Employment agreements, in non-union environments, not only govern the terms of the working relationship itself, but they may also include provisions setting out exactly how the employment relationship may be brought to an end.
Generally, termination provisions in employment agreements are crafted to reduce employers’ severance obligations upon termination. By signing an employment contract that includes a termination clause, an employee essentially agrees to opt out of his or her common law entitlement to reasonable notice of termination, and instead agrees to accept the specified, usually reduced, compensation upon termination that is set out in the employment agreement. Typically, such notice entitlements are limited to the statutory minimum pursuant to the Employment Standards Act (ESA) or Canada Labour Code (CLC).
The legal validity and enforceability of a termination clause in an employment agreement might therefore become critical in determining the amount of notice an employee is entitled to when the employment ends.
WHAT ARE THE COURTS SAYING?
The crucial question, of course, is does a specific agreement provide for less than what employment standards law requires? While in many cases, such termination provisions will likely be held as void and unenforceable, in certain circumstances it can become highly complex and technical. The enforceability of termination clauses can depend on various factors, such as the specific language used, the overall employment agreement, and the circumstances surrounding the termination.
What happens if one provision in a section on termination of employment is unenforceable, but not another? The Court of Appeal considered this question in Waksdale v. Swegon North America Inc., 2020 ONCA 391, and ruled the employer’s “for cause” termination clause, which failed to comply with the minimum standards of the ESA, was held to void an otherwise legally enforceable “without cause” clause within the same employment agreement. In other words, a termination clause will not be enforceable unless the entire employment contract complies with the minimum standards set out in the ESA.
[9] The issue is whether the two clauses should be considered separately or whether the illegality of the Termination for Cause provision impacts the enforceability of the Termination of Employment with Notice provision.
[10] In conducting this analysis, it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect.
The Waksdale decision confirms that termination provisions will be read alongside the rest of the employment agreement, rather than in isolation, in assessing their validity and enforceability.
Similarly, in Gracias v. Dr. David Walt Dentistry, 2022 ONSC, the courts determined that since the ‘for cause’ clause in the employment contract was invalid, the entire termination clause was invalid. Therefore, even if the provision that breaches the ESA has nothing to do with the termination, it will still render the termination clause void.
[94] In the immediate case, while the termination without cause provision in the employment contract may be lawful, the termination for cause provision contracts out of the Act and is void. The unlawful termination provision cannot be severed, and it taints the entirety of the termination provisions.
The Courts went further in Henderson v. Slavkin et al., 2022 ONSC 2964 by voiding the employment agreement because the termination language used in the conflict of interest and confidentiality provisions were held to be invalid. In this case,
[38] [the sub-paragraph] does not represent a complete sentence, as a word or words are missing. One would have to guess as to what words are missing such that an employee would not be able to know, upon entering the contract, what conduct in that case might cause termination without notice or compensation in lieu thereof. I am further of the view that sub-paragraph (b) is equally broad, unspecific and ambiguous…the clause is invalid and must be set aside.
Therefore, the language used in the provisions made it difficult for an employee to what was expected of them to avoid termination without notice or pay in lieu.
However, the courts in Henderson also cautiously maintained:
[28] The role of a judge in interpreting a termination clause in relation to the ESA requirements is to “look for the true intention of the parties, not to disaggregate the words looking for any ambiguity that can be used to set aside the agreement and, on that basis, apply notice as provided for by the common law” Cook v Hatch Ltd., 2017 ONSC.
This reasoning is in line with the court’s decision in Oudin v Centre Francophone de Toronto, 2016 ONCA 514 (CanLII), in which Ontario’s Court of Appeal appears to affirm that a contextual approach, focusing on what the parties’ reasonably understood the termination clause to mean, must be taken when considering whether it actually attempts to contract out of providing the minimum entitlements required at law.
In circumstances where a termination clause is ambiguous on its face, it may be interpreted in favour of the employee based on the doctrine of contra proferentum, which literally translates to “interpretation against the draftsman.” The rationale behind this principle is that it is the responsibility of the drafting party to be as clear and explicit as possible, particularly in an employment dynamic, where the employer has unequal bargaining power.
Where a termination clause is broadly drafted, however, to make reference to the minimum entitlements set out in the legislation, it may be held to be enforceable, even if it does not expressly refer to specific entitlements such as benefits. As the Court in Stevens v Sifton Properties Ltd., 2012 ONSC 5508 (CanLII) articulated, the clause will only be considered null and void where it
[64] attempt[s] to ‘draw the circle’ of employee rights and entitlements on termination with an all-encompassing specificity that results in the effective and impermissible exclusion and denial of the benefit continuation rights mandated by the legislation.
On the other hand, a termination provision that provides for adequate minimum notice but fails to make express reference to severance and/or benefit continuation over the notice period will be rendered unenforceable and illegal. In Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 the termination provision in question contravened the ESA and was held to be unenforceable because it excluded the employer’s statutory obligation to make benefits contributions during the notice period. The courts agreed with the employee’s submissions that:
[35] [the employer’s] voluntary contributions or offer to contribute to [the] benefit plans after giving her notice her employment was being terminated cannot remedy an otherwise unenforceable termination clause. The enforceability of the clause stands or falls on its own wording, not on what [the employer] may have done during the notice period or after [the] employment was terminated.
Therefore, although the employer continued to actually make contributions to the employee’s benefit plans during the notice period, such actions could not ultimately cure the deficient clauses. In highlighting the vulnerability of employees, the courts in Wood provided a useful summary of the considerations relevant to interpretation and enforceability of a termination clause:
[28] 1. Employees have less bargaining power than employers when employment agreements are made;
- Employees are likely unfamiliar with employment standards in the ESA and thus are unlikely to challenge termination clauses;
- The ESAis remedial legislation, and courts should therefore favour interpretations of the ESAthat encourage employers to comply with the minimum requirements of the Act, and extend its protection to employees;
- The ESAshould be interpreted in a way that encourages employers to draft agreements which comply with the ESA;
- A termination clause will rebut the presumption of reasonable notice only if its wording is clear, since employees are entitled to know at the beginning of an employment relationship what their employment will be at the end of their employment; and
- Courts should prefer an interpretation of the termination clause that gives the greater benefit to the employee.
Overall, the validity of a termination clause must be ascertained based on a careful and nuanced review of the language used in drafting the provision; the context in which the employment contract was negotiated and agreed to; and the parties’ intent and understanding of the employer’s obligations and the employee’s entitlements. Given these complexities, it is always a good idea to have a lawyer review your employment contract with you before you sign it.