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Shifting Sands: Ontario Court of Appeal Upholds Termination Clause

Employers, ever-weary of the next judicial pronouncement on the enforceability of specific termination clauses in employment contracts, may mark a recent decision by Ontario’s top court down on the positive side of the ledger.

Starting Point

To be enforceable, a specific termination clause in an employment agreement must meet two requirements.  First, the clause must clearly state that the employee is not entitled to reasonable notice under the common law.  Second, the clause must provide entitlements on termination that are equal to or greater than the entitlements set out in applicable employment standards legislation in the jurisdiction.  In Ontario, the Employment Standards Act (ESA) provides for certain minimum entitlements on termination of employment, including notice or termination pay in lieu, vacation pay and benefits continuation.

If a clause fails to meet either of these criteria, then it is unenforceable, and the employee will be entitled to reasonable notice under the common law.

Latest Decision

In Nemeth v Hatch Ltd, the employee was dismissed without cause after almost 20 years of service.  The employee’s contract included the following termination clause:

The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

The employer provided the employee with termination pay, severance pay and benefits continuation as set out by the ESA.  It took the position that the termination provision eliminated any further entitlements.

The Plaintiff brought a wrongful dismissal action, claiming that the termination clause did not meet either legal requirement, and so was unenforceable.

The Ontario Superior Court rejected that claim on a summary judgment motion.  The Ontario Court of Appeal upheld that ruling on appeal and provided detailed reasons.

On the first requirement, the Court of Appeal held that the clause clearly specified a period of notice different than the common law.  There was no legal requirement to expressly state that the common law did not apply, if the clear reading of the contract showed that the parties agreed to a different valuation of the notice period.

The Court of Appeal also found that the clause’s entitlements were equal to or greater than the minimum ESA requirements.

Recall that in another recent Ontario Court of Appeal case, Wood v. Fred Deeley Imports,  a clause that did not specifically provide for severance pay to be paid in lump sum was found to be invalid.  However, in that case, there was a subsequent clause that clarified that only what was set out in the termination clause would be paid to the employee.  There was no room under the contract for severance pay that was not specifically set out in the contract.

Critically, in Nemeth, unlike in Wood, the contract did not attempt to preclude or eliminate the entitlement to severance pay. In Nemeth, unlike in Wood, there was no language of limitation that could be construed as excluding entitlement. The Court of Appeal held that the clause in Nemeth only limited the notice to which the employee was entitled, not severance pay or benefits continuation. Consequently, the clause could be read as providing notice or termination pay in lieu pursuant to the contractual formula, and severance pay pursuant to the ESA.  As a result, it met the second requirement for validity.

Thus, the Court deemed the clause enforceable, and the employee’s benefits were limited to what was set out in the clause.  Given the employee’s length of service, the contract likely reduced the employer’s liability (by avoiding common law notice) by over a year of salary.

What Employers Should Know

The result in Nemeth will reassure employers that carefully drafted termination clauses can still succeed in limiting an employee’s entitlements on termination.

Nonetheless, the rapid and often seemingly inconsistent development of the law in this area does not show any signs of slowing down.  The sands are still shifting almost monthly.  Employers must be cautious to regularly review their contractual termination provisions with counsel.  This should be done both for contracts used for new hires, as well as existing contracts, which new caselaw may have rendered obsolete.  A failure to do so could lead to unwanted surprises when a termination clause that would have been bulletproof not long ago may become vulnerable to attack.

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