Ontario Divisional Court offers another take on termination clauses
A series of Ontario decisions in 2017 and 2018 demonstrated that termination clauses are tricky business! Many employers include termination clauses in employment agreements, which set out the entitlements of employees upon the termination of their employment.
Typically, the aim of these clauses is to rebut the presumption of common law notice and restrict the employee’s notice to what is statutorily required under the Employment Standards Act, 2000 (the ESA). However, drafting a termination clause that successfully accomplishes this aim is more difficult than many employers would expect. A recent decision out of the Ontario Divisional Court has tied together many of the principles derived from recent case law and provides additional clarification as to how termination clauses will be interpreted.
In this case, the court reviewed a decision of a motions judge which had found that a termination clause in an employment agreement had not been sufficiently clear to oust the presumption of common law reasonable notice. The wording of the termination clause read:
“[The company] may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time.”
The interpretation of the clause’s enforceability turned on the words “pursuant to the Employment Standards Act, 2000” and the different wording which had been used in the termination clause applicable to the employee’s probationary period. The Divisional Court found that the wording used in the termination clause gave rise to two possible interpretations: one that ousted the employee’s entitlement to common law reasonable notice and limited the employee’s termination entitlements to the minimum period under the ESA, and one that did not. The issue was that the clause did not explicitly limit notice or pay in lieu of notice to only what is provided for in the ESA. The words “pursuant to the ESA” could be interpreted to mean that the notice would comply with the terms of ESA but not oust the presumption of common law notice. The court noted that the terms of the employment agreement that governed the employee’s probationary period had used the words, “only providing you with the minimum notice necessary to ensure compliance with the ESA as amended from time to time.” The two provisions are clearly distinguishable by what the motions judge referred to as “warning signs” such as the word “only” which was included in the probationary clause, but was not included in the termination clause applicable to the employee at the time of her dismissal.
The Divisional Court found that the use of different wording in the probationary clause and the termination clause indicated that the drafters of the agreement had intended to give meaning to that difference. The court also invoked the rule of contra proferentum which, in the employment context, dictates that ambiguities in employment agreements drafted by the employer ought to be interpreted in favour of the employee. Since the termination clause could be interpreted both to oust the presumption of common law reasonable notice and not to oust the presumption, the agreement was interpreted to give the employee the greater entitlement, which was common law reasonable notice.
The court reached this finding after distilling past case law on interpreting termination clauses into eight key principles:
- all contractual provisions must meet the minimum notice requirements for termination without cause set out in the ESA;
- there is a presumption that an employee is entitled to common law notice upon termination of employment without cause;
- provided minimum legislative requirements are met, an employer can enter into an agreement to contract out of the provision for reasonable notice at common law upon termination without cause;
- the presumption that an employee is entitled to reasonable notice at common law may be rebutted if the contract specifies some other period of notice as long as that other notice period meets or exceeds the minimum requirements in the ESA;
- the intention to rebut the right to reasonable notice at common law “must be clearly and unambiguously expressed” in the contractual language used by the parties;
- there is no need for any specific wording, however, it must be clear from the language that the parties have agreed to limit the employee’s common law rights on termination;
- any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause in accordance with the principle of contra proferentum; and
- surrounding circumstances may be considered when interpreting the terms of a contract but they must never be allowed to overwhelm the words of the agreement itself.
As with previous cases involving interpretation of termination clauses, this case is a reminder that employers must be very careful about the wording used in a termination clause. Failing to use clear, unambiguous terminology may result in vastly increased costs if an employee is dismissed without cause. Although courts have moved away from strict interpretations of termination clauses that would render them inoperative more frequently, this case is illustrative of the fact that ambiguity in a termination clause will still be resolved in favour of the employee. While the court here did not find that the termination clause was invalid, it nevertheless found that the employee was still entitled to the greater notice period because the termination clause was not explicit enough about ousting the presumption of common law reasonable notice. Employers should be mindful of this decision and review their termination clauses for any ambiguous language that might not be as clear as once thought. A well thought out termination clause can save a business considerable costs when they are required to let employees go without cause.