The Court of Appeal has once again weighed in on the interpretation and enforceability of termination clauses in employment contracts in the recent decision of Nemeth v. Hatch Ltd. (“Hatch”). Hatch involved the termination of an employee, Mr. Nemeth, with 19 years of service, in accordance with the following termination clause:

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.

The employer (“Hatch”) took the position that this clause limited Mr. Nemeth’s entitlements to the minimum provided for in the Employment Standards Act, 2000 (“ESA”), and paid Mr. Nemeth eight (8) weeks’ notice in lieu of termination and 19.42 weeks of severance pay. Hatch also continued Mr. Nemeth’s benefits during the eight-week notice period.

Mr. Nemeth brought an action for wrongful dismissal in the Superior Court of Justice and claimed that the termination clause was void for contravening the ESA, and therefore Mr. Nemeth was entitled to reasonable notice at common law. The Court upheld the termination clause in full, finding that the clause was enforceable and Nemeth was not entitled to any further damages. Mr. Nemeth appealed to the Court of Appeal.

The Court of Appeal considered three issues:

1. Is it necessary to include an explicit stipulation in a termination clause in order to displace the common law?
2. Is the termination clause void because it purports to contract out of the ESA?
3. Does the termination clause entitle the appellant to 19 weeks’ notice on termination of his employment?

Is it necessary to include an explicit stipulation in a termination clause in order to displace the common law?

Answer: No, as long as the clause clearly specifies some other period of notice and complies with the ESA.

In finding that it is not necessary for a contract to explicitly say the common law does not apply, the Court of Appeal noted the longstanding principle from Machtinger v. HOJ Industries Ltd. that employees are generally entitled to common law notice unless the contract of employment clearly specifies some other period of notice and complies with the ESA.

The Court of Appeal elaborated on this principle in Hatch, explaining that:

The need for clarity does not mean that the parties must use a specific phrase or particular formula, or state literally that ‘the parties have agreed to limit an employee’s common law rights on termination’. It suffices that the parties’ intention to displace an employee’s common law notice rights can be readily gleaned from the language agreed to by the parties.

The Court of Appeal found that the termination clause was sufficiently clear to remove Mr. Nemeth’s entitlement to common law notice, as it explicitly specified another period of notice.

Is the termination clause void because it purports to contract out of the ESA?

Answer: No because while the contract was silent with respect to severance pay, it did not contain “all inclusive” language that limited Mr. Nemeth’s entitlement to only those provided for in the contract.

Recent decisions from the Ontario Superior Court and Court of Appeal have led many practitioners to conclude that the failure to reference benefits or severance pay in a termination clause is fatal to its enforceability.  However, the Court of Appeal in Hatch found that the termination clause’s silence with respect to Mr. Nemeth’s entitlement to severance pay did not contravene the ESA.

In doing so, the Court of Appeal distinguished Mr. Nemeth’s termination clause from the clause at issue in its 2017 decision, Wood v. Fred Deeley Imports Ltd. (“Wood”). In Wood, an employee was dismissed pursuant to a termination clause that stated the employee would be entitled to two (2) weeks’ notice per year of service, and specifically stated the employee would not be entitled to any payments other than those provided for in the contract. The Court of Appeal in Wood found that this restrictive language amounted to an attempt to contract out of the ESA, and was therefore void and unenforceable.

The Court of Appeal in Hatch found that its 2005 decision in Roden v. Toronto Humane Society (“Roden”) was more applicable to the case at hand. In Roden, the Court upheld a termination clause that referenced the ESA, but was silent with respect to the employer’s obligation to continue benefits throughout the notice period. The employee argued that the failure to mention benefits amounted to an attempt to contract out of the minimum requirements of the ESA. The Court rejected this argument, finding that the silence obliged the employer to comply with the minimum standards.

Following Roden, the Court of Appeal in Hatch held that the fact the termination clause was silent with respect to severance pay did not amount to a contravention of the ESA so long as the clause did not include explicit language saying the employee would not be entitled to anything more than what had been set out in the termination clause. 

Does the termination clause entitle the appellant to 19 weeks’ notice on termination of his employment?

Answer: Yes, in this case the reference to the ESA was ambiguous and was therefore interpreted against Hatch as setting a floor for notice and not a ceiling.

While the Court of Appeal found that the termination clause was enforceable and sufficient to rebut the presumption of common law reasonable notice, the Court also found the termination clause was not sufficiently clear to limit damages to the ESA minimum.

The Court of Appeal explained that the termination clause gave rise to two possible interpretations: one that gave Mr. Nemeth the ESA minimum notice, which in this case was eight (8) weeks, and the other entitling Mr. Nemeth to one week per year of service for a total of 19 weeks of notice. The Court favoured the second interpretation, noting:

There is no language restricting the appellant’s entitlements to only the minimum notice stipulated under the ESA. If the respondent had wished to include such a limitation, it was free to draft the termination clause differently, using language that converts the statutory floor into a ceiling.

As a result, the Court of Appeal allowed Mr. Nemeth’s appeal in part and ordered Hatch to pay an additional 11 weeks’ notice in addition to the eight (8) weeks already provided.

Implications

The interpretation and enforceability of termination clauses is an area of law that has garnered a lot of interest from the Court of Appeal in recent years. The result has been a moving target with respect to what constitutes an enforceable termination clause.  For now it appears the following principles apply:

1. Employers are not required to explicitly state in their termination clause that a contractually-agreed period of notice displaces the common law. Rather, it is sufficient that the termination clause clearly specifies an alternative period of notice that complies with the minimum requirements of the ESA.
2. Where contracts are silent with respect to an ESA entitlement, the termination clause will remain enforceable so long as the clause does not use “all inclusive” language that restricts an employee’s entitlement to what is provided for in the termination clause.
3. Employers seeking to restrict an employee’s entitlements upon termination of employment should do so explicitly and with clarity. As Hatch illustrates, any ambiguous language found in a termination clause will likely be interpreted in favour of the employee.