skip to main content
June 17, 2013

Court Casts Doubt on Enforceability of Standard Termination Clauses

Author Hendrik Nieuwland

In previous Snapshot articles we have written about the utility of using a contractual termination clause to minimize an employer’s severance obligations.  A recent decision of the Ontario Superior Court of Justice has cast some doubt on the enforceability of termination clause language commonly used by employers.
In Stevens v. Sifton Properties Limited, [2002] O.J. No. 6244 (S.C.J.), the Plaintiff had a written employment contract that spelled out her entitlements on termination without cause, as follows:
The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice and/or severance pay, in accordance with the Employment Standards Act of Ontario.
You agree to accept the notice or payment in lieu of notice and/or severance pay referenced...herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.
The Plaintiff was terminated without cause after three (3) years of employment.  Relying on the termination clause, the employer paid the Plaintiff her minimum three (3) weeks’ pay under the Employment Standards Act, 2000 (the "ESA").  The employer also continued the Plaintiff’s full benefits coverage over the three (3) week notice period.  
The Plaintiff brought an application to the Court claiming the termination clause was unenforceable.  The Court agreed.  The Court held that employers could displace the common law presumption of reasonable notice of termination by contractually limiting entitlements to the minimums provided under the ESA.  However, the Court concluded that the termination clause in question provided the Plaintiff with less than her minimum ESA entitlements.  This was because the termination clause did not expressly state that the Plaintiff would receive benefits.  The ESA requires an employer to continue all benefits over the minimum statutory notice period.  The Court cited the decision in Machtinger v. HOJ Industries Limited, [1992] 1 S.C.R. 986, in which the Supreme Court of Canada held that it is unlawful for contractual language to provide an employee with less than the minimum entitlements under employment standards legislation.  Consequently, the Plaintiff's termination clause was deemed to be void.  
There certainly is an argument that the Court in Stevens got it wrong.  The termination clause in Stevens said that the employee would receive “notice or payment in lieu of notice”.  “Notice” means “working notice” under the ESA.  When an employee works out her notice period, the employer continues to provide benefits as a matter of course.  Therefore, it should be implicit that a termination clause that offers “payment in lieu of notice” includes a promise to provide benefits over the notice period.  In our experience that is exactly what employers intend, and the employer in Stevens followed through with that intention by providing the Plaintiff with benefits in addition to notice pay.  Nevertheless, the Court held that the issue is not whether the employer acted in compliance with the minimum requirements under the ESA, but whether the language of the termination clause complies with those minimum requirements.  
In our view, the Court in Stevens took an overly narrow and impractical analysis of standard form termination clauses.  The Court’s view in Stevens does not reflect a consensus amongst the judiciary.  In an earlier decision, King v. Weber Manufacturing Technology Inc., [2008] O.J. No. 4033 (S.C.J.), the Court upheld a termination clause that used very similar language to that found in Stevens, and which did not mention the provision of benefits at all.  Nevertheless, the significance of the Stevens decision cannot be understated.  While termination clauses may differ in style, the format seen in the Stevens case is common in the marketplace.  Most termination clauses that we have seen in our practice do not expressly refer to benefits at all.  The enforceability of these clauses is therefore very much in doubt.
As human resources professionals, this is an opportune time to re-examine the language of your termination clauses.  There appear to be two (2) ways to revise a termination clause to avoid the problem faced in Stevens.  First, the termination clause can be drafted to simply state that an employee will be provided with his/her minimum “entitlements” under the applicable employment standards legislation.  This strategy was used with success in Clarke v. Insight Components (Canada) Inc., [2008] O.J. No. 5025 (C.A.).  Alternatively, the termination clause can be drafted so it expressly states that benefits will be provided over the minimum statutory notice period.
65 Queen Street West, Suite 1800, Toronto, Ontario M5H 2M5
T 416 304 6400 F 416 304 6406