Employment & Labour

Decisions on termination clauses inconsistent: MacLeod

By AdvocateDaily.com Staff

Ontario courts need to provide more clarity when examining the language in termination clauses so employees and employers can get a better idea of what will be enforced and what won’t, Toronto employment lawyer Doug MacLeod tells AdvocateDaily.com.

Many termination clause cases “are being struck down,” says MacLeod, principal of MacLeod Law Firm, adding it's a “big issue” in the employment law bar.

“Almost all the time, the end result of the decision is the employer didn’t comply with the Employment Standards Act, therefore the termination clause is not enforceable,” he says, noting that an employer can’t contract out of the Act.

MacLeod says the courts are reaching their conclusions about termination clauses “in very convoluted ways, but in a nutshell, that’s what’s happening.”

Until roughly a decade ago, he explains, termination clauses weren’t often found in employment contracts, but when they were, they were poorly drafted.

“I think perhaps it was because employees were working fairly long service with a company and there was sort of an understanding that ... employers would take care of them,” MacLeod says.

He says at that time employees were less likely to sue an employer and were able to negotiate a fair package when they departed.

“My guess is that employers got burned in wrongful dismissal actions and just didn’t want to go through that again,” he says, so they started adding the clauses that are intended to reduce termination costs for employers.

When there is no termination clause in an employment contract, “the courts will imply a term into the contract, and it basically says we’re going to assume the employer has to pay reasonable notice of termination,” MacLeod says.

The most important factor when determining what is reasonable is the length of service, and many years ago an “informal rule of thumb” of one month’s notice per year of service developed, and although the Court of Appeal has explicitly rejected this it is a good place to start in many cases, he says.

But termination clauses are only required to comply with the minimum standards contained in the province’s Employment Standards Act (ESA), which means an employee who works less than three months is entitled to no notice, while someone who works three months to less than a year gets a week’s notice. Anyone who works one year to less than three years is entitled to two weeks, and after that, an employee receives an extra week per year of service, to a maximum of eight weeks.

For employers, the benefits of including a termination clause are obvious, MacLeod says, pointing out that termination costs and the risk of litigation can be significantly reduced “because it’s very clear what the person gets. They’re not arguing about how much is reasonable notice; they’re just applying that termination clause that was agreed to at the outset.”

But 10 years in, while most employers have been revising the clauses so that they can withstand court scrutiny, “these older contracts are being attacked by employee lawyers,” who are focusing on certain grey areas, he says.

One of those concerns benefits, MacLeod says. The Act requires that in addition to notice of termination, benefits must be continued during the same period.

“If the termination clause doesn’t include benefit continuation, some courts have said that clause doesn’t comply with the Act, and we’re not going to enforce it, and therefore the employee gets reasonable notice,” which costs more than complying with minimum standards under the legislation, he says.

Another area is severance pay, he says, which is a minimum standard under the ESA for employees with at least five years service who work for companies that have an annual payroll of at least $2.5 million. They’re entitled to one week of pay for each year of service, up to 26 weeks.

“If the termination clause doesn’t refer to severance pay, some judges have said they won’t enforce it,” MacLeod says. “They would then award damages equal to pay in lieu of 'reasonable' notice of termination.”

While these challenges have met with some success, he says, “the courts haven’t been that clear all the time. So you’ll have a line of cases suggesting a termination clause can be attacked on a certain basis, and then the Ontario Court of Appeal may come up with a decision that doesn’t really go along with that line.”

Signing an employment contract with a termination clause that includes minimum notice in line with the Act is no guarantee litigation won’t be launched, he says.

“There’s language that seems clear on the face of it that courts have said, ‘No, we’re not going to enforce it.’”

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