Saturday, 29 October 2016

Employment Contract Deemed Void Ab Initio for Failing to Account for Hypothetical Severance

(c) istock/zimmytws

If an employment contract makes no mention of the payment of statutory severance in the event of a termination without cause, is the contract legally unenforceable regardless of whether the employee is actually entitled to severance at the time of dismissal? That is to say, must an employment agreement account for all future hypothetical scenarios in order to be legally binding?

In the case of Garreton v Complete Innovations Inc., 2016 ONSC 1178 (CanLII) the Honourable Mr. Justice Laurence A. Pattillo endorsed the words of the Honourable Justice Low in Wunderman, “It is not that difficult to draft a clause that complies completely with the Act, no matter the circumstance” and held that, unless an employment contract would always be valid, no matter what the reality at the time of termination, it is void from the start.

Facts

The case concerned dismissed employee Marcela Garreton (“Garreton”) and her former employer, the defendant Complete Innovations Inc. (“CI”).

CI is in the business of providing mobile workforce tracking software for both Canadian and American clients. Following a six month contract, Garreton became a full-time employee of CI on March 11, 2010 as a “trainer” pursuant to a written contract of employment (the “Agreement”). Garreton was terminated for cause without notice on June 12, 2012. At the time she was 43 years old and earning a salary of $63,500 plus 10% bonus and benefits.

Although the employer alleged just cause for termination, the Small Claims Court trial judge found that no just cause existed and awarded the plaintiff employee five months pay in lieu of notice.

The employer appealed both decisions. With respect to this post, it argued that the trial judge had failed to give proper effect to the termination provision contained within the employee’s employment contract.

The termination provision contained within the employment agreement provided as follows:

Complete Innovations Inc. may at any time terminate this agreement by providing the Employee with (1) one week notice if their duration of continuous employment with the Company is more than 3 months but less than 1 year. (2) weeks prior written notice of intention to terminate if the Employee duration of continuous employment with the Company is more than 1 year but less than (3) years. If the duration of continuous employment with the Company is more than 3 years each additional year will entitle the Employee to (1) one additional week of notice to a maximum of 8 weeks. … Complete Innovations Inc. shall maintain on your behalf your employee benefits for a period of not less than the period required by applicable statute.

Critically, the agreement made no mention of the provision of statutory severance, regardless of the length of service.

Decision

In resolving that, (a) if the termination provision is not onside with notice provisions and severance provisions of the ESA at the outset, then it is void and unenforceable from the beginning; and (b) a potential violation in the future is sufficient to void the agreement ab initio, Justice Pattillo reasoned as follows:

[22] Sections 64 and 65 of the [Employment Standards] Act provide that where an employee has 5 or more years employment and the company has a payroll of $2.5 million or more, the employee is entitled to effectively a further week for each year of employment for severance pay over and above termination pay. CI has a payroll of more than $2.5 million. Clearly therefore, the termination provision, which limits pay in lieu of notice to 8 weeks maximum and the above provision which includes severance pay in the notice are contrary to the Act in that they limit an employee who is terminated and entitled to severance pay to less than he or she is entitled to under the Act.

[23] While the termination clause is therefore void and unenforceable for a CI employee of more than 5 years, is it so for Garreton who was an employee of less than 3 years?

[24] Garreton relies on Wright v. The Young and Rubicam Group of Companies (Wunderman)¸ 2011 ONSC 4720 (CanLII). In that case, Low J. found that a notice provision in an employment contract was void for potentially violating the Act.

[25] In that case, as here, the contract provided for the proper notice under the Act given the employee’s years of employment but was contrary to the severance provisions in ss.64 and 65. [26] In reaching her decision, Low J. relied on Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986; Shore v. Ladner Downs, [1998] B.C.J. No. 1045 (B.C.C.A.) and the obiter comments by M. D. Forrestall J. in Slepenkova v. Ivanov, [2007] O.J. No. 4708 (S.C.J.) aff’d 2009 ONCA 526. CI in turn relies on the more recent case of John A. Ford & Associates Inc. (c.o.b. Training Services) v. Keegan, 2014 ONSC 4989 where Price J., after considering the above cases disagreed with Low J.’s decision and held that the contract of employment, “must conform to provincial employment standards legislation for the particular employee, in the particular circumstances (para. 150).

[27] With the greatest of respect, I disagree with Price J.’s conclusion. In my view, the employment contract must be considered at the time it is executed. If the termination provision is not onside with notice provisions and severance provisions (if applicable) of the Act at the outset, then it is void and unenforceable. Potential violation in the future is sufficient. As Low J. states, “It is not that difficult to draft a clause that complies completely with the Act, no matter the circumstance.”

[28] Accordingly, for the above reasons, I find the termination provisions of the Agreement respecting notice to be void and unenforceable.

The appeal was dismissed and costs of $8,235.00, plus HST were awarded to Ms. Garreton.

Commentary

Garreton is just another example of the ambiguity in the law concerning employment agreements. While this blog has previously looked at the issue of the requirement to include the word “benefits” in a termination provision, see “Benefits”: The Most Important Word in Ontario Employment Law, the issue of severance has not yet been canvassed.

Frankly, I am of the opinion that this decision, like that in Wunderman is correct. These decisions are simply extensions of what the Supreme Court of Canada said in Machtinger.

However, until the Court of Appeal for Ontario weighs in on this issue, and as I mentioned in my post Will Wood Finally Answer the Question of Benefits? There’s Hope, there is hope that they will do so soon, we really are left to wonder what is truly required in order to have a legally enforceable termination provision in an employment contract.

Takeaways for Employees with Labour Pains

As with all posts to consider the issue of ‘illegal’ termination provisions, the takeaway for employees is to have your severance offers reviewed by a lawyer before you accept them. Even if you signed an employment contract that contains a clause concerning notice and severance, there is no guarantee that a court will upheld that contract. It is always prudent to seek professional legal advice on this issue before acting.

If you are an individual looking for assistance with respect to the interpretation or enforceability of the terms of your employment contract, then contact the professional, experienced and cost-effective employment lawyers for employees at Ottawa's Kelly Santini LLP; we would be happy to be of service to you.

Takeaways for Employers with Labour Pains

It is growing increasingly difficult for employers to be sure that their employment contracts will be legally enforceable at the time they wish to rely upon them.

It is for that reason that we recommend annual reviews of your employment contracts. What may have been perfectly acceptable yesterday may be ruled completely unacceptable today. All that matters is the state of the law on the date the contract is reviewed.

If you are an employer and you want to know on what side of the line your employment contracts fall, contact the professional, experienced and cost-effective employment lawyers for employers at Ottawa's Kelly Santini LLP; we would be happy to be of service to your business or organization.

Contact Me

To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260.

Sean P. Bawden is a partner with Kelly Santini LLP, located in Ottawa, Ontario, Canada. He practices in the areas of employment law and civil litigation. He has also taught Trial Advocacy for Paralegals and Small Claims Court Practice at Algonquin College in Ottawa.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

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