Termination clauses in employment law contracts; can they be set aside?

Posted on February 6, 2017 · Posted in Blog

When a contract of employment is terminated by an employer “without cause”, they are required by law to provide reasonable notice, and/or pay in lieu thereof. The Employment Standards Act, 2000 [“ESA’] is the base floor to which all employers must adhere. Although it does provide a statutory minimum, the common law (Bardal factors) is far more generous to employees that are terminated through no fault of their own, and is presumed to be applicable absent certain exceptions.

Many employers nowadays tend to insert termination clauses into their contracts of employment in order to limit the application of the common law Bardal factors, opting instead for the statutorily prescribed minimum notice period. If an employer does insert a legitimate termination clause in the offer of employment accepted by the employee, s/he is presumptively bound by these more onerous statutory provisions. The employee as a result loses entitlement to the common-law provisions, unless the employer waives them by offering a more generous notice period and/or pay.

There are legitimate grounds for challenging the legitimacy of such limiting provisions. The following four factors can pierce through the application of termination clauses:

1. The termination clause excludes the continuation of benefits: If a termination clause either expressly or by implication excludes the continuation of benefits for the duration of the notice period, the clause is rendered void and the common-law provisions prevail. The authority for this is found in section 61(1) of the ESA. In practical terms, this means that a termination clause which does prescribe the proper notice period, but denies the continuation of benefits during this notice period can nullify the clause and force instead the application of the common law. So a two year employee that would have been entitled to two weeks’ pay as per the ESA could receive two months’ pay instead. The difference is rather significant, and widens the longer the period of employment.

2. The termination clause entitles the employee to less than the prescribed minimum in the ESA. Remember that section 57 of the ESA is the prescribed minimum to which employees are entitled to when dismissed without cause. Even the slightest discrepancy less than the bare minimum prescribed is considered unlawful, and would render the termination clause unenforceable.

In a landmark Supreme Court decision, the dismissed employee was awarded seven months’ pay instead of the four weeks to which the ESA entitled him. The employer had initially only provided two weeks’, and paid a significant premium for not meeting the prescribed floor. (For further information and discussion on termination clauses, click here.)

3. The employee’s position has escalated within the company. If the roles and responsibilities of the terminated employee have shown a steady progression throughout the period of employment, a termination clause can be rendered void. For example, if over the course of employment there is a significant increase in pay, roles and responsibilities, and overall prestige, the employer cannot rely on the statutory minimum in the ESA as fair and reasonable. Courts have shown a propensity to militate in favour of the more generous reasonable common law notice period for advancing employees over their period of employment.

4. The termination clause is ambiguous or vague. Courts have shown a willingness to discard termination clauses in favour of the common law where the termination clause is not clear and specific in its language. Boilerplate clauses with little or no reference to the ESA, the province of Ontario and to the specificity of severance and statutory requirements will be discarded in favour of the common law. The termination clause must be clear, unambiguous, and specific in its reference to Ontario’s statutory regime, and the continuation of benefits during this period. A vague, poorly worded, or boilerplate clause with little or no connection to Ontario’s ESA militate in favour of the more generous common law.

In sum, employers are increasingly resorting to termination clauses that prescribe the statutory minimum to the detriment of employees terminated without cause. The silver lining for employees is that termination clauses must be airtight and specific, failing which they are often void, rendering the more generous common law enforceable instead. Employers are inclined to cooperatively negotiate a more generous notice period for legally represented employees, as the costs of doing so for them are far less than the expensive costs of protracted litigation.

If you or someone that you know just received a severance package with a termination clause, and you are not sure whether it is legally binding, I am well prepared and thrilled to help. You can contact me here, and I am delighted to speak with you for a complimentary initial consultation.