Management Lawyers

Ambiguity Killed the Termination Clause

Published on November 20, 2017

The Ontario Superior Court recently struck down a termination clause in an employment agreement because of a seemingly minor ambiguity.

The Case

The employee in Amberber v. IBM Canada Limited was 57 years old and had almost 16 years’ service when IBM dismissed him without cause. IBM sought to rely on the termination clause in his employment agreement, which stated as follows: 

If you are terminated by IBM other than for cause, IBM will provide you with notice or a separation payment in lieu of notice of termination equal to the greater of (a) one (1) month of your current annual base salary or (b) one week of your current annual base salary, for each completed six months worked from your IBM service reference date to a maximum of twelve (12) months of your annual base salary.  This payment includes any and all termination notice pay, and severance payments you may be entitled to under provincial employment standards legislation and Common Law. Any separation payment will be subject to applicable statutory deductions. In addition, you will be entitled to benefit continuation for the minimum notice period under applicable provincial employment standard legislation.

The Court referred to the above portion as the “options provision”. The clause also contained further language, which the Court referred to as the “failsafe provision”: 

In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (“statutory entitlements”) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment.

In addition to eleven weeks and three days of working notice, the employer provided a separation payment of $22,675.50, which was equivalent to 18 weeks of the employee’s base salary. As such, the employee was provided with 29 weeks’ and three days notice or pay in lieu thereof.

When the employee pointed out, during the litigation, that the termination clause actually required that he be paid 31 weeks’ in lieu of notice, the employer deposited the remainder into his bank account.

The Decision

The Court rejected the employee’s alternate argument that the employer should be disallowed from relying on the termination clause because it initially breached it when it failed to pay his full 31 week entitlement under same. The Court found that there was no “deliberate and clear repudiation” of the employment contract on the part of the employer. The employee was paid the bulk of his entitlement on termination, received the balance within a reasonable period of time, and any initial failure of the employer to do so was clearly accidental.

However, , the Court found that there are circumstances in which a payment to a terminated employee under the options provision would violate the ESA. If a termination clause potentially violates the ESA at any date after the employee is hired, the courts have found that it is void, and the common law applies. Despite this, the Court noted that the failsafe provision prevented the clause as a whole from violating the ESA, assuming it applied.

In order to rebut the presumption of common law reasonable notice, a termination clause must do so clearly and unambiguously. Such clauses must make it clear that an employee’s entitlement is being limited. Unfortunately, the Court determined that an ambiguity in the failsafe provision prevented it from saving the otherwise invalid options provision, and so the clause was unenforceable.

The Court noted that a portion of the clause, which it called the “inclusive payment provision”, did not clearly apply to the failsafe provision. The inclusive payment provision stated that “[t]his payment includes any and all termination notice pay, and severance payments you may be entitled to under provincial employment standards legislation and Common Law.”

The Court found that because the inclusive payment provision followed the options provision and was not repeated at the end of the clause, it was not clearly captured by the failsafe provision. As such, the termination clause as a whole was ambiguous as to whether the employee was limited to his entitlement under statute.

The Court invited the parties to proceed before it in determining the amount of common law reasonable notice due.

The Takeaway

We have written extensively in the past about the courts’ harsh treatment of termination clauses in employment contracts which purport to limit employees to their statutory entitlements. Despite the regularity with which the courts strike out these provisions, the Court in this case commented that, “IBM could easily have drafted a termination clause [that would have been enforceable].”

This case further illustrates the need to seek legal advice from an employment lawyer when drafting such provisions. Even a seemingly minor ambiguity in the language could leave an employer surprised to find itself exposed to the uncertainty of paying common law reasonable notice, when it previously believed that its liability was pre-determined by contract. 

employment law,  employment litigation,  wrongful dismissal litigation