• Don't Skimp on Statutory Minimums: Drafting an Enforceable Termination Clause
  • April 26, 2017 | Authors: Dana Adams; Leanne Monsma
  • Law Firm: Field Law - Edmonton Office
  • The recent decision of the Court of Appeal for Ontario in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (Wood), once again highlights that employers must be very careful when it comes to drafting termination clauses as a termination clause that does not clearly provide for at least the minimum requirements in the applicable legislation may be unenforceable.

    Julia Wood (Ms. Wood) began working for Fred Deeley Imports (Deeley) in April 2007. At this time, Ms. Wood and Deeley entered into an employment agreement which contained the following termination clause:

    [The Company] is entitled to terminate your employment at any time without cause by providing you with 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.
     
    In April 2015, Deeley notified Ms. Wood that, due to the sale of its business, it would be terminating her employment on August 4, 2015. By this time, Ms. Wood had worked for Deeley for eight years and four months.

    Ms. Wood subsequently challenged the enforceability of the termination clause on the basis that it did not meet the minimum requirements set out in Ontario’s Employment Standards Act.1 While the Ontario Superior Court of Justice dismissed Ms. Wood’s application for summary judgment, the Ontario Court of Appeal allowed her appeal and held that the termination clause was unenforceable.
     
    The Ontario Court of Appeal noted that, pursuant to Ontario’s Employment Standards Act, Ms. Wood was entitled to eight weeks’ notice of termination; contributions to her benefit plans during that period; and just over eight weeks’ severance pay. As such, to be enforceable, the termination clause needed to entitle Ms. Wood to at least these things.

    The Ontario Court of Appeal found that the termination clause neither entitled Ms. Wood to contributions to her benefits plan or severance pay.

    With respect to contributions to her benefits plan, the Ontario Court of Appeal noted that the termination clause said nothing about benefit contributions and in fact, on its plain wording, excluded Deeley’s obligation to contribute to Ms. Wood’s benefit plans during the notice period by providing that “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph” and “the payments and notice provided for in this paragraph are inclusive of your entitlement to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.”

    With respect to severance pay, the Ontario Court of Appeal noted that, since the termination clause provided that the two weeks’ notice of termination or pay in lieu thereof for each year or partial year of employment was “inclusive of [Ms. Wood’s] entitlements to notice, pay in lieu of notice and severance pay,” it would have been possible for Deeley to fulfill its obligations under the termination clause without paying Ms. Wood her severance pay, for example, by giving Ms. Wood working notice only.

    Based on these two things, the Ontario Court of Appeal held that the termination clause was unenforceable.

    Interestingly, the Ontario Court of Appeal reached its conclusion notwithstanding that Ms. Wood actually received more compensation than she would have received under Ontario’s Employment Standards Act. She received a total of 21 weeks’ salary (13 weeks’ working notice plus a lump sum payment for eight weeks) and under Ontario’s Employment Standards Act she was entitled to a total of 16.3 weeks’ salary (eight weeks’ notice and 8.3 weeks’ severance pay). Additionally, Deeley made contributions to her health and dental plan throughout the 13 weeks’ working notice and offered to make its annual contribution to her registered retirement savings plan (in exchange for her signing a release) and under Ontario’s Employment Standards Act, Deeley was required to make contributions to Ms. Wood’s benefits plans during the eight weeks’ notice of termination.

    Having found that the termination clause was unenforceable, the Ontario Court of Appeal awarded Ms. Wood damages equal to a period of reasonable notice at common law of 39 weeks.

    Notwithstanding that there are significant differences between Ontario’s Employment Standards Act, and Alberta’s Employment Standards Code2 (for example, the Alberta Employment Standards Code does not require employers to pay severance pay in addition to notice or pay in lieu of notice), the decision of the Ontario Court of Appeal in Wood provides a number of important lessons for employers in Alberta when it comes to drafting termination clauses.

    First, if the termination clause includes exclusionary language, it should also include a saving provision providing that the employee will not receive less than the minimum requirements under the applicable legislation.

    Second, the termination clause must be abundantly clear. If the termination clause could be interpreted in more than one way, it may be unenforceable.

    Finally, it is what the contract says, not what the employer does, that matters. Even if the employee is provided with more compensation than they would have otherwise received under the applicable legislation, the termination clause may still be unenforceable.

    Field Law’s Labour and Employment Group can advise and assist employers in drafting and interpreting termination clauses and employment agreements to ensure that they are enforceable.


    [1] SO 2000, c 41.
    [2] RSA 2000, c E-9.