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February 28, 2013

Termination Clauses and Strategic Terminations under the ESA

Authors Malcolm MacKillop and Hendrik Nieuwland

Many employers have introduced termination clauses into employment contracts. A termination clause is useful because it limits the amount of severance an employee is entitled to when his or her employment is terminated without cause. The most aggressively worded termination clauses limit a dismissed employee’s entitlements to the minimum amounts under the Employment Standards Act, 2000 (the “ESA”). Many employers wonder whether such restrictive termination clauses would be enforced by the courts, particularly for senior level employees. Another common question is whether an employee’s bonus should be included in the sums awarded under a termination clause. A recent decision of the Ontario Superior Court answers both of these questions.

In Dimson v. KTI Kanatek Technologies Inc., 2012 ONSC 6556, the plaintiff was employed by the defendant for six years and occupied the senior position of Vice-President, Strategic Accounts. He signed a contract that included a termination clause that limited his severance entitlements to the minimum amounts owing under the ESA. He was dismissed on a without cause basis and paid in accordance with the termination clause. He then sued the employer for wrongful dismissal, claiming that the termination clause was unenforceable and he was therefore entitled to common law reasonable notice damages.

The contentious part of the termination clause dealt with the calculation of bonuses upon termination. It said: “If at any time Kanatek provides you with a bonus, it will not be included in the calculation of payment for the purposes of this Article or as otherwise agreed to or required by the Employment Standards Act”. The plaintiff claimed that as a result of this language being in the termination clause his bonus would be excluded in the calculation of his termination and severance pay, that this result was contrary to the ESA and, therefore, the termination clause was void. The defendant argued that the termination clause complied with the ESA because it preserved the plaintiff’s right to the inclusion of a bonus if the parties agreed or if including the bonus was required by the ESA. The ESA stipulates that where an employee receives wages that are not paid on the basis of time (like a bonus), the bonus should only be included in the minimum termination and severance pay if the employee received the bonus in the 12 weeks prior to the date of termination.

The court held that the termination clause was “perfectly acceptable” as it provided expressly for entitlements to be paid in accordance with the standards set out in the ESA. Since the plaintiff did not receive a bonus in the 12 weeks prior to the day he was terminated, he was not owed any bonus in calculating his minimum termination and severance pay. The action was dismissed on the basis that the termination clause was enforceable and the plaintiff was paid the entire amount owing under his contract.

The Dimson case is important for two reasons. First, the court upheld a contractual provision that severely restricted the entitlements of a dismissed senior level employee. In this respect, the court’s decision runs contrary to the philosophy apparently underlying other recent cases where the Court of Appeal appeared to be far more merciful to senior level employees and their entitlements on termination. [See, for example, Wronko v. Western Inventory Service, 2008 ONCA 327, where a dismissed Vice-President received 24 months’ severance pursuant to a termination clause after being given 24 months’ notice that the termination clause was being changed, and Bowes v. Goss Power Product Limited,2012 ONCA 425, where a dismissed Vice-President received 12 months’ severance pursuant to a termination clause even though he found a comparable job within two weeks of his dismissal.]

Second, the Dimson case appears to create an incentive for the strategic termination of employees who receive large bonuses or commissions. As already mentioned, these earnings may be excluded from the minimum termination and severance pay if they are paid more than 12 weeks prior to the termination. In light of Dimson, employers who use restrictive termination clauses could lower their severance costs if they strategically terminate employees at least 12 weeks after paying any large bonuses or commissions. Such a tactic could be used to great effect in industries where large bonuses or commissions are earned at particular times of the year, such as the insurance or financial services industries. Dimson is currently under appeal, so we will have to wait and see if the Court of Appeal ultimately agrees with the practical implications of this decision.

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