The enforceability of written termination clauses in employment contracts is a very hot, indeed controversial, topic right now. We spoke to Matthew Certosimo, partner at Borden Ladner Gervais LLP, who walked us through this challenging minefield.
“At common law, the employment relationship is contractual and, in the absence of a written agreement addressing without cause termination, there is an implied term of reasonable notice,” he prefaced. “Over the years, the Canadian courts have developed what is now fairly established criteria to assist in determining what is reasonable notice, on a case-by-case basis.”
Certosimo explained how, in 1992, a decision from the Supreme Court of Canada, Machtinger v. HOJ Industries Ltd dealt with the enforceability of a particular termination clause.
“It was found to be unenforceable,” he told us, “because it was an attempt to provide an employee with less than the minimum entitlements under Ontario’s Employment Standards Act (ESA). The Supreme Court essentially said that there’s a floor below which you may not go.
“However, the Supreme Court went on to note that workplace parties could agree to make the non-union employee’s minimum entitlements under the ESA the employer’s maximum obligations, on a termination without cause - essentially flipping the floor to the ceiling. And so, if the parties wanted to agree that all the employee gets is the minimum then that’s up to them, but you cannot go below that point.”
In the years that followed, many employers in Ontario sought to replace the common law’s implied term of reasonable notice with written minimalist termination clauses in employment agreements. Employees began challenging the enforceability of such clauses, citing the Machtinger case, and arguing that the employer-drafted attempt to limit employee entitlement on dismissal without cause effectively or implicitly went below the floor, because of a variety of drafting problems and vagueness.
“And so,” continued Certosimo, “in part because of the relationship between the common law obligations and the statutory floor created by the ESA, an unwary drafter can fall into traps that create ambiguity around contractual intentions.” Plaintiff employees started to succeed in challenging such clauses, eventually leading to the Ontario Court of Appeal’s decision in Wood v. Fred Deeley Imports.
“In the Wood case, the court set out a number of considerations that should go into the assessment of the enforceability of a written termination clause, including the wording of the clause, and the protection for employees intended by the ESA,” explained Certosimo. “Again, the Court repeated the long-held principle of Canadian employment law that these contracts are different from standard commercial contracts, in part because of the importance of work in our lives, but also because of the vulnerability of a person at the time of termination.”
Writing the judgment in Wood, Justice John Laskin went on to identify five key considerations that flow from those over-arching principles:
- The employee is generally the weaker party at the beginning of the relationship, and rarely is in a position to bargain on an equal footing.
- Many employees are unfamiliar with the ESA, and may not seek to challenge unlawful termination clauses.
- The ESA should receive an interpretation that encourages employers to comply with minimum requirements and extends protection to employees.
- Termination clauses also should be interpreted in a way that encourages employers to draft agreements in compliance with the ESA.
- A termination clause will rebut the presumption of the implied term of reasonable notice only if its wording is clear. Any ambiguity as to whether or not the contract can be enforced should be resolved in favor of the employee.
“There’s also a school of thought that says it’s unfair to employees to limit their entitlements on termination to just the ESA minimum, particularly after a period of long service and taking into account the vulnerability the employee faces after losing their job. But, the Machtinger case left open the possibility of parties agreeing to make the floor the ceiling or to agreeing to something other than common law reasonable notice.”
Which leads us to Nemeth v. Hatch Ltd., in January, 2018, the Ontario Court of Appeal’s most recent judgment in this line of cases. The termination clause in issue provided the employee with one week’s notice per year of service, with a minimum of four weeks, or the “notice required by the applicable labour legislation”.
The Court of Appeal did not accept in Nemeth the common recent attacks on such a clause, notwithstanding the apparent direction it provided in the earlier Wood case: it did not accept ambiguity - because of Machtinger, the clause need not explicitly state that the employee is waiving common law reasonable notice, as the clause clearly specifies some other period of notice agreed upon by the parties; and it did not accept that silence implicitly seeks to contract out of the ESA - because of a 2005 Court of Appeal case, Roden v. Toronto Humane Society, silence with respect to other ESA entitlements, such as benefits or severance pay, does not amount to an implicit attempt to contract out of those ESA obligations or go below the ESA floor.
“The point of this exercise is not just for the employer to reduce exposure in the case of termination without cause,” added Certosimo, “it’s also for both parties to create some certainty at the front end of the relationship, as to what their obligations are at the end. Think of it like a prenuptial agreement in a marriage. If we put aside ideological views and focus on classic contract principles, for both parties, employee and employer, knowing how to draft a contract that will be enforceable creates certainty and confidence and avoids disputes.”
As the Court of Appeal noted in its conclusion to Nemeth, a termination clause cannot provide for less than the ESA’s minimums, but such a clause can be drafted to meet or exceed statutory entitlements. “Yet,” Certosimo underscored, “to make it through this minefield, to draft an enforceable termination clause, we really cannot ignore the unique nature of the employment relationship – that’s the central message of the leading cases.”
C-Suite talks HR, John Stix, co-founder of Fibernetics
Ask a Lawyer: How will the legalization of marijuana change workplace norms?