Case of the Month: Ontario Court Sheds Light on Enforceability of Limits on Termination Notice

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Being wrongfully dismissed can actually be an economic windfall for employees given the wide range of damages potentially available. That’s why many employers put a clause in employment contracts purporting to limit termination payouts to the minimum notice required by the province’s ESA laws or other set amount. A new case from Ontario’s top court offers insight into what has become perhaps the hottest issue in all of Canadian HR law: Ensuring that termination notice limits are legally valid and enforceable.

THE CASE

What Happened: After 8+ years of service, a 48-year-old sales planner making $100,000 a year was laid off without cause. Her employment contract included the following clause:

[The Company may terminate you without cause at any time] by providing you 2 weeks’ termination notice or pay in lieu thereof for each completed or partial year of employment. . . . The Company shall not be obliged to make any payments to you other than those provided for in this paragraph, except for amounts which may be due and unpaid at the time of termination. The payments and notice provided for in this paragraph are inclusive of your entitlement to notice, pay in lieu of notice and severance pay under the [Ontario] Employment Standards Act. (emphasis added).

The employee claimed the clause was unenforceable. The employer disagreed, noting that the 2 weeks per year worked in working notice the clause provided was actually more generous than the 1 week per year in working notice required by the ESA.

What the Court Decided: The Ontario Court of Appeal ruled that the clause was unenforceable.

How the Court Justified Its Decision: The general rule: ESA benefits are minimum requirements. Thus, while employment contracts may provide for greater benefits, they can’t provide for less than the ESA requires. The working notice provisions of the clause did go beyond ESA requirements, the Court acknowledged. But the clause also took away an ESA benefit. Specifically, it didn’t expressly say the employer had to make contributions to benefits plans during the working notice period as required by the ESA.

The employer claimed that the obligation was implied under the clause. It also noted that it did, in fact, make all the required contributions. But, the Court wasn’t impressed. The enforceability of a termination clause turns on its wording rather than what the employer actually provides after termination. And the wording of this particular clause was fatally flawed. “Nothing in [previous case law] suggests that an employer’s conduct on termination or during the notice period can remedy an illegal and unenforceable termination clause,” the Court emphasized.

Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII), Feb. 23, 2017

WHAT IT MEANS

While actions may speak louder than words in some contexts, when it comes to termination clauses the opposite is true. Recognition of this principle is the first thing employers should take from the Wood case.

The second takeaway is an understanding of why the wording of this particular termination clause made it “illegal and unenforceable.” The fatal flaw wasn’t simply omitting the employer’s ESA obligation to make post-termination contributions. In fact, the Court cited a 2005 case called Roden v. Toronto Humane Society in which a termination clause with the exact same omission was upheld.

The difference: Unlike in Roden, the termination clause in Wood (specifically, the bold face language) purported to limit the employee’s termination notice to only the benefits expressly listed in the clause. Coupled with this “all-inclusive” language, the Court interpreted the omission as not just an oversight but an active attempt by the employer to illegally contract out of its ESA post-notice contribution requirements.

The Moral

If your termination clause purports to limit notice, whether to minimal ESA requirements or a more generous pre-determined amount or formula, make sure it accounts and provides for no less than the minimum termination notice and benefits to which employees are entitled under your province’s ESA laws.