News & Updates

Unenforceable Termination Clauses - Employment Contracts

May 09, 2014

Recent court decisions have held that many standard termination clauses in employment agreements are void and without effect. The courts are striking some termination provisions and permitting employees to receive the higher common law notice.

Persons are not permitted to contract out of or waive any employment standard in the Ontario Employment Standards Act, 2000 (“ESA”). If you do so, the clause in the contract will be void. However, you are permitted to provide a greater entitlement than found in the ESA.

The Supreme Court of Canada in Machtinger v. HOJ Industries Ltd., 1992 CanLII 102, held that a termination clause in an employment agreement that doesn’t meet ESA minimums is null and void for all purposes including to show intent of the parties. Once a termination clause is considered void, then common law notice is substituted and not the correct minimal provisions of the ESA.

Recently, the case law highlights two common circumstances where many termination provisions in employment contracts are now being held void.

1. 1.  Termination Provision has Potential of Providing LESS than ESA

The court held in Wright v. Young and Rubicam Group of Companies, 2011 ONSC 4720 CanLII (“Wright”) that if a termination clause in an employment agreement has the potential to fall short of statutory minimums, then regardless of whether that particular provision applies to the subject employee, the whole termination clause is void and the common law is substituted.

For example, the following clause is unenforceable because if the employee was employed less than one year, he/she would not receive any termination pay:

The Company may terminate your employment at its sole discretion for any reason, without cause, upon the provision of 2 weeks written notice of termination, or pay in lieu thereof, for every completed year of service to a maximum of 26 weeks written notice.

Reason: unenforceable because if the employee was employed for less than one year and terminated, employee would get nothing which is contrary to the minimum provisions of the ESA which states the employee is entitled to one week of termination pay. (e.g., it doesn’t matter that the employee is actually employed for more than 1 year and that the potential violation of the ESA would not apply to him/her).

1. 2. Termination Provision failed to include Benefits

Many employment contracts provide for provisions such as:

(b) The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the Employment Standards Act of Ontario.   (c) You agree to accept the notice or payment in lieu of notice and/or severance pay referenced in paragraph (b) herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.

The court in Stevens v. Sifton Properties Ltd., 2012 ONSC 5508 CanLII (“Stevens”), voided the above termination clause because it failed to include that benefit plan contributions would continue during the notice period --- this despite the fact that the benefits were actually paid. The court stated that paragraph (c) purports to set forth an exhaustive list of what the employee was to receive in satisfaction of all claims and demands arising out of the ESA. Perhaps it would have been enforceable if paragraph (b) stood alone without paragraph (c).

Problems can also arise where the calculation of termination pay contains a defined terms. For example if “Base Salary” is defined in the contract and the termination clause provides that termination notice is calculated on “Base Salary” without any reference to benefit entitlements, the clause will be unenforceable. This was the case in Wright referred to above.

What has been held enforceable?

The following is a summary of recent cases where the termination clause was held to be valid and enforceable:

Case	Termination Provision	Comments
Roden V. Toronto Humane Society, 2005 ONCA 33578 CanLII	Otherwise, the Employer may terminate the Employee’s employment at any other time, without cause, upon providing the Employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation.	The Ontario Court of Appeal upheld this provision. It is similar to the provision in Stevens (above) but does not contain the second portion that was held in Stevens  to exclude benefit entitlement.
Clarke v. Insight Components (Canada) Inc., 2008 ONCA 837	Your employment may be terminated for cause at any time in which event you shall be entitled to only the amount of your salary and vacation pay earned up to the effective date of termination. Your employment may be terminated without cause for any reason upon the provision of reasonable notice equal to the requirements of the applicable employment or labour standards legislation. By signing below, you agree that upon the receipt of your entitlements in accordance with this legislation, no further amounts will be due and payable to you whether under statute or common law.
Dimson v. KTI Kanatek Technologies Inc., 2012 ONCA 454	In addition, Kanatek may terminate this Agreement at its sole discretion for any reason, without cause, 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.

Your Employment Contracts

Employment law is constantly evolving and previously enforceable employment contract provisions can become stale and unenforceable in light of new case law. Your employment contract precedents or templates should be reviewed regularly to ensure that your termination clauses are enforceable in light of these recent decisions.

Tags: Employment