Many termination clauses thought to align with case law have been labelled unenforceable
Exclusive to Canadian HR Reporter from Rudner Law.
It’s no secret that it’s open season on termination clauses. A series of decisions imposed strict restrictions on what courts will consider enforceable termination clauses, the clarity of which is up for debate.
As a result, many termination clauses that were thought to align with case law have ended up in the “unenforceable” heap.
This open season started with “for cause” clauses, but a recent decision fired shots across the bow at “without cause” clauses.
Without cause in termination agreement
In Baker v. Van Dolder’s Home Team Inc., the Ontario Superior Court of Justice ruled that a without cause clause stating that the employer could terminate the employee’s employment “at any time” was unenforceable. This confirmed that Dufault v. The Corporation of the Township of Ignace, which invalidated a without cause clause for containing similar wording, was good law. As such, language such as “at any time” and “sole discretion” is now fatal.
But the court didn’t stop there - it then ruled on the enforceability of the for cause clause, finding that it was unenforceable because it stated that upon dismissal for cause, the employee would not get anything except if required by the Employment Standards Act, 2000 (ESA). Further, the clause defined cause to be a less stringent standard than “wilful misconduct”, the statutory standard required to disentitle an employee from notice.
The court reasoned that: “Given that many employees will not be familiar with the ESA provisions, many employees would assume that they had no entitlement if they breached the contractual standards.” Consequently, the clause was not saved by its saving provision - the language providing that notice would be provided if required by the ESA.
This requires us to ask: are termination clauses that limit employees to their ESA minimums vulnerable to challenge on the grounds that employees might not know what their ESA entitlements are? Put otherwise, does an ESA-only clause have to specify what the ESA entitlements are? After all, case law holds that termination clauses must clearly express what an employee’s entitlements on termination are - any ambiguity in that regard is problematic.
Add Baker to the equation and it's understandable if midnight has become some employment lawyers’ afternoon. And if you think that’s dramatic, consider this: termination clauses that were enforceable six months ago are potentially unenforceable today.
ESA-only termination clauses
While there is reason to be wary, thankfully there is no reason to despair. Enforceable, ESA-only termination clauses are still very much draftable; the key is to ensure that the provisions do not breach the ESA, contain no ambiguity or extraneous language, and clearly set out what the employee’s entitlements upon dismissal are.
In practice, this may now result in clauses providing an explanation of how ESA notice entitlements are calculated, and even providing a table setting out ESA notice by length of service. Ensuring that employees are aware that all compensation, including benefits, will continue during the notice period is also good practice.
Similarly, counsel drafting for severance employers would be wise to include language advising employees of their entitlement to ESA severance pay.
For cause clauses
Regarding “for cause” clauses, these may be best left unused if an employer opts to go for an ESA-only clause, since employees are only disentitled from their ESA notice for “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Instead, the clause could simply advise the employee that should they be guilty of wilful misconduct, they will not be entitled to notice as stipulated in the ESA.
There is no need to mention cause and attempt to define it, since only the statutory wilful misconduct standard will disentitle an employee from their ESA termination entitlements.
Another option is a short and sweet termination clause which simply states that upon dismissal, the employee will get what they are entitled to under the ESA – the provisions would not distinguish between cause and without cause dismissals. This is a bit of good news for those who favour short termination clauses.
Evolving case law and terminations
Brief or not, enforceable termination clauses are very much still a thing, even though it seems as if every other termination clause these days is unenforceable.
Given quickly evolving case law, and our courts’ concern with fairness in the employment relationship, employers are on notice to draft carefully and to review their employment agreements regularly. There is little point in investing in well-drafted contracts only to let them become unenforceable by assuming that the law won’t change.
As recent decisions illustrate, it changes quickly, and the goalposts for what is an enforceable termination clause are shifting.
As we head into a period of economic tumult, it is an ideal time for employers to pick up their best investment and insurance: HR advice.
David Gelles is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].
