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Limiting termination entitlements in employment contracts: What is enforceable and what is not?

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Before an employment relationship commences, perhaps the last thing that either workplace party wants to talk about is how it will end. That said, it is usually beneficial for employers to ensure that the offer letter (or employment contract) outlines all terms of employment, including the employee’s entitlements upon termination.

There is employment standards legislation in all Canadian jurisdictions (such as Ontario’s Employment Standards Act, 2000) that sets a “floor”, or minimum, on employees’ termination entitlements; however, no jurisdiction has legislated a “ceiling”, or maximum entitlement. Instead, in the absence of any limiting language in an employment contract, employees’ termination entitlements default to those provided for under “common law”, which can be significantly greater than those dictated by statute.

When crafting such “limiting language”, employers must take great care to ensure that, in all circumstances, the contract provides the employee with at least his or her minimum statutory entitlements – i.e. in respect of notice, severance and benefits.  Failing to do so will result in the termination provisions being set aside and trumped by the common law – as was the result in the following cases, for example:

  • In Wright v. The Young and Rubicam Group of Companies (Wunderman) ([2011] OJ No. 4960), the employment contract provided for a “stepped” notice entitlement (i.e. one week of notice during the probationary period, four weeks of notice in the first two years of employment, six weeks of notice in the next three years of employment, etc.). Upon termination, the employee argued that the contractual notice provision was unenforceable, on the basis that, at some point in the future (albeit not at the time of termination), the stepped notice schedule would not satisfy his minimum applicable statutory notice and severance entitlements.  Accepting the employee’s argument, the court declared the termination provision to be invalid, and instead applied common law principles to set the employee’s reasonable notice period at 12 months.
  • In Stevens v. Sifton Properties Limited (2012 ONSC 5508), the employment contract provided for the employee to receive her minimum notice and severance entitlements, but did not contemplate the continuation of benefits through the statutory notice period, as is required by the Ontario legislation. Further, the contract explicitly stated: “you agree to accept the notice or payment in lieu of notice and/or severance pay referenced […] herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.”  The Court held that the termination provision was contrary to the employee’s right to receive continued benefits through the statutory notice period; and the Court therefore struck down the termination provision in its entirety, and ruled that the employee was entitled to pay in lieu of reasonable notice under common law.

Although courts will be quick to invalidate flawed termination provisions, they are certainly prepared to give effect to properly drafted clauses; and the following cases represent examples of situations where courts have done so, and ruled in favour of the employer:

That said, the “properly drafted clause” can be something of a moving target—for example, the three cases listed above pre-date the Stevens v. Sifton Properties Limited decision in which the court rejected a termination clause that was silent on the issue of benefits.

When preparing employment contracts (and the termination provisions therein), employers should ensure that they are carefully drafted to reflect the latest caselaw and other legal developments, and to thereby maximize the likelihood that their clauses will be enforceable when the time comes.

Ryan D. Campbell