Be wary of termination agreements that limit entitlements
By Paul Russell, AdvocateDaily.com Contributor
People should always seek legal advice if they are asked to sign a termination agreement upon being hired since these contracts invariably favour the employer, says Toronto employment lawyer Stephen Moreau.
“Employees have to be very careful with these contracts, as most limit entitlements, sometimes quite severely,” says Moreau, a partner with Cavalluzzo LLP.
He cites a recent Ontario Court of Appeal (OCA) decision concerning a managing director who was terminated from his position after almost eight years at a firm, earning a salary of $170,000 at the end, plus yearly bonuses.
According to court documents, when the man was hired he signed an agreement stating that should his employment be terminated, the company had the discretion of paying him either what he was entitled to under the Employment Standards Act (ESA) or two months of base salary. However, when he was let go, the company chose to give him a lump-sum severance payment representing about 12 weeks of salary, but no bonus pay for that period.
The man brought an action for wrongful dismissal, arguing the termination agreement was void since it provided him with far less than what he was owed for reasonable notice under common law, and that he should have been given bonus payments for the notice period.
The court agreed and ordered the company to pay him eight months’ wages in lieu of notice, plus an appropriate bonus, stating, “The termination clause was unenforceable given that it contracted out of statutory entitlements without substituting a greater benefit.”
“This is another example where an employer and an employee don’t quite know what they’re doing in terms of drafting a termination agreement,” Moreau tells AdvocateDaily.com. “This is a classic example of a case where the employer did not make its intentions known clearly, so the employee was not aware that he was being asked to give up something quite significant for something very poor.”
Working with the numbers provided in the judgment, he estimates the man will receive slightly more than $113,000 for the eight months, compared to approximately $26,000 he would have received for the eight-week period.
“So he’s $90,000 better off on salary alone,” says Moreau, “plus he is entitled to approximately $70,000 in bonuses for that period, which means he came out ahead by about $160,000.”
He says the man is fortunate the employer crafted a termination agreement that was ambiguously worded, and therefore not enforceable.
“When this man signed the agreement, you would assume he did not know he was giving up on the potential for such a large sum of money,” says Moreau, who was not involved in the matter and comments generally. “These contracts are often the product of poor negotiations by parties who have very little knowledge of what they’re agreeing to, or in the worst case, the employer knows what it is asking the employee to live with.”
He says these agreements often result in litigation, requiring the courts to dissect them to see if they are unfair to the point of being illegal.
“This is yet another case in what I would call the ‘termination clause battleground.’ Contract wording similar to what we see in this case is constantly being litigated in our courts.”
Moreau says the fact that employees agree to the terms in employment contracts makes winning these cases difficult.
“Even though employers and employees signed a contract, I think it is fair to question whether the employees fully understood what they were getting into,” he says.
In this case, Moreau says giving just two months of base salary without also paying a bonus is illegal under the ESA.
“Employees rarely know that they have entitlements, whether they sign a contract or not,” he says. “It’s time the courts recognize that and stop giving these contracts so much weight.”