Enforceability of Employment Agreements: Termination Clauses in Ontario

BY SIMRAN BAKSHI, ASSOCIATE LAWYER 

In the excitement of finding a new job, it can be tempting to overlook the importance of the termination provisions that might be included in the employment contract you have been asked to sign.

Employment agreements in non-union environments typically govern the terms of the working relationship itself, but they may also set 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. In fact, that employment agreement you barely remember signing might be at the center of your wrongful dismissal claim of the future. 

ENTITLEMENTS WHERE THERE IS NO EMPLOYMENT AGREEMENT CONTAINING A TERMINATION PROVISION

At common law, an Ontario employer may usually dismiss any employee without cause by simply providing reasonable notice of termination or pay in lieu of that notice to the departing employee.

(Like virtually everything in the law, there are definite exceptions to this general statement. For example, if the termination is inherently discriminatory or a retaliatory reprisal after a legitimate workplace safety complaint by the terminated employee, termination may be legally prohibited, and reinstatement of employment could be ordered by a court or tribunal.)

Where there is no employment contract that provides for entitlements upon termination, "reasonable notice" is determined at common law by Ontario's courts upon considering a number of factual issues about the employment, including:

• the length of the employment
• the employee's age and seniority
• the level of the position held (e.g. managerial or entry level)
• the expected difficulty in finding comparable employment, and 
• An extensive and still-developing list of other considerations. Collectively, these considerations are known in case law as the "Bardal factors," after being outlined by the court in a landmark 1960 case called Bardal v. Globe and Mail.

DOES YOUR EMPLOYMENT AGREEMENT OPT YOU OUT OF THE COMMON LAW?

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 instead accept the specified, usually reduced compensation upon termination that is set out in the employment agreement. 

Typically, a termination clause will limit your notice entitlements to only the statutory minimum that must be provided at law 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 notice an employee is entitled to when the employment ends.

IS A TERMINATION CLAUSE IN AN EMPLOYMENT AGREEMENT ENFORCEABLE?

The law will not enforce an employment agreement that provides (or may in the future provide) for less compensation and benefit than the applicable employment standards legislation requires. If a termination provision provides less than any statutory minimum, it will likely be held to be void and unenforceable by a court.

Does a specific agreement provide for less than employment standards law requires?  While the answer to this question is often obvious, in certain circumstances it can become highly complex and technical. 

Ontario's courts are currently somewhat divided on how to interpret employment agreements that do provide for adequate minimum notice and severance, but are silent as to whether employment benefits will continue throughout the contractual notice period, as required under Ontario's ESA.

DOES AN EMPLOYMENT CONTRACT ADEQUATELY PROVIDE FOR BENEFIT CONTINUATION DURING THE STATUTORY NOTICE PERIOD?

Ontario Courts have regularly interpreted termination clauses that fail to make express reference to benefit continuation over the notice period to be null and void.

As the Court explained in Stevens v Sifton Properties Ltd., 2012 ONSC 5508 (CanLII):

[65] “…[E]mployers should be provided with incentive to ensure that their employment contracts comply with all aspects of the employment standards legislation, including provision of adequate notice (or pay in lieu thereof) and mandated benefit continuation…” (emphasis added)

Furthermore, in circumstances where a termination clause is ambiguous on its face, it may be interpreted in favour of the employee on the basis of 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 in general 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 further articulated:

It is only where a clause “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 [entitlements such as] the benefit continuation rights mandated by the legislation” that it may be considered null and void.

In the recent case of Oudin v Centre Francophone de Toronto, 2016 ONCA 514 (CanLII), 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:

[8] The motion judge’s reasons make it clear that he understood and considered the appellant’s submission that - by referring only to “notice” - the clause ought to be interpreted as an attempt to contract out of all obligations under the ESA. The motion judge rejected this submission and found that there was no attempt to contract out of the ESA and that the parties had agreed that the ESA would be respected.

[9] The motion judge’s decision was based on his interpretation of a contract. He considered the circumstances of parties, the words of the agreement as a whole and the legal obligations between the parties. He concluded at paragraph 54:

Contracts are to be interpreted in their context and I can find no basis to interpret this employment agreement in a way that neither party reasonably expected it would be interpreted when they entered into it. There was no intent to contract out of the ESA in fact; to the contrary, the intent to apply the ESA is manifest.

It remains to be seen whether the Oudin decision, will change the course of the rather strict interpretation that the Court has often applied in favour of the employee, when reviewing termination clauses.

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. 

You should certainly review your employment agreement with your lawyers if your employment come to an end.  It is essential that you do so before signing any release or related settlement documentation relating to the termination.

- Simran Bakshi, Associate Lawyer, Toronto

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