Court Strikes Down Termination Provision that Provides For Salary During Notice Period


Time Published on May 22, 2015

Increasingly, the courts are striking down termination provisions in employment contracts resulting in lengthy common law notice awards to employees.  A recent decision from the Ontario Divisional Court continued this concerning trend.

In Miller v A.B.M. Canada Inc, the Divisional Court was asked to overturn a decision by the Superior Court of Justice in a wrongful dismissal claim in which a termination clause was invalidated and common law notice awarded.

The Employment Standards Act, 2000 (the “ESA”) provides that employers and employees cannot “contract out” of the minimum standards provided in the legislation. This means that an employer cannot provide an employee with termination entitlements in an employment contract which are less than that stipulated in the ESA. Courts have held that where a termination provision could provide less than the ESA minimums, the entire clause is invalid and so the implied entitlement to “reasonable notice” under the common law applies.

Mr. Miller held a senior management position for A.B.M. for approximately 1.5 years prior to being terminated on a without cause basis.  The employment contract stipulated that in addition to his salary, he was entitled to a vehicle allowance.  Finally the employment contract provided that the employer would match the employee’s contributions to a pension plan (the “Fringe Benefits”).

The termination clause that was at issue read as follows:

Regular employees may be terminated at any time without cause upon being given the minimum period of notice prescribed by applicable legislation, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation. [emphasis added]

The trial court found that the termination provision only purported to entitle the employee to “salary” alone in calculating compensation in lieu of notice and that this necessarily excluded the Fringe Benefits.

As a result, because the ESA requires that the Fringe Benefits be incorporated into the calculation of statutory termination pay, the contractual termination clause fell below the minimum requirements of the ESA and was invalid.

The Divisional Court upheld the trial Court’s decision.  The employer argued on appeal that the silence of the contract on whether the Fringe Benefits would continue gave rise to a presumption (rebuttable only elsewhere in the contract – not in subsequent actions by the employer) that they would be paid.  The Divisional Court rejected this argument, holding that in interpreting the contract it should apply the “contra proferentem” principle.  This longstanding principle of contractual interpretation holds that ambiguity in a contract ought to be read against the party who drafted the contract, particularly where there is an imbalance of bargaining power in the drafter’s favour. In employment contracts, that principle is commonly applied to resolve ambiguity in favour of employees.

As a result, the Divisional Court upheld the trial decision.

What Employers Should Know

The ESA guarantees “wages” must remain unchanged during the working notice period, and during the notional notice period that is paid out as termination pay in lieu.    However, the definition of “wages” under the ESA is broader than the everyday use of the term, and can include non-salary monetary compensation such as that at issue in this case.  Employers must be aware of their responsibility to compensate employees for such fringe benefits or to continue them for the balance of the notice period.  This obligation must be expressly reflected in termination provisions in employment contracts, or at least included by virtue of language used.  Careless drafting or utilizing language found enforceable in decades past may expose employers to common law reasonable notice liability.

The Divisional Court noted that the contract used by the employer in Miller was a precedent which had been used by previous legal counsel, but that the actual agreement had not been reviewed by counsel at the time it was signed.  In other words, the employer elected to save some money and it cost them in the long run.  Given the rapidly changing case law on what language courts will consider acceptable for termination provisions, it is essential not only that employers engage legal counsel during the hiring process, but also periodically verify that their contracts are still enforceable throughout the employment relationship. There are opportunities to patch holes, but only if you spot them in time and react properly.

At the 2015 Ontario employment law conference, participants may choose between three afternoon Break-Out Sessions. Session 1, Updating Your Employment Contracts, will cover:

  • How to avoid having your contracts rendered void by the “consideration” pitfall,
  • Changing terms of an employment contract,
  • Recent developments on termination provisions,
  • Use of “morality clauses” to address workplace harassment, violence or off duty misconduct, and
  • Drafting restrictive covenants to protect your business.

 

Tag employment law