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Clear drafting: Essential to the enforceability of termination clauses

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When terminating an employee without just cause, an employer is required to provide the employee with reasonable notice of the termination or reasonable payment in lieu of such notice at common law.  The length of notice can be significantly less than the common law would require provided that the parties enter into an employment agreement containing an enforceable termination clause.

One of the essential elements of an enforceable termination clause is that it cannot contract out of (or provide for less than) the applicable minimum statutory termination entitlements.  As a result, employees who have been terminated from their employment and who are bound by an employment agreement containing a termination clause, will often attempt to challenge the enforceability of such a clause by arguing that it breaches the minimum statutory termination entitlements in order that the potentially greater entitlements under the common law apply.

Such was the situation in Dimson  v. KTI Kanateck Technologies Inc. (2013 ONCA 454),  where Mr. Dimson, a six year employee, was terminated from the senior position of Vice-President, Strategic Accounts.  Mr. Dimson’s employment agreement included the following clause:

“18 (c) …. KANATEK may terminate this Agreement at its sole discretion for any reason, upon providing employee all payments or entitlements in accordance with the standards set out in the Ontario Employment Standards Act, as may be amended from time to time… (d) if at any time KANATEK provides you with a bonus, it will not be included in the calculation of payment for the purposes of this Article or as otherwise agreed to or required by the Employment Standards Act.”

Upon the termination of Dimson’s employment, the employer provided him with pay in lieu of notice and severance pay pursuant to the Employment Standards Act of Ontario (the “ESA”).  Because Dimson’s total compensation was variable, it was required by s. 61 (1.1) and 65(6) (a) of the ESA to average his salary, commission and income for a 12 week period preceding the termination of his employment.  The employer did not average Dimson’s bonus earnings in the calculation of his termination and severance pay because he had not received a bonus during this 12 week period.

Dimson sued his employer in the Ontario Superior Court alleging that the employment contract was void or illegal and as a result unenforceable because its language with respect to bonuses violated the ESA.  If it were unenforceable, Dimson stood to have a reasonable notice period assessed which exceeded his minimum termination entitlements under the ESA.  He argued that the meaning of the termination clause was that a bonus could never be included in the calculation of termination payments regardless of what might be required by the ESA, and that the clause constituted improper contracting out of the ESA.

The employer argued that the language in the termination clause preserved Dimson’s right to the inclusion of a bonus in the calculation of his termination entitlements if he and the employer so agreed or if it was required by the ESA (that is, if Dimson had been entitled to a bonus in the 12 week period preceding the termination of his employment, in accordance with the averaging period as set out in the Act).  Therefore, the employer maintained, the termination clause was not contrary to the Act and the agreement remained enforceable.

The Court ruled that the termination clause was in accordance with the standards set out in the Act.   The judge stated:

“clause 18 (d) makes it clear that with respect to the bonus, it will be included in termination entitlement calculations if the parties come to a subsequent agreement about this or it is specifically required by the ESA.”

The judge went on to also say:

“This interpretation arises form the plain meaning of the language.  No extra words need to be read into the clause to give it this meaning.  This interpretation….avoids an illogical interpretation that the parties are forbidden forever from entering into any agreement to change this aspect of termination entitlement.

The Ontario Court of Appeal dismissed the employee’s appeal on July 2, 2013.

Contract Drafting Tips to Remember:

  • Ensure that the language used in termination clauses (and in the employment agreement as a whole) is simple, clear and truly reflective of the intention of the parties otherwise ambiguity could lead to the clause being unenforceable;
  • Where there is any concern that an employee may not understand the terms inserted in a contract, provide them with ample opportunity to review the contract before signing, including the ability to obtain independent legal advice; and
  • Also where there could be concern regarding interpretation of a particular clause, the insertion of an example of the application of the language in the agreement may be of assistance to clarify exactly what is intended by the parties.

Patrizia Piccolo