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The Importance of Properly Drafted Termination Clauses

If you’re an employer, you likely know that having employment contracts with your employees is important. But do you know why? There are numerous reasons why having an employment agreement is beneficial. In particular, however, is because it can limit the amount that an employer must pay to its employees upon a termination when drafted properly.

The amount of compensation that an employee is entitled to upon a termination without cause is informed from various sources of law. Under the Employment Standards Act, employees are entitled to one week’s pay per year of service to a maximum of eight weeks (“Termination Pay”). Additionally, in some circumstances, they may be entitled to “Severance Pay” which is an additional one week’s pay per year of service (e.g. employees with five or more years’ service and who are employed by an employer with a payroll of $2.5M or greater, among other reasons). At a minimum, these payments must be provided to the employee.

The other place we must look is the common law. The lead case is Bardal v Globe & Mail from 1960. In this case, the Court ruled that an employee is entitled to reasonable notice of termination where it is without cause. The period of reasonable notice is determined by looking at all the facts of each case, in particular the age of the employee, the character of the employment, the length of service, and the availability of similar employment.

Generally speaking, reasonable notice under the common law tends to entitle an employee to significantly more than their bare minimums under the Employment Standards Act. This is why it is usually in an employer’s best interest to ensure that their employees are limited to Employment Standards Act payments and not common law reasonable notice. The way that employers are able to do this is through a properly worded termination clause in the employment contract. The clause must carefully state that the employee is entitled to receive only those minimum entitlements under the Employment Standards Act.

It is very important that the termination clause is properly drafted. If there is any ambiguous language or language that appears to be in contravention with the Employment Standards Act, courts are quick to hold the termination clause unenforceable and award employees with common law reasonable notice.

Termination clauses will be found unenforceable where permit terminations with cause but they fail to outline the standard for terminations with cause under the Employment Standards Act: “wilful misconduct, disobedience, or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Merely stating that an employee can be terminated for “cause” is insufficient.

Similarly, defining your own standard of cause will most likely render the clause unenforceable. In Henderson v Slavkin et al., the contract permitted terminations for cause where the employee breached confidentiality and conflict of interest provisions. The Court found that this permitted terminations without notice for conduct that did not meet the high standard under the Employment Standards Act. It ruled the termination provisions unenforceable.

In a more recent case, Dufault v The Corporation of the Township of Ignace, the Court found that providing for termination without cause at the employer’s “sole discretion…at any time” will render the clause invalid, because there are situations where employers are in fact prohibited from terminating employees (e.g. during a job-protected leave of absence or where it might amount to a reprisal for exercising a right).

There are several other ways that Courts have justified finding a termination clause unenforceable and awarded an employee with common law reasonable notice. This is part of a growing trend to protect employee rights. The Ontario Court of Appeal in Waksdale v Swegon North America held that the Employment Standards Act is remedial and must be interpreted in a way that favours employees. Even if only one small piece of a termination clause is inconsistent with the Employment Standards Act, the entire clause will be rendered unenforceable. This is why it is crucial to have employment agreements drafted in a way that is consistent with the Employment Standards Act, and to have the contracts reviewed periodically to ensure ongoing compliance. At Barriston, we have a great team of employment lawyers who are staying up to date on developments in the law pertaining to employment contracts and who would be happy to perform a review.

Written by Nicolas Guevara-Mann