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Employment & Labour

Surprise OCA decision upholds termination clause

Litigating over a termination clause remains a roll of the dice after the Ontario Court of Appeal (OCA) bucked its recent trend to uphold an imperfect clause, Toronto employment and human rights lawyer Nicole Simes tells

The unanimous three-judge panel of the province’s top court ruled that the termination clause in the case was legally enforceable, limiting the fired employee to 19 weeks' termination pay following 19 years of service.

Simes, a lawyer with MacLeod Law Firm, says the decision is good news for employers since the defendant in the case could have been exposed to common law damages worth 19 months of pay if the clause had been voided. But, she warns them not to get too carried away because the decision appears at odds with other recent pronouncements from the same court.

“It’s a very significant decision. For employers, it suggests there is some light for them if they have a termination clause that the employee challenges as unenforceable, but for anyone considering litigating in employment law in 2018, this emphasizes the gamble you are taking,” Simes says.

“This matter was very fact-specific, but we had multiple cases in 2017 where it seemed like the court was sending a very different message. Parties on both sides need to take a serious look at settlement if the only issue is enforceability of a termination clause because the situation is so unclear that everyone needs to assume they are at risk,” she adds.

The termination clause in the OCA case provided for a notice period amounting to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.”

Before the decision, Simes says most observers would have assumed the clause would be found unenforceable due to a number of decisions suggesting that termination clauses must mention three minimum entitlements arising out of the Employment Standards Act (ESA) in order to be upheld: pay in lieu of notice, severance pay and the continuation of benefits throughout the notice period.  

In some cases, Simes says courts have found termination clauses void for failing to mention one of the three features, even where they do not apply to the employer at issue, such as a business that does not offer any benefits or whose payroll is too small to meet the threshold for severance pay.

“This appeal court decision turns all that on its head,” she says.

Writing for the panel, OCA Justice Lois Roberts said the need for clarity in a termination clause when employees contract out of common law notice “does not mean that the parties must use a specific phrase or particular formula.”

“While the parties are free to express their agreement in language of their choice, a high degree of clarity is required and any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause,” Roberts added, noting that the clause was clear enough to be enforced.

In addition, she said the termination clause should not be found void because of its silence on the issue of severance pay, finding that it did not indicate an intention to contract out of the ESA.

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