Employment & Labour

The termination clause: the most litigated aspect of a contract

By AdvocateDaily.com Staff

When drafting employment contracts, it’s important that employers and their counsel pay special attention to termination clauses to avoid litigation after an employee is fired, says Toronto employment lawyer Anatoly Dvorkin.

At the very least, it’s crucial that termination clauses comply with the minimum notice requirements found in Ontario’s Employment Standards Act (ESA), says Dvorkin, a founding partner of D2Law LLP.

“An employment contract will have many clauses in it. It will talk about everything from an employee’s salary to such issues as overtime and vacation. It will talk about the position. It will talk about other parts of the compensation package, such as benefits,” he tells AdvocateDaily.com.

“The No. 1 clause that parties go to court about is the termination clause. That’s the most frequently litigated clause in employment contracts.”

An employment contract is unenforceable if it fails to meet the minimum requirements of the Act, Dvorkin says, at which point an employee will be entitled under common law to notice or pay in lieu of notice.

Common law also applies when there is no employment contract, or the contract has no termination clause, he adds. “Either the employer pays enough or the employee can sue, and the employer cannot make the argument that the employee was limited to what was provided by the ESA because there was no contract for that.”

Since the amounts provided under common law are more “generous” than those found in the legislation, Dvorkin says, “it’s very important that when an employer is having their lawyer draft an employment agreement, the termination clause should meet the minimum standards of the ESA” to avoid a larger payout to the employee.

To limit confusion down the road, he notes, it may be better to simply specify in the termination clause that an employee is entitled to notice or pay in lieu of notice in accordance with the ESA, rather than including actual amounts.

An “overarching issue” with employment contracts is that they’re “static documents” that remain the same throughout an employee’s time with an employer, even if the employee is promoted, unless they’re changed, Dvorkin explains.

“If someone is hired to work in the mailroom and 20 years later they’re the CEO and they never renegotiated the employment contract, and then they’re fired, the termination provisions that apply in the original contract won’t be upheld because that contract can’t possibly be intended to have dealt with the position that the employee now occupies,” he says.

“It’s important that where that sort of situation happens and the employment agreement evolves, employers need to take the opportunity to update the contract.”

When the courts are considering the amount of notice or payment in lieu of notice, they consider a number of factors, Dvorkin says, including the employee’s position with the employer, length of service, the current job market, an employee’s age “and any other factors that might make it more or less possible for the employee to replace that employment.”

It’s important to remember, he says, that an employment contract “can be challenged the same way as any other contract, using the same legal principles. But on top of that, it can also be challenged for not meeting ESA minimums.”

Whether a termination clause is ambiguous is an important factor for employment lawyers to consider, he says, adding that the more vague the clause, the more likely a court will rule in an employee’s favour.

“There are probably thousands of cases in Ontario alone that deal with whether the termination clause was ambiguous. So the drafting of the termination clause becomes of paramount importance if you want to ensure it will be accepted by the court,” Dvorkin says.

Benefits, for example, is one area in a termination clause where ambiguity could be argued, he says. The ESA mandates that benefits should continue throughout a notice period. But when the termination clause fails to mention benefits or indicates that they won’t continue in the notice period, it’s considered ambiguous and therefore unenforceable, he adds.

Because employment law involves a power imbalance between employers and their employees, Dvorkin says, “a court will sometimes do whatever it can to find that a termination clause wasn’t drafted correctly.”

In an attempt to balance those interests, “The courts tend to favour the employee where there’s any sort of ambiguity. Any time there’s a discrepancy in power, the courts look to favour the less powerful party wherever they can. And where they can is when there is any ambiguity.”

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