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Employment & Labour

New OCA decision on the enforceability of termination clauses

By Laura Williams

The Ontario Court of Appeal recently released a new decision on the enforceability of termination clauses that sheds light on the proper interpretation of employment agreements and the validity of “saving provisions.” In the context of employment agreements, saving provisions typically provide that the employee shall not receive less than their minimum statutory entitlements under the Employment Standards Act (the ESA) in any circumstance, even if parts of the termination clause could be interpreted to suggest that the employee will receive less than their minimum ESA entitlements.

In the case, the company terminated the employee’s employment and gave him a few months’ working notice and a termination payment in accordance with the termination clause in his employment agreement. The termination clause provided: that the employee would receive the greater of one month’s notice or one week’s notice for every six months of employment, or pay in lieu thereof; that this sum would be in full satisfaction of termination entitlements under the ESA; and that, if the entitlements outlined in the termination clause were less than the employee’s entitlements under the ESA, he would receive termination entitlements in accordance with the ESA minimum entitlements instead.

The initial decision

At trial, the employee argued that the termination clause in his employment agreement was not enforceable and that he was therefore entitled to common law reasonable notice. The judge ruled that the termination clause failed to rebut the presumption of common law reasonable notice because it was ambiguously drafted, and consequently the employee was entitled to damages at common law.

The judge analyzed the termination clause by breaking it into three parts: the “options provision” (i.e. one month’s notice or one week’s notice for every six months); the “inclusive payment provision” (i.e. payment is in satisfaction of ESA entitlements); and the “failsafe provision” (i.e. employee will receive ESA entitlements if those are greater than the entitlements set out in the termination clause). The judge reasoned that because the “inclusive payment provision” was immediately after the “options provision” but was not repeated after the “failsafe provision,” that it applied to the “options provision” but not to the “failsafe provision.” As such, the judge ruled that the employee’s termination entitlements under the agreement would only be inclusive of his ESA entitlements if he received one month’s notice or one week’s notice per six months of employment under the “options provision”, but not where he received his ESA minimum entitlements under the “failsafe provision” instead. Since the employee did receive his ESA minimum entitlements under the “failsafe provision,” the judge held that he was entitled to damages because the presumption of common law reasonable notice had not been rebutted.

The appeal decision

The Court of Appeal overturned the lower court’s decision and held that the judge erred in failing to consider the termination clause as a whole. The court held that the judge had artificially bifurcated the clause and created ambiguity that did not reasonably exist. Additionally, the court affirmed that employers can make contracts that incorporate the minimum notice requirements of the ESA by reference and that courts should not strain to create ambiguity where none exists.

The court also rejected the employee’s argument that the saving provision (i.e. the “failsafe provision”) should be void because it operates in the same manner as a severability clause that provides for any unlawful provisions within an agreement to be severed from the agreement. Notably, the court recently held in this case (which you can read about further on our blog) that severability clauses are not capable of making a termination clause enforceable by severing provisions that violate the ESA. Further, if a portion of the termination clause is unenforceable, then the entire clause is unenforceable and is struck. The court stated that the “failsafe provision” is distinct from a severability provision because it “ensures that any portion of the termination clause that falls short of the ESA must be read up so that it complies with the ESA,” rather than purporting to sever a provision of the termination clause that violates the ESA. As a result, the court held that the “failsafe provision” was effective in ensuring that the employee received his termination entitlements under the ESA. Consequently, the court held that the termination clause in the employee’s employment agreement was valid and that he was not entitled to reasonable notice at common law.

Implications

The decision affirms the general principle that contracts must be interpreted as a whole, rather than in a piecemeal fashion. This is important because certain portions of a termination clause may appear to violate the ESA when interpreted in isolation, which could result in the clause being declared unenforceable if it is analyzed in parts, even though the clause complies with the ESA when read as a whole. As many employers know, a termination clause being unenforceable can be very costly.

It also affirms that saving provisions are distinct from severability clauses and that they can legitimately be used to clarify the respective rights of employers and employees in the event of termination. Therefore, an appropriate saving provision can increase the likelihood that a court will find a carefully drafted termination clause enforceable. However, the court’s ruling does not suggest that employers should rely exclusively on saving provisions. To minimize risk, employers should have a careful approach and ensure that the entirety of a termination clause clearly sets out all entitlements an employee will receive on termination of employment.

As employers may note, the Court of Appeal has issued several decisions in the last year ruling on different aspects of termination clause enforceability. Careful drafting of termination clauses remains key, as does regularly updating them to address legal developments. Employers who have not yet addressed the recent developments would be well advised to ensure that the termination clauses in their agreements continue to be enforceable and to consider whether their organizations may be well advised to implement new employment agreements for existing employees to minimize risk of unenforceable termination clauses.

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