Monday, 10 September 2018

Today’s Tip for Making a Termination Clause Legally Binding: KISS

Stop me if you’ve heard this one before: An employer attempts to limit, by employing a contractual termination clause, its obligation to provide notice of termination to no more than the statutory minimum amount prescribed by the provisions of the Employment Standards Act, 2000 and the employee alleges that such clause is void ab initio because it violates the strictures of such statute. In Burton v. Aronovitch McCauley Rollo LLP, 2018 ONSC 3018 (CanLII) the Ontario Superior Court of Justice once again had reason to examine such arguments.

In this case, however, the court considered all of the earlier decisions in Roden, Wood, and Nemeth.

Facts

Let’s get to it, here is the contractual termination clause at issue:

(a) AMR may, at its sole discretion, terminate your employment without cause (a “Non-Cause Termination”). In the event of a Non-Cause Termination, AMR shall provide you with severance pay in accordance with the Employment Standards Act, as amended, and any successor legislation, if so required as at the time of a Non-Cause Termination; and

(b) Notwithstanding the foregoing, and for greater certainty, if the amounts which you would receive upon a Non-Cause Termination, as set out above, are less than the amounts to which you would be entitled under the Employment Standards Act, as amended or any successor legislation, then you shall be entitled to notice, severance pay, and any other payment required by the relevant legislation in force as at the time of the termination.

The reasons for the employee’s termination are immaterial to this post, but form the subject of a blog post authored by Dr. David Doorey on his blog, The Law of Work, in the post Does a Recent Wrongful Dismissal Case Demonstrate a Key Omission from Canadian Labour Law?

Decision of the Ontario Superior Court

In finding the termination provision binding on the employee, Justice Patrick J. Monahan wrote the following reasons for decision:

[2] The validity and effectiveness of termination clauses similar to that found in the Contract, taking into account the minimum standards required by the Act, has been considered in a number of recent decisions of the Court of Appeal. Taking into account those decisions, in my view the termination clause in the Contract is consistent with the Act, since it provides that the Plaintiff is to receive the entitlements provided for under the Act in the event of a “without cause” termination. Nor is the termination clause unconscionable or otherwise legally invalid. AMR provided the Plaintiff with her entitlements under the Act when it terminated her employment on April 29, 2015, in accordance with the terms of the Contract. Since the termination clause is sufficient to oust the Plaintiff’s entitlements to notice at common law, the Plaintiff’s claim for additional compensation arising from her termination of employment cannot succeed.

[23] Section 5 of the [Employment Standards] Act provides that no employer shall contract out of or waive an employment standard and “any such contracting out or waiver is void”. In Machtinger v. HOJ Industries Ltd., the Supreme Court of Canada found that if a termination clause is null and void by operation of the Act, it is unenforceable for all purposes.

[24] One of the requirements of the Act is that an employer must continue to make benefit plan contributions on behalf of an employee during the period of notice required by the Act. The Plaintiff contends that the Termination Clause is invalid since it fails to provide for the continuation of such benefit plan contributions. In the alternative, the Plaintiff argues that the Termination Clause is unconscionable.

[25] Three relatively recent decisions of the Court of Appeal have considered whether termination clauses with broadly similar wording to that used in the Contract satisfy the minimum requirements of the Act with respect to the obligation to continue to make benefit plan contributions during the statutory notice period.

[26] In Roden v. The Toronto Humane Society at issue was the legal effectiveness of a termination clause which provided as follows:

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.

[27] In Roden, the employees whose employment had been terminated challenged the enforceability of the termination clause on the basis that it made no reference to the employer’s obligation in respect of benefit plan contributions during the notice period. Gillese J.A. held that the fact that the termination clause was silent with respect to the obligation to continue to make benefit plan contributions did not represent an attempt to “contract out” of the employer’s obligations under the Act. Instead, the termination clause referentially incorporated the minimum notice period set out in the Act, which would include the obligation to continue benefit plan contributions. Thus the termination clause did not attempt to provide something less than the legislated minimum standards under the Act and was legally enforceable.

[28] In contrast, in Wood v. Fred Deeley Imports Ltd. the Court of Appeal found that the termination clause in that case did attempt to contract out of the employer’s obligations to continue to make benefit plan contributions during the notice period and was for this reason unenforceable. The termination clause in question provided as follows:

[The Company] is entitled to terminate your employment at any time without cause by providing you with the 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph… The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

[29] Laskin J.A. noted that, in general, courts interpret employment agreements differently from other commercial agreements. They do so mainly because of the importance of employment in a person’s life and the vulnerability of employees when their employment is terminated. Laskin J.A. also noted that the Act is remedial legislation, intended to protect the interests of employees. This means that the Act should be interpreted in a manner that “encourages employers to comply with the minimum requirements of the Act”. Moreover, termination clauses should be interpreted in a way that “encourages employers to draft agreements that comply with the ESA” and that, “faced with a termination clause that could reasonably be interpreted more than one way, courts should prefer the interpretation that gives the greater benefit to the employee.”

[30] Turning to the specific termination clause in that case, Laskin J.A. noted that the clause required the employer to provide 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment. There was no explicit reference to the statutory obligation to continue to make benefit plan contributions during the notice period. However, the termination clause went on to provide that “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph”, and also stated that the “payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.” On its plain wording, the clause required the employer to provide termination pay only, thereby excluding the employer’s obligation to contribute to the employee’s benefit plans during the notice period. For this reason, the clause was an attempt to reduce the employer’s obligations below the minimum required by the Act and was legally unenforceable.

[31] Laskin J.A. contrasted the clause in Wood from that considered in Roden. In Roden the termination clause was silent with respect to the employer’s obligation to make benefit plan contributions during the notice period. However, the Roden termination clause incorporated by reference the employer’s obligations under the Act and did not attempt to exclude or limit the obligation to make benefit plan contributions during the notice period. In contrast, the termination clause in Wood was not merely silent about the employer’s obligation to contribute to benefit plans, but employed language that excluded that obligation. The payments the employer is required to make in Wood are the “only payments” to which the employee is entitled and are “inclusive” of her entitlements under the Act. In Laskin J.A.’s view, it was the “all-inclusive” language in the termination clause in Wood, and its absence from the termination clause in Roden, which distinguished the two cases.

[32] Most recently, the Court of Appeal in Nemeth v. Hatch Ltd. considered whether the following termination clause provided the minimum entitlements under the Act:

The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

[33] The first question that arose was whether the clause was sufficiently clear to displace an employee’s common law notice entitlement. In considering this question, Roberts J.A. noted that it was not necessary for the parties to use a specific phrase or particular formula, provided that the parties’ intention to displace common law rights could be readily gleaned from the language agreed to by the parties. In this case, by incorporating by reference the minimum notice required under “applicable labour legislation”, the clause clearly substituted a different notice period from that provided at common law. It was therefore clear that the parties had agreed to limit the employee’s common law notice entitlement.

[34] Roberts J.A. then considered the question of whether the termination clause provided the employee with his minimum entitlements under the Act. At issue was the fact that the termination clause was silent with respect to the employee’s entitlement to severance pay. However, in Roberts J.A.’s view, the silence of the termination clause on this point did not reflect an intention to “contract out” of the Act. This was because it did not include the “all-inclusive” language that had been fatal to the validity of the clause utilized in Wood. As such, the clause provided the minimum severance obligations under the Act and was not void pursuant to section 5 (1).

[35] Turning to the Termination Clause in this case, I would note, first, that the clause does substitute a different notice period upon termination from that otherwise applicable at common law. The Termination Clause provides that the Plaintiff shall be entitled to “notice, severance pay, and any other payment required by the relevant legislation in force as at the time of the termination.” As was the case in the Nemeth, this incorporation by reference of the minimum notice required under applicable law is sufficiently clear to displace the Plaintiff’s common law notice entitlement.

[36] I would further hold that the Termination Clause makes explicit provision for the continuation by the employer of benefit plan contributions during the notice period. This is reflected in the requirement to make “any other payment required by the relevant legislation.” These words must mean more than simply pay in lieu of notice and/or severance pay required by the Act, as both are already explicitly and independently referenced in the Termination Clause. In my view, the reference to “any other payment required by the relevant legislation” is sufficiently broad to include the requirement to continue to make benefit plan contributions during the notice period.

[37] This conclusion is reinforced by the observation that benefit plan contributions are generally paid to third-party benefit providers rather than to the employee herself. The reference in the Termination Clause to “any other payment required by the relevant legislation” is not limited to payments made directly to the employee. This can be contrasted with the clause in Wood which referenced “payments to you” in the phrase “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph.” The open-ended wording utilized in the Termination Clause reflects a requirement that AMR continue to make benefit plan contributions to third party benefit providers on behalf of the Plaintiff during the statutory notice period.

[38] Moreover, the clear intention of the Termination Clause is to ensure that the Plaintiff receive no less than all of the amounts to which she is entitled under the Act. This is reflected in the opening lines of subclause H(b) of the Clause, which state that, notwithstanding payments provided for earlier in the Clause, “if the amounts which you would receive upon a Non-Cause Termination, as set out above, are less than the amounts to which you would be entitled under the Employment Standards Act, as amended or any successor legislation, then you shall be entitled to …any other payment required by the relevant legislation in force at the time of the termination.” This reflects an intention to ensure that payments due upon a non-cause termination are to be not less than the entitlements provided for under the Act.

[39] In any event, even if I am wrong in concluding that the Termination Clause expressly requires AMR to continue to make benefit plan contributions during the statutory notice period, there is no attempt to exclude any such obligation. The Termination Clause does not contain the exclusionary language utilized in Wood which purported to limit the employer’s obligations during the notice period to that expressly provided.

[40] Both Roden and Nemeth indicate that if a termination clause incorporates by reference the applicable employment standards obligations, mere silence with respect to the obligation to make benefit plan contributions will not impair the legal validity of the clause. Thus, even if the Termination Clause does not expressly require the continuation of benefit plan contributions, it is, at worst, merely silent on the matter. As such, in my view there is no basis for concluding that the Termination Clause represents an attempt to contract out of the Plaintiff’s statutory entitlements upon termination.

[41] I therefore conclude that the Termination Clause required AMR to provide the Plaintiff with no less than her minimum entitlements under the Act. AMR met this obligation when it provided the Plaintiff with 8 weeks’ termination pay in lieu of notice, 12.33 weeks’ of severance pay, and continued to make benefit plan payments on her behalf beyond the required 8 week notice period.

[42] The Plaintiff argues, in the alternative, that the Termination Clause is unenforceable on the basis that it is unconscionable. As the Court of Appeal noted in Titus v. William F. Cooke Enterprises Inc. a party relying on the doctrine of unconscionability to set aside a transaction faces a high hurdle. Four elements are necessary in order to sustain a finding of unconscionability: (i) a grossly unfair and improvident transaction; (ii) the victim’s lack of independent legal advice or other suitable advice; (iii) an overwhelming imbalance in bargaining power; and (iv) the other party’s knowingly taking advantage of this vulnerability.

[43] The Plaintiff’s argument on this issue fails on the first criteria. A termination clause requiring an employer to provide the employee with his or her entitlements under the Act cannot be said to be “grossly unfair or improvident”. This is clear from the fact that the Court of Appeal upheld the validity of a termination clause with precisely this legal effect in Roden. In addition, in Machtinger, Iacobucci J. noted that the Act sets out “what the provincial legislature deems to be fair minimum notice periods.” Iacobucci J. further commented that one of the purposes of the Act “is to ensure that employees who are discharged are discharged fairly.” Given this characterization of the entitlements under the Act, I cannot see any basis upon which it can be maintained that a contractual provision requiring that an employee receive these very entitlements could be said to be unconscionable.

[44] Accordingly, the Termination Clause is legally enforceable and limits the Plaintiffs entitlement upon termination of employment to those provided for under the Act. AMR provided the Plaintiff with her entitlements in that regard when her employment was terminated. Accordingly, her claim for additional compensation must be dismissed.

According to a tweet that I received from the firm that represented the defendant in this matter, the court awarded $54,000 in costs against the plaintiff employee, on top of an earlier costs award. Ouch.

Commentary

I have looked at contractual termination clauses in a number of earlier posts.

I think we finally have clarity. In fact, I actually made this comment before in my commentary on both the Wood and Nemeth decisions:

With respect to Roden, I have often said what Justice Laskin said, one way to potentially ‘save’ an otherwise illegal termination provision is to omit the inclusion of Porky Pig’s oft-cited refrain, ‘that’s all, folks.’…

Maybe silence is golden. … I guess if we learn anything from Nemeth it’s that Roden is still alive and kicking, and that silence on the issue of severance is not fatal, so long as the contract is silent on the issue and does not contain what should now be referred to as the “Porky Pig Provision.”

Porky Pig Provisions. It all comes down to Porky Pig Provisions. If anyone ever gets a judge to call them as such in a reported decision, I’ll buy you dinner at a restaurant of your choosing.

Jokes and promises aside, it’s that simple – whatever you do, if you’re not sure about whether you’ve fully covered off your legal requirements, (a) don’t say that what is in the agreement is all that the employee is going to receive; and (b) always include a saving clause, which essentially says, “if I’ve missed anything directly, I incorporate the balance of what I have missed indirectly.”

For a long time, especially post Wood it seemed like the only way to draft a legally binding termination provision was to write a super-long and detailed one that employed all three of the magic words of “notice”, “severance”, and “benefits.” Now, it would appear that the easiest way to draft a legally binding termination clause is to say, “the employer will follow the ESA on termination” and perhaps no more. (But see the commentary of Justice Michelle O’Bonsawin in Bergeron v. Movati Athletic (Group) Inc., 2018 ONSC 885, which I summarized in my post: Lack of Clear Warning Voids Termination Provision suggesting otherwise.)

When I sent out a tweet about this case, I received more commentary than usual:

The comments were as follow:

  • Here's an idea: let's have legislative reform which prevents employees from contracting out of common law entitlements.
  • Maybe I need to take a harder look at this decision, but whatever happened to having to clearly opt out of common law notice and that "complying with the ESA" was insufficient to do so?
  • Oudin was a missed opportunity. Someone needs to try and get such a restatement of law at an appellate court.
  • The termination provision fun never ends!

A restatement of law may well be necessary. I thought Wood was that restatement. I think a lot of us believed that. Now, I am not so sure and am no longer sure what the leading case even is – all I know is what the most recent decision is.

Takeaways for Employees with Labour Pains

The takeaway for employees is really two-fold. First, have an employment lawyer review the terms of your employment contract before you sign it. I explain this point as clearly as I can in my post Beware the Innocuous Termination Provision. Second, have an employment lawyer review the terms of your employment contract before you start a wrongful dismissal case.

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

Takeaways for Employers with Labour Pains

Employers, use written employment contracts to limit (or at least define) your obligations on termination. Next, get an experienced employment lawyer to draft it for you, so that (hopefully) anyone looking at it will concede that it is binding, rather than trying to “take a run at it.”

If you are an employer and you need to make changes to the terms of your employee’s employment, or if you want to introduce written employment agreements with your staff, the professional, experienced and cost-effective employment lawyers for employers at Ottawa's Kelly Santini LLP 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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