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Serious insight for serious situations.

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#1 Termination pay, termination notice, termination with or without cause and pay in lieu of notice (Part 2)

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Second installment. You’ve decided that you do not have cause to terminate so you will be proceeding on a without cause basis. The next question becomes “What are the employee’s entitlements on termination?”. Well, there are really only two possible options, which I’ve attempted to represent pictorially (clearly, I missed my calling as a graphic artist…).

Option 1:










Option 2:


Option 1: Does the employee have an enforceable termination clause in his or her employment contract?

Pull out that offer letter or formal employment agreement (hopefully you’re using the former, the latter being somewhat antiquated). Check a couple of things:

  • Was the contract presented to the employee before his or her start date?
  • Did the employee sign the contract? Does the signature pre-date the start date?
  • Was the employee given at least a week between the date when they received the contract for review and the date by which he or she was expected to sign and return it?

If you’ve answered “no” to any of the above, then you may have an issue with enforceability, even if the contract contains a termination provision.

If you’ve answered “yes” to all of the above, then you’re off to a pretty good start and on to the million dollar question: “Does the contract contain an enforceable termination provision?”

Here’s where the smaller box in the above diagram comes into play. The ESA (Ontario Employment Standards Act) establishes minimum requirements on termination. You cannot contract out of the ESA. Your termination provision must at a minimum provide the minimum ESA entitlements on termination, namely:

  • the minimum period of notice required by the ESA
  • the minimum amount of severance pay required by the ESA
  • benefits continuation for the minimum period of notice required by the ESA
  • vacation accrual for the minimum period of notice required by the ESA

Assuming the termination clause meets all of the above requirements, then it stands a decent chance of being enforceable. The employee’s entitlements on termination would be governed by the termination provision in the employment contract.

If the termination provision does not meet all of the above, it will be unenforceable. If that’s the case, you move on to the second option in my lovely diagram, namely the common law. More on that in the next post.

As you’ll appreciate, employees have a vested interest in challenging the enforceability of termination provisions. And they’ve become quite creative. Some examples:

Example 1

The contract provides that the employer can terminate by providing the minimum notice required by the ESA or pay in lieu of that notice. Pay in lieu of notice will be calculated on the basis of base salary only. Little did you know that the ESA imposes a specific formula for calculating pay in lieu of notice (commonly referred to as “termination pay”) for employees who are paid on a basis other than time (i.e. every single salaried employee). The formula requires the use of the employee’s average earnings in the last 12 weeks of employment to calculate termination pay. So incentive payments (ex. commissions and bonuses) and monetary perquisites (ex. car allowance) earned in the last 12 weeks of employment must be included in the calculation.

Example 2

Same facts as Example 1. By limiting termination pay to base salary, the formula in the contract also fails to take into account that the employee must earn vacation pay during the statutory minimum notice period.

Example 3

Another provision (not the termination provision) of your employment contract is unenforceable. For instance, your vacation provision does not respect the minimum statutory entitlements (by offering less than 2 weeks’ vacation or vacation pay at less than 4% of annual earnings). Your contract also doesn’t contain a severability clause (i.e. “if any provision of this agreement is deemed void and unenforceable, that provision shall be struck and the rest of the contract will remain in full force and effect”). Well, traditional contract law would interpret one void provision in the contract as voiding the entire contract. This is an extremely legalistic argument, but you certainly don’t want to be on the receiving end of that statement of claim…

Example 4

The employee joined your business in the context of the purchase of another business. At the time of the purchase, the employee was offered employment that limited service to the employee’s start date with your business (i.e. not recognizing service with the seller). Unbeknownst to you, in the context of a sale of business, the ESA requires that service with the seller and the buyer be bridged for the purposes of calculating entitlements on termination.

If your contract doesn’t contain an enforceable termination provision, the employee’s entitlements are governed by Option 2 – the common law. See you in the next few days for a more detailed discussion of that option!

Adrian Ishak

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About the Author: Toronto Employment Lawyer Adrian Ishak’s practice focuses on all aspects of employment law including employee relations, terminations, wrongful dismissals, employment contracts, and employment policies. He provides strategic counselling on a number of human resources, privacy and human rights issues. With a joint Ontario and Québec call and with experience in both jurisdictions, Adrian guides his clients through employment standards matters, pay and employment equity, and human rights obligations in Canadian common law and Québec’s civil law jurisdiction. Adrian represents clients in both English and French.