause

Clauses like this are intended to limit notice or pay in lieu to statutory minimums, but Alberta courts apply a strict interpretation against employers.
For such a clause to be enforceable:

-It must clearly and unambiguously waive common law notice rights.
-It must comply fully with the Employment Standards Code (ESC) minimums.

Even minor ambiguities can render it unenforceable, reverting the employee to common law reasonable notice (often one month per year of service).

In your clause, the language “the maximum amount of pay or notice as prescribed by section 56 of the Alberta Employment Standards Code” could be vulnerable. If any part of it is inconsistent with the ESC (see next question), courts may find it void.

Case examples:

Kosowan v. Concept Electric Ltd., 2007 ABCA 85 — ambiguous or inconsistent wording invalidated a termination clause.

Rossman v. Canadian Solar Inc., 2019 ONCA 992 — Ontario case, but persuasive in Alberta; an internal inconsistency in reference to statutory minimums voided the clause.

So: it might not effectively limit entitlement to minimums if the wording is even slightly unclear or incorrect.

2. Error in Section Reference and Terminology

You’re correct that Section 56 of the Alberta ESC deals with termination notice or pay in lieu, not “severance pay.” Alberta doesn’t have a statutory severance requirement — only Ontario and federal law do.

This mislabeling and incorrect section reference could make the clause ambiguous. Courts in Alberta have invalidated termination clauses that:

-Cite the wrong statutory section, or
-Use inaccurate terminology that could confuse the employee about their rights.

An employee (and a court) could reasonably interpret the clause as misstating the law, making it unenforceable. Ambiguity always benefits the employee in these situations.

3. Exclusion of Regular Overtime from Termination Pay

If the employee regularly works and is paid for contractual overtime, that pay is part of “wages” under the Employment Standards Code (s. 1(1)(x)).

Section 56(1) requires notice or pay “at least equal to the wages the employee would have earned” during the notice period — meaning base pay + regular overtime + other guaranteed pay components.

If the employer excludes the consistent overtime pay, that would:

-Breach the Code’s minimums, and
-Further weaken the enforceability of the clause, since it would fail to meet statutory compliance.

It could also strengthen a wrongful dismissal claim, as courts would interpret the clause and payment practice together as inequitable or misleading.

4. Effect of the New Contract (New Role and Pay)

Because the employee:
-Accepted a new role,
-Received a substantial pay increase, and
-Signed a new employment contract,
the employer may argue that this was a new employment relationship starting January 2025.

However, courts look at continuity of employment, not merely a change in role or contract. If the employee remained with the same employer and there was no break in service, courts often find continuous service for calculating notice — unless the new contract clearly states prior service will not be recognized.

In this case, since he was promoted internally, it’s likely considered continuous service. Courts in Alberta (e.g., Ceccol v. Ontario Gymnastic Federation, applied in AB) are reluctant to reset service unless the change was so substantial it created an entirely new employment relationship.

Given 7.5 years of continuous service, the employee would likely retain that tenure for notice calculation purposes.

5. Possible Constructive Dismissal or Bad Faith Termination

If management is having him train his replacement without explanation, that raises potential issues:

-If his role is being materially reduced, reassigned, or eliminated without notice or agreement, that can constitute constructive dismissal — an employer-initiated change to a fundamental term.

-If they terminate him soon after the promotion without transparent reasons, there may also be an element of bad faith under Honda Canada Inc. v. Keays, 2008 SCC 39, which could justify aggravated or moral damages.

Evidence that he’s being “replaced quietly” could help demonstrate the employer’s lack of good faith or honesty in the manner of dismissal, even if the termination itself is without cause.

Overall, the termination clause carries significant legal risk for the employer. Its ambiguity, incorrect reference to section 56, and misuse of the term “severance pay” make it likely unenforceable, exposing the employer to common law reasonable notice obligations. Excluding regular overtime from termination pay would likely breach the Employment Standards Code and further strengthen a wrongful dismissal claim. Although the employer might argue that the January 2025 promotion created a new employment relationship, the courts would probably find the employee’s service continuous for notice purposes. Finally, quietly replacing the employee without explanation could raise concerns of constructive dismissal or bad-faith conduct, potentially leading to additional damages.

I hope this helps.

-HRInsider Staff

[Lisa Binns]

#97464

Thank you so much for the information and fast response! I appreciate this.

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