One of the emerging issues in Ontario law has been the judicial rulings against termination clauses in an employer’s offer letter or employment agreement, which set outs an employee’s entitlement on termination of his or her employment.
Termination “Without Cause”
When an employee is terminated “without cause” an employer is required to provide that terminated employee with working notice that his or her employment is ceasing. For a variety of reasons including sabotage or a hostile workplace, working notice may not be appropriate and as such, an employer may provide a terminated employee with pay in lieu or notice (which would represent the number of weeks the employee would have received had the employee received working notice).
The determination of the number of weeks of notice or pay in lieu of notice an employer must provide on termination is unique to each employee and is based on several factors including years of service, age, experience, and likelihood of re-employment.
Quite often employers will insist that an employee’s entitlement to notice or pay in lieu of notice (i.e. termination pay and/or severance pay) is tied to the minimum standards afforded by Ontario’s statutory law, given that reasonable notice, as determined by similar court decisions, is often far greater and can be a financial burden on an employer, which simply wants to rid itself of an employee.
Therefore, to lessen the exposure of paying an amount far in excess of what it deems reasonable, employers have relied on termination clauses to claw back an employee’s entitlement on termination.
The courts have stated that if an employer wants to use a termination clause to bind an employee to the statutory minimum, the clause should have clear and unambiguous language such that an employee would (i) understand the entitlement relinquished; and (ii) recognize that the termination clause was a bargained component of the employment contract.
New Case Law
For some time, there was a general understanding of what the courts deemed acceptable language for a termination clause to be in accordance with statutory law; however, the courts have altered their direction in two recent decisions.
In Stevens v. Sifton Properties Ltd., a termination clause was considered null and void because it did not set out the employee’s right to benefits on termination, even though the employer continued the employee’s benefits for the length of the notice period. In Bowes v. Goss Power Products Ltd., the Court of Appeal reinforced an Ontario Superior Court of Justice ruling that found that a terminated employee is not required to mitigate his or her damages by seeking new employment unless it is set out in the termination clause.
To err on the side of caution, employers should audit their existing offer letters and employment agreements to ensure that they are onside with what appears to be a judicial shift. Further, if an employer is absolutely certain that it does not want to be subject to reasonable notice guidelines set by case law, which as stated above, are often far greater, it should consider amending a termination clause to provide for entitlement that exceeds the statutory minimum but perhaps less than the common law guideline.
However, imposing or amending a new termination clause is not necessarily easy and should be contemporaneous with any consideration provided to the employee. For new hires, an employer should ensure that the employee executes an offer letter or employment agreement, containing the termination clause, at the time of accepting the position. For existing employees, one course of action is to provide a new employment agreement at the time of an annual review, when an employee is provided with an increase in wages or discretionary bonus that would create a new, binding employee contract.
Adam J. Savaglio is an associate at Scarfone Hawkins LLP practicing in business law and employment law and can be reached at firstname.lastname@example.org/Twitter-@adambizlaw
As published in the Hamilton Spectator on October 12, 2013