Generous termination clauses: Think twice before making promises

Many employers include termination clauses in employment contracts to limit their liability when dismissing employees. When employers draft generous termination provisions providing for more than statutory minimums, they must follow through on that generosity when terminating employees. Failing to do so could leave employers exposed to full liability under the common law.

The Case

The employee in Holmes v Hatch Ltd. had been employed for almost 17 years as Project Manager and Senior Water Resources Engineer before he was terminated without cause. The termination provision in his employment contract was as follows:

“In the event that we must terminate your employment for reasons other than cause, you will receive a termination package which takes into account your years of service, position and age. As a minimum the amount of combined notice and severance you will receive will equal 4 weeks plus one week for each completed year of service, or such greater amount as may be required by statute at the time of termination.”

The employer noted that it had paid the employee his salary for approximately 25.5 weeks after his termination, and had continued his employment benefits for 8 weeks. It argued that this was more than the minimum prescribed by the second sentence of the termination clause, and that the employee had therefore received all he was entitled to.

Normally, when a party breaches a contract, it is required to perform no more than the minimum performance guaranteed under the contract. However, the clause in question promised the employee an appropriate termination package that complies with the Employment Standards Act (ESA) minimums and is based on a consideration of the listed factors. It treated consideration of the factors to arrive at a suitable termination package as an additional requirement, subject to the ESA minimums.

The court found that the termination provision explicitly incorporated several common law Bardal factors: years of service, position, and age. A proper interpretation of the provision required that these words be given meaning, and as such the employer was obligated to consider these factors when deciding on the content of the employee’s termination package.

The court found that the employer had not provided sufficient credible evidence to prove that it had indeed considered these factors when making its decision. As such, the court found that the employer had breached the employment contract, and thus could not rely on it to limit its liability. The court awarded 18 months common law notice to the employee, minus any notice payments already made by the employer and subject to mitigation.

The Takeaway

Employers may choose to provide for more than the statutory minimums when drafting termination clauses for a variety of reasons. However, they should be aware that failing to provide compensation in accordance with these clauses could leave them exposed to liability under the common law, which can be significant. Employers should consult with employment law counsel when drafting termination clauses to ensure that they are promising what they intend to promise, and not more.

To learn more about how to draft enforceable termination clauses that suit your organization’s needs, register to Learn the Latest® at the Ontario Employment Law Conference.

This blog was first published on First Reference Talks.

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