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Termination Clauses: A Cautionary Tale

Anyone involved in the human resources side of management will be familiar with the concept of notice periods for terminated employees, and how they are calculated.  In most cases, the primary factor involved in determining the appropriate length of a reasonable notice period is the employee’s length of service.  However, this is not always the case.  In cases dealing with particularly senior and specialized employees, significant notice periods may be awarded even for employees with short service.  In such cases, employment contracts with termination clauses can take on even greater importance for employers attempting to maximize their flexibility and limit their liability.

In Rodgers v CEVA, the plaintiff had been hired as the most senior employee in the Canadian division of the defendant, which handled trucking and logistics.  The plaintiff was responsible for 500 employees and sales in excess of $140 million annually.

At the time of his hiring, the plaintiff was also required to make a significant investment in shares of the defendant’s Equity Plan prior to the commencement of employment.

The plaintiff’s employment was terminated after slightly less than three years on the job.  At trial, the defendant did not allege cause.

The plaintiff was ultimately awarded a 14 month notice period.

The Court noted several factors which it found justified such a significant notice period.  First, it found that the plaintiff’s ability to mitigate was somewhat limited.  The plaintiff’s experience was limited to one industry, and although capable and experienced, he had only a high school education.  As a consequence, his job search was hampered by the reality that there were simply not many companies carrying on a similar business in Canada.

Although not explicitly stated by the Court, the plaintiff earned a substantial salary, one which it appears likely he may only have been able to obtain working in the single, specialized sector of the economy.

Finally, the Court found that the requirement that the plaintiff invest substantially into the Equity Plan prior to beginning employment was intended and did create the impression that by taking the job the plaintiff would have a higher degree of job security than might otherwise be anticipated.

What Employers Should Know

Although the plaintiff’s damages were reduced due to his commencement of other employment, the defendant was still required to pay a significant amount in pay in lieu of notice.

The high notice period awarded in this case goes to underscore the importance of implementing employment contracts that may limit such recovery through termination clauses.  The maxim of “hope for the best, plan for the worst” is particularly true when entering into an employment relationship.  This is particularly so when dealing with upper level employees, who are likely to command significant notice periods regardless of their years of service.

It is important to note that a termination clause does not necessarily need to limit an employee’s entitlements to the minimum set out in the Employment Standards Act.  Indeed, many senior executives may be unwilling to agree to such a restrictive term.  However, by including an agreeable notice clause that creates a formula for determining notice upon dismissal, the parties will have certainty in their relationship, and can avoid not only the costs associated with wrongful dismissal litigation, but also the jeopardy posed by judicial discretion in notice periods.

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