What is the most important and expensive word in Ontario employment law? “Benefits.” That one single word has cost more employers more money, and created more headaches and confusion for Ontario employment lawyers over the past four-to-five years, than any other.
Why is the word “benefits” so important, expensive, and frustrating? Because there is a debate in Ontario jurisprudence as to whether the failure to specifically say “benefits” in a contractual termination provision renders the contract “void ab initio”, that is void from the start.
A decision of the Ontario Superior Court of Justice, released October 29, 2015, Oudin v Le Centre Francophone de Toronto, 2015 ONSC 6494 (CanLII), only serves to add to the confusion.
The Starting Point: Notice of Termination
Here is the issue: Under Ontario employment law an employer may terminate the employment of any of its employee at any time for (almost) any reason subject only to two restrictions: (1) the reason for employment cannot be ‘illegal’; and (2) the employer must provide the employee with notice of the termination or a payment in lieu thereof.
I will not get into what constitutes an illegal reason for termination, but suffice to say, that list is much shorter than most what think. Second, yes, there is an exception to the rule set out above, which is that if the employee gives the employer “just cause” to terminate the relationship, then no notice of termination is owed, but again what constitutes “just cause” is beyond the scope of this post.
So we return then to the issue of notice of termination. Contrary to what a lot of people may believe the starting point for any analysis of how much notice of termination an employee is owed is not, and I cannot emphasis this point enough, not the Employment Standards Act, 2000. Employers who start there tend to get themselves into trouble and employees who finish there tend to sell themselves short, and here is why.
The starting point for any analysis of how much notice of termination an employee is owed is the 1992 decision of the Supreme Court of Canada in Machtinger v. HOJ Industries Ltd., [1992] 1 SCR 986, 1992 CanLII 102 (SCC). Period. Full stop. Start here.
What the Supreme Court said in Machtinger was this:
Employment contracts for an indefinite period require the employer, absent express contractual language to the contrary, to give reasonable notice of an intention to terminate the contract if the dismissal is without cause. [T]his common law principle of termination only on reasonable notice should be characterized as a presumption, rebuttable if the contract clearly specifies some other period of notice, whether expressly or impliedly. What constitutes reasonable notice will vary with the circumstances of each case and will depend on the character of the employment, the length of service, the employee's age and the availability of similar employment having regard to the employee's experience, training and qualifications.
Neither the minimum notice periods set out in the Employment Standards Act nor the terms of the two employment contracts operate to displace the common law presumption of reasonable notice.
Two crucial points come out of that passage: (1) Employers generally owe employees “reasonable notice” of the termination of their employment; and (2) the amounts set out in the Employment Standards Act will not cut it when we’re talking about “reasonable notice.”
Now, the other important point of what the Court said in Machtinger is that the common-law presumption of reasonable notice is “a presumption, rebuttable if the contract clearly specifies some other period of notice.”
Because the amount of reasonable notice of termination to which an employee is entitled is often far, far greater than the minimum amount prescribed by the Employment Standards Act, and therefore much more than the employer would like to provide, employers tend to attempt to limit the amount of notice required by using a contract to clearly specify some other period of notice.
The Legal Issue: Contract Must be Legal
Of course, there is one further wrinkle to what the Supreme Court said in Machtinger: obviously the contractual termination provision, i.e. that clause that both rebuts the common-law presumption of termination only upon reasonable notice and clearly specifies some other period of notice, must be legal. (Section 5 of the Employment Standards Act, 2000 further enshrines this principle.)
On this point and of critical importance to this post is the following passage from the Court’s decision in Machtinger:
Many individual employees are unaware of their legal rights, and employers can rely on the fact that they will not challenge contractual notice periods below the statutory minimum. It is more consistent with the objects of the Act to take the approach that, if an employment contract fails to comply with the minimum statutory notice provisions, then the presumption of reasonable notice will not have been rebutted.
Whether any particular contractual termination provision complies with the “minimum statutory notice provisions” has become the focus of much, much judicial inquiry and legal debate. The most recent focus of that debate has been, as mentioned at the outset of this post, the word “benefits.”
Why the Word “Benefits” Matters
To cut to the chase, the word “benefits” matters for two reasons: (1) it is used in the Employment Standards Act, 2000, and (2) as we just learned, the Supreme Court of Canada in Machtinger said that “if an employment contract fails to comply with the minimum statutory notice provisions, then the presumption of reasonable notice will not have been rebutted.”
With respect to its actual use in the Employment Standards Act, 2000 here is what the law says:
54. No employer shall terminate the employment of an employee who has been continuously employed for three months or more unless the employer,
(a) has given to the employee written notice of termination in accordance with section 57 or 58 and the notice has expired; or
(b) has complied with section 61.
60. (1) During a notice period under section 57 or 58, the employer…
(a) shall not reduce the employee’s wage rate or alter any other term or condition of employment;
(b) shall in each week pay the employee the wages the employee is entitled to receive, which in no case shall be less than his or her regular wages for a regular work week; and
(c) shall continue to make whatever benefit plan contributions would be required to be made in order to maintain the employee’s benefits under the plan until the end of the notice period.
61. (1) An employer may terminate the employment of an employee without notice or with less notice than is required under section 57 or 58 if the employer,
(a) pays to the employee termination pay in a lump sum equal to the amount the employee would have been entitled to receive under section 60 had notice been given in accordance with that section; and
(b) continues to make whatever benefit plan contributions would be required to be made in order to maintain the benefits to which the employee would have been entitled had he or she continued to be employed during the period of notice that he or she would otherwise have been entitled to receive.
Therefore, sections 54, 60(1)(b), and 61(1)(b) make two things quite plain: (1) an employer cannot terminate an employee’s employment without either: (a) providing actual notice (sections 57 and 58) or (b) providing a payment in lieu of notice (section 61); and (2) that employer must continue to make whatever benefit plan contributions would be required to be made in order to maintain the benefits to which the employee would have been entitled had he or she continued to be employed during the period of notice that he or she would otherwise have been entitled to receive.
The continuation of benefits during the notice period is therefore a minimum statutory right out of which the employer cannot contract.
Enter Wunderman
While the law has been static for some time, (Machtinger came out in 1992 and Ontario’s Employment Standards Act was most recently updated in 2000), the issue of benefits really did not come to the fore until 2011.
In 2011 the Ontario Superior Court of Justice released its decision in Wright v. The Young and Rubicam Group of Companies (Wunderman), 2011 ONSC 4720 (CanLII). While a full summary of that decision can be found in the post, Poorly Drafted Employment Agreement Proves Costly, in summary what the court said in that case was this:
[16] Benefits are part of the compensation. Benefits are purchased for the employee by payments made by the employer to a benefits provider. This agreement was drawn by the employer. Even if there is an ambiguity, the ambiguity should be resolved in accordance with the principle of contra proferentum. The fact that the defendant continued benefits for the statutory notice period under the [ESA] does not change the meaning of the language used in the agreement stipulating that the payments under the termination provisions are to be inclusive of “all … entitlements to compensation”. The agreement provides for payment of base salary only. Payment of base salary, if treated as inclusive of all entitlements to compensation, means that there will be no other compensation flowing to the employee – in short, no benefits.
[36] There is, in my view, no particular difficulty in fashioning a termination clause that does not violate either the minimum standards imposed by the Employment Standards Act or the prohibition against waiving statutory minimum requirements and there is no compelling reason to uphold a termination clause which the draftsman may reasonably be understood to have known was not enforceable either at all or under certain circumstances.
Prior to the court’s decision in Oudin paragraph 36 of Wunderman held a lot of sway.
The Wunderman case was expanded upon, and the issue of benefits made more acute in the same court’s decision in Stevens v. Sifton Properties Ltd., 2012 ONSC 5508 (CanLII). Again, while a full summary of that case can be found on this blog in the post Termination Provisions in Contract Unenforceable Without Continuation of Benefits, what the court said in that case was this:
[56] Notwithstanding the defendant employer’s voluntary provision of benefits, Justice Low held that the contract termination provisions in the Wright case violated the provisions of the legislation, thereby rendering them null and void, such that the plaintiff was entitled to the provision of reasonable notice required by common law…
[57] I see no meaningful basis on which to differentiate the circumstances in Wright from those in the case before me, and agree with the reasoning in Wright.
[58] Counsel for the defendant employer sought to distinguish Wright by suggesting that contracts of employment cannot reasonably be expected to address all matters explicitly, and that the particular termination provisions in paragraph 13 should be read as an intention to address only the provision of notice or pay in lieu of notice, leaving benefit continuation in accordance with the legislative requirements unaffected.
[59] I do not think that is a reasonable reading of the paragraph 13 provisions. They may not refer to benefits expressly, but they do address benefits implicitly and inevitably insofar as they purport to set forth an exhaustive summary what the plaintiff was to receive “in satisfaction of all claims and demands against the [employer] which may arise out of statute or common law with respect to the termination of [her] employment”. The plaintiff has rights to benefit continuation arising “out of statute ... with respect to termination of [her] employment”, and paragraph 13, on its face, purports to take those away upon mere payment of the required pay in lieu of notice and/or severance pay.
[60] Even if I accepted the defendant’s submission that an alternate reasonable reading of paragraph 13 was possible, at best that would give rise to an ambiguity requiring resolution in favour of the plaintiff, pursuant to application of the contra proferentum doctrine.
[64] The failing of the particular termination provisions in the case before me is that they attempt to “draw the circle” of employee rights and entitlements on termination with an all-encompassing specificity that results in the effective and impermissible exclusion and denial of the benefit continuation rights mandated by the legislation That is what puts paragraph 13 offside, and requires the “termination provision package” of paragraph 13 to be regarded as null and void, in accordance with the policy considerations and directive outlined by the Supreme Court of Canada in Machtinger.
Wunderman and to a greater extent Stevens were thus understood to stand for the proposition that, if an employer wanted to rebut the common-law presumption of termination only upon reasonable notice that employer would have to use the word benefits.
Cases to endorse such an approach include a decision of the Ontario Superior Court of Justice sitting at Ottawa, Paquette c. Quadraspec Inc., 2014 ONCS 2431 (CanLII), which was first summarized by this blog in the post Pardon my French: The Decision in Paquette c. Quadraspec Inc., 2014 ONCS 2431.
Indeed the more recent decision of the Divisional Court in Miller v A.B.M. Canada Inc., 2015 ONSC 1566 (CanLII) should have, one would have thought, ended all discussion on this issue.
In a subsequent decision citing Miller, Carpenter v Brains II, Canada Inc., 2015 ONSC 6224 (CanLII), Justice Stinson of the Ontario Superior Court of Justice wrote the following about the Miller case:
Marrocco A.C.J.S.C.J. went on to note (at para. 15) that “the trial judge found and we agree that the Employment Agreement was not silent and that the wording of the agreement provided that benefits were not to be paid during the notice period, ...” The clause was therefore contrary to the ESA and was unenforceable.
In short, it was believed, unless the agreement said “and benefits” or was significantly ambiguous as to what would happen during the notice period, see e.g. Dimson v. KTI Kanatek Technologies Inc., 2012 ONSC 6556 (CanLII), summarized in Sometimes "Never" means "Sometimes", the agreement had to fail.
Blue-Pencil Severance to the Rescue
In Oudin v Le Centre Francophone de Toronto, 2015 ONSC 6494 (CanLII), the Honourable Justice Sean F. Dunphy of the Ontario Superior Court of Justice went out of his way to cure an offending termination provision. The same seems contrary to not only what Justice Low had said in Wunderman, “There is, in my view, no particular difficulty in fashioning a termination clause that does not violate either the minimum standards imposed by the Employment Standards Act…”, it also seems contrary to the approach taken by the Supreme Court of Canada in Shafron v. KRG Insurance Brokers (Western) Inc., [2009] 1 SCR 157, 2009 SCC 6 (CanLII), for a summary of which see: No Blue Pencils for Date in Non-Compete, in which the Court said that it has no interest in trying to fix poorly drafted contractual provisions.
In Oudin the contractual termination provision provided as follows:
s. 9.2 Termination and contractual rescission: This agreement may be terminated without notice or compensation by CFT for the reasons mentioned in article 4 of this agreement. The CFT may also terminate this agreement for any other reason by giving the employee 15 days notice or the minimum prescribed by the Employment Standards Act or by paying an amount of salary equal to the salary the employee would have had the right to receive during the notice period (after deduction and/or withholding at source), in the entire discretion of CFT.
Although Justice Dunphy found that the agreement could be viewed as illegal, he relied on a different part of the contract, one that provided that, “If any of the provisions of the present agreement is invalid or unable to be performed by virtue of any law, regulation, order or any other requirement or other principle of law, this modality shall in such case be considered to be modified or nullified, but only to the extent necessary to comply with the statute, regulation, order, legal requirement or principle and the other dispositions of the present agreement shall remain in force” to sever the offending words, leaving only those necessary to make the agreement legal. On this point Justice Dunphy wrote the following:
[39] The plaintiff relies upon the decision of the Supreme Court of Canada in Machtinger. In Machtinger, whether through deliberate action or accidental slip, it was common ground that provisions of the contract had the effect of providing a lower standard than that prescribed by the ESA. The issue in Machtinger was whether the court could have regard to the admittedly invalid termination provisions of the employment contract in determining what level of reasonable notice should be implied in construing the contract. Iacobucci J. delivered the judgment of the majority and held that if the clause is void for one purpose, it cannot be looked at for another where there was no evidence as to what the intention of the parties would be in the event the clause was found to be void.
[40] That is simply not the case here. The parties have explicitly spelled out what they intend to do in the event any part of the contract is found to be unenforceable. In s. 12(2) the parties have provided that “[i]f any of the provisions of the present agreement is invalid or unable to be performed by virtue of any law, regulation...this modality shall in such case be considered to be modified or nullified, but only to the extent necessary to comply with the statute, regulation, order, legal requirement or principle and the other dispositions of the present agreement shall remain in force” [translation].
In dismissing the plaintiff’s argument that the contract must be legal at all times in order to be valid, what Justice Dunphy said, without any reference to any of the decisions mentioned above is the following:
[50] The plaintiff appeared to advocate for the view that if any potential interpretation can be posited that might in some hypothetical circumstance entail a potential violation of the ESA, however absurd or implausible the interpretation may be, then the only possible result is to strike out the entire section of the agreement. That is not the law.
In short, Justice Dunphy was unimpressed and unmoved by the plaintiff’s argument and found the contractual notice provision binding.
Commentary
Recently I was accused, I believe in jest, of being rather opinionated on matters of employment law. Perhaps I am, but I like to think I come at it from a somewhat learned place.
In this case, I cannot help but echo the frustration and concern expressed by some others with respect to the Oudin case. (See e.g. Alison McEwen’s commentary in the Workplace Matter’s law blog, Breaking the law isn't enough: the ESA-violating clause that was saved by the severability provision.)
Simply put I think Justice Dunphy, respectfully, got it wrong. I do not know what was argued in front of him, but from his commentary at paragraph 50 of his reasons for decision, I have to presume that plaintiff’s counsel tried to argue Wunderman. (Note that in Wunderman the contractual termination was sometimes offensive, but at other times not. The court in that case said if it had the potential to be offside, that it was; essentially what Justice Dunphy expressly rejected at paragraph 50.)
The real problem here is that we have no appellate decision on point. None of the cases mentioned above have gone to decision before the Court of Appeal for Ontario. And while Miller is a decision from the Divisional Court, that is as high as we’ve gone. The result is therefore a “tie” amongst the judiciary.
With full candour I have argued Dimson is good law. I actually have a decision under reserve right now, in which the employer’s termination provision was very similar to that used by the employer in that case. One shall see what the court does in that case.
Nonetheless in my personal opinion the word “benefits” must be used. Or, as was the case in Dimson, the word “payment” must not be used.
Benefits matter. Sometimes benefits can matter more to an employee than salary. In that respect and given the clarity of the Employment Standards Act, employment agreements ought to say “and benefits” to be enforceable.
Hopefully the Court of Appeal will have the opportunity to weigh in on this issue soon, and in doing so end the debate by specifically referencing Wunderman, Stevens, and, should they be so inclined, this blog. (Ha! A man can dream.)
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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