Termination Clauses

In Ontario, the enforceability of an employment contract vis-à-vis a termination clause can be a great benefit or an unfortunate detriment for either employers or employees.

Termination clauses in employment contracts effectively outline the obligations of employers upon terminating an employee.

This means, if the termination clause is unenforceable, employees may get common law, in excess of minimum entitlements under the Employment Standards Act, 2000 (“ESA”). For businesses—that could spell disaster.

When an employee is dismissed without cause—i.e., for any reason not related to or justified by an employee’s performance or conduct, the employer is required to provide that employee with notice in advance of the date of termination or payment in lieu of that notice.

Under the ESA, employers are required to provide employees with their statutory “notice” period in the event of dismissal without cause. This notice consists of salary, benefits, and other elements of an employee’s compensation package.  This statutory notice is the bare minimum an employer must provide an employee.

For example, assuming an employee is covered by the ESA, an employer who fires an employee due to company restructuring will have to pay that employee their notice entitlements under the ESA, up to a maximum of eight (8) weeks, in addition to benefits that employee would have enjoyed had they remained employed for that duration.

If that employee worked for five (5) years or more, and the employer either has a large enough payroll or initiated a mass termination of fifty (50) or more of its employees because its business, in whole or in part, closed, the employer would have to provide the employee with severance pay, up to a maximum of twenty-six (26) weeks’ worth.

The above applies all the time – even if the contract is enforceable. When the contract or the termination clause is not enforceable, employers may have to pay additional amounts as prescribed by case law.

How much additional notice can someone expect? It depends on what employment lawyers have dubbed “the Bardal factors”—these include age, years of service, pay, position, job market, and all characteristics that make finding a comparable job difficult to obtain. The older, more senior, higher-earning individuals tend to receive longer notice periods because arguably, it will be more difficult for them to get comparable employment.

It is always in employers’ best interest to have an employment contract that limits the entitlements of an employee. The problem is, many contracts are not as clear-cut as one would hope, and often, employees are entitled to much more than the minimum entitlements under the ESA.

After all, it is the employer who is responsible for drafting its own employment contracts, so any lack of clarity would be used against the drafter (i.e. the contra proferentem rule).

Recent decisions have given more weight to the intentions of the parties to the contract.

In Burton v Aronovitch McCauley Rollo LLP, 2018 ONSC 3018, the employee claimed the employer’s termination clause was unenforceable for failing to explicitly provide for post-termination benefits.

The judge in Burton considered three similar cases with the same issue: Roden v The Toronto Humane SocietyWood v Fred Deeley Imports Ltd., and Nemeth v Hatch Ltd.

While there were differences in those cases, the court in Burton relied heavily on the fact that where there is sufficiently clear language displacing the common law entitlements of the employee, the termination clause will be enforceable.

Termination clauses and contracts could be unenforceable for many reasons. However, those reasons are not always clear and are often a point of contention between employment lawyers. The entitlements of a dismissed employee could range from a few weeks to many months. When the stakes are high, make sure you make informed decisions from competent counsel.

What does this mean for you?

If you are an employer, we can help you draft and roll out enforceable employment contracts with proper termination clauses limiting your liability when terminating an employee.

If you are an employee, we can review and negotiate and let you know what your entitlements may be upon your dismissal. Most of the time, employees are entitled to much more than what employers offer.

Whether you are an employer or employee, employment agreements are too complex to deal with on your own. Contact us at (800)771-7882, or email [email protected] and we would be happy to assist.

If you are a small or medium-sized company looking for full-service support, visit our CLO program page for our strategic solutions.