Do termination clauses still make sense?

Employment termination clauses are vital components of any employment contract, yet they often face legal scrutiny in courts across Ontario and Canada.

A recent Ontario Supreme Court decision, Bertsch v. Datastealth Inc., highlights the significance of drafting these clauses with precision and clarity to ensure they comply with Ontario’s Employment Standards Act (ESA).

With so much attention on these clauses, and many not standing up to judicial scrutiny, some employers may be wondering: why bother?

But one employment lawyer says there’s still a case for these

The role of termination clauses: beyond the basics

Termination clauses are meant to provide both parties — the employer and the employee — with clarity and predictability when an employment relationship ends. In many cases, they limit an employer’s liability by defining the entitlements that an employee receives, often capping them at the ESA minimums.

But these clauses must be drafted carefully to be enforceable.

Andrew Bratt, partner at Gowling WLG's Toronto office and the national practice group leader for Employment, Labour, and Equalities, explains why courts take such a strict approach to these clauses:

“Our courts tend to be incredibly employee-friendly, and they will often bend over backwards to try to invalidate termination provisions on the basis of ambiguity or invalidity. If a termination clause isn’t crystal clear, if on its face you do not understand what it’s saying, then the courts... have said it must be struck.”

The Bertsch v. Datastealth Inc. case serves as an example of a termination provision’s journey through the courts and how, when drafted correctly, these clauses can withstand legal scrutiny.

Termination clauses under scrutiny: the legal landscape

In Bertsch v. Datastealth Inc., the employee argued that the termination provisions of his employment contract were unenforceable as they did not comply with the ESA. Specifically, he claimed that the clause failed to adequately reference the statutory exemptions under the ESA’s regulation, O. Reg. 288/01.

This regulation stipulates that employers may dismiss employees without notice only in cases of "wilful misconduct, disobedience, or wilful neglect of duty."

The judge, however, found the clause clear and compliant. As stated in the decision:

“I find that this clause does not result in any breach of the ESA or O.Reg 288/01… The termination provision to be valid must not potentially contravene the ESA and its regulations; and it must properly exclude common law notice.”

As Bratt explains, while many trial courts invalidate termination clauses over minor technicalities, this decision shows that clarity in drafting can pay off.

“The judge finally said, ‘You know what? Enough is enough. This clause is clear. The intention of the parties is clear. I’m not going to bend on this one.’”

Compliance with the ESA: why precision matters

Employers need to ensure that their termination clauses are not only clear but also compliant with all statutory requirements. The ESA sets a higher threshold for dismissing an employee without notice than common law does. As Bratt explains, under common law, “cause” might include incompetence or performance issues, but under the ESA, it must be “wilful misconduct, disobedience, or wilful neglect of duty.”

“Under the Employment Standards Act in Ontario, you can only be terminated without notice if you are guilty of wilful misconduct, wilful neglect of duty, [or] wilful disobedience. The standard under the ESA is not the same as just cause at common law. It’s a higher burden,” he explains.

This distinction is crucial when drafting termination clauses, he goes on. If a clause does not specify the higher threshold required by the ESA, it risks being interpreted as attempting to contract out of the ESA — rendering it invalid.

In Bertsch v. Datastealth Inc., the judge affirmed this by rejecting the employee’s claim:

“There is no reasonable alternative interpretation of the relevant clauses here that might result in an illegal outcome i.e., there is no reasonable interpretation which would be contrary to the minimum requirements of the ESA and regulations.”

Importance of legal advice and annual reviews

With the constantly evolving nature of employment law, having an airtight termination clause in place requires more than just one-time legal advice. Bratt advises employers to stay proactive.

“Make sure you have proper counsel drafting these provisions for you, because it’s a small price to pay… But the other takeaway is you have to consistently have these provisions reviewed… because this law evolves so frequently.”

The need for periodic reviews cannot be overstated, as new decisions, such as Waksdale v. Swegon North America Inc. and the more recent Default case, frequently challenge existing standards. Even well-drafted clauses may become non-compliant over time if the law changes or if courts reinterpret regulations.

Why bother? the value of a well-crafted termination clause

Given the complexities and risks involved, some employers might question the value of termination clauses, but as the Bertsch decision shows, a properly drafted and regularly updated clause can protect employers from costly litigation and severance payouts.

As Bratt points out, the decision not only sets expectations but also provides leverage in negotiations, often leading to settlements rather than trials.

“The juice is still worth the squeeze,” he says. “If you have a really well-drafted termination clause, you’re going to be able to negotiate a much better severance package because plaintiff counsel will have to tell their client you have some risk here.”