When can a restrictive termination clause stand up in court?

When can a restrictive termination clause stand up in court?

When can a restrictive termination clause stand up in court?
Many employers who seek to limit their liability upon termination of an employee introduce termination clauses that strictly limit an employee’s entitlements to the Employment Standards Act, 2000 (“ESA”) bare minimums.   Whether or not these clauses are enforceable for senior level employees has always been a cause for concern for employers.  Further, another issue that employers grapple with is whether an employee’s bonus should be included in the sums awarded under a termination clause.  A recent decision of the Ontario Superior Court addresses both of these questions, and provides some well-needed clarity for employers on the issue. 

In Dimson v. KTI Kanatek Technologies Inc., 2012 ONSC 6556, a senior level Vice-President who earned an annual salary of $165,000, received full benefits, a car allowance, commissions, and a bonus based on the company’s earnings was terminated on a without cause basis, after working for the company for six years.
At the time of hire, the employee signed an employment contract that included a termination provision limiting his termination entitlements to the minimums provided under the ESA.   After being terminated, the dismissed employee sued his employer for wrongful dismissal, claiming that the termination clause was unenforceable because the employer did not average his bonus earnings in the calculation of his termination and severance pay.    The employer, on the other hand, maintained that since the dismissed employee did not receive a bonus during the twelve weeks prior to his termination, the bonus would not form part of the termination and severance pay. 

The termination clause in dispute provides as follow:

18(c)   In addition, KANATEK may terminate this Agreement at its sole discretion for any reason, upon providing Employee all payments or entitlements in accordance with the standards set out in the Ontario Employment Standards Act, as may be amended from time to time.
18(d)   If at any time KANATEK provides you with a bonus, it will not be included in the calculation of payment for the purpose of this Article or as otherwise agreed to or required by the Employment Standards Act.

Upon a review of the above language, the motions judge agreed with the employer, finding that the language in clause 18(d) preserves the plaintiff’s right to the inclusion of a bonus in the calculation of his termination entitlements if he and the defendant otherwise agreed or if it was required by the ESA. This was the “plain, literal and sensible” meaning of clause 18(d).  This finding was affirmed at the Ontario Court of Appeal.

What then can employers take away from this decision? First, it is notable that the court upheld a contractual provision that severely restricted the termination entitlements of a dismissed senior level employee. 

Although the outcome in this case is favourable to employers, employers should be prepared to draft clear and concise language of any termination provision to avoid facing potential litigation liability regarding the enforceability of termination clauses in an employment contract.  The lawyers at CCPartners can assist employers in the drafting of employment agreements that include termination and bonus provisions.

 For more information visit www.ccpartners.ca.