The enforceability of contractual termination clauses has become a perpetual question in Ontario. In theory, employers are allowed to contract the amount of reasonable notice an employee will receive, so long as it does not fall below the minimum entitlements provided under the applicable employment standards legislation. However, if a termination clause is found to be unenforceable (as they frequently are), employers become liable for “common law” reasonable notice, which typically exceeds statutory or contractual provisions.

Ontario’s courts have been grappling with the types of deficiencies that will render a termination clause unenforceable. In 2012, the court in Stevens v. Sifton Properties held that the failure to indicate that employee benefits continued during the statutory notice period rendered the termination clause unenforceable in that case. A number of subsequent cases followed the Stevens approach. However, in 2016 the Court of Appeal in Oudin v. Centre Francophone de Toronto upheld a termination clause which did not specifically address benefits, finding there was no intent by the parties to contract out of Ontario’s employment standards.  

A recent Court of Appeal decision, Wood v. Fred Deeley Imports Ltd (“Wood”),released last month, attempts to provide some clarification on the issue, but raises another possible hurdle for enforceability relating to “severance pay”.

Background

Wood was hired by Fred Deeley Imports in 2007 as a Sales and Event Planner. In 2015, Wood’s employment was terminated as part of an asset sale. Her employment contract provided:

 [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 [“ESA”].

The company paid Wood termination and severance pay under the ESA, and an additional lump sum payment of eight (8) weeks. It also continued her benefits for 13 weeks.

Wood brought an action against her employer for common law notice on the basis that the termination clause in her employment contract was unenforceable because it did not expressly provide for benefits over the statutory notice period.

A motion judge upheld the clause at first instance. However, the Court of Appeal subsequently held that the termination clause was unenforceable because it failed to stipulate benefit continuation during the statutory notice period.

The employer attempted to argue that its reference to “pay” in the termination clause was broad enough to include both “salary” and “benefits”. The Court disagreed and noted that the employer bore the burden of using clear and unambiguous language.

The employer’s actual continued contribution to benefits during the statutory notice period had no bearing on the enforceability of the termination clause at law. The court held that “the wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA.”

Obligation to Pay Severance During the Notice Period

Notably, the Court in Wood also chose to go on and discuss whether the termination clause was also unenforceable because it failed to satisfy the employer’s obligation to pay severance pay.

The Court noted that, under the ESA, the employer has an obligation to provide notice or pay in lieu of notice of termination, as well as the obligation to pay severance pay. The Court held that these were two distinct obligations that the employer had combined into one under the wording of the termination clause. 

The Court took issue with the clause because it would ostensibly permit the employer to terminate employment in ways that did not satisfy its obligation to pay severance pay under the ESA.

For example, if the employer had chosen to provide the employee with 18 weeks of working notice, the employee would have received more “notice” than the minimum required under the ESA, but no severance pay, which must be paid as a lump sum and not as working notice.

The Court noted that the following wording would have made the clause enforceable:

Deeley is entitled to terminate your employment…by providing you with one week’s notice of termination or pay in lieu thereof for each completed or partial year of employment, and severance pay equal to one week’s salary for each completed or partial year of employment.

Takeaway for Employers

In this case, Ontario’s highest court confirmed the principle flowing from the lower court’s decision in Stevens v. Sifton – that is, a termination clause must expressly provide for benefit continuation, and an employer’s decision to actually provide benefits over the statutory notice period will not save a deficient contractual clause.

The decision also creates another challenge for employers who attempt to provide a contractual “formula” for notice of termination. If the employer fails to craft the clause in a way that ensures the minimum severance pay is paid by way of lump sum, rather than by working notice or salary continuation, the clause will fail.

The foregoing is for informational purposes only, and should in no way be relied upon as legal advice. For legal advice tailored to your circumstances and business, please contact any of SOM LLP’s lawyers by email or telephone.