Some Clarity on Termination Clauses…

Some Clarity on Termination Clauses…

Topic: Employment and Labour Law March 17, 2017 by Tess Brown


For a number of years, the courts in Ontario have been divided on the enforceability of termination clauses that did not specifically provide for the continuation of an employee’s benefits during the notice period. The continuation of benefits is a legislated minimum requirement under the Employment Standards Act (“ESA”).  Some trial judges were of the view that a termination clause that did not explicitly provide for the continuation of benefits was in clear breach of the ESA and was thus void and unenforceable, while others disagreed. Recently, however, the issue has made its way to the Ontario Court of Appeal, providing some clarity as to what position should prevail.

In the recent decision of Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, an employee, Wood, was hired as a Sales & Event Planner for Fred Deeley Imports. She continued to work for Fred Deeley Imports for a period of 8 years. In April of 2015, Fred Deeley Imports entered into an asset sale agreement with Harley-Davidson Canada and immediately notified all of its employees that they would be terminated effective August 4, 2015.

A termination clause in Wood’s employment contract purported to limit her entitlements as follows:

“[Fred Deeley Imports] 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…  If [Fred Deeley Imports] terminates your employment without cause, [Fred Deeley Imports] shall not be obliged to make any other 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.”

In accordance with the termination clause, Fred Deeley Import Ltd. paid the applicant her salary and benefits for the 13 weeks of working notice, plus an additional lump sum payment equivalent to 8 weeks’ pay. Thus the amount actually received by Wood was greater than her ESA entitlement.  Despite this, Wood subsequently commenced an action against the respondent, contending that the entire employment agreement was unenforceable, or in the alternative, that the termination clause was unenforceable and in either case, she should thus be entitled to common law notice.  Common law notice would provide a much greater benefit to Wood, 9 months versus the 5 months actually provided.

The trial judge found both the employment agreement and the termination clause to be enforceable.  Wood appealed on a number of issues, including the enforceability of the termination clause.

The Ontario Court of Appeal held that to contract out of even one of the minimum requirements under the ESA without substituting a greater benefit would render the subject termination clause void and unenforceable. It further held that, on its plain wording, the termination clause in the Wood case excluded Fred Deeley Imports’ obligation to contribute to the Wood’s benefit plans during the notice period and as such, was an attempt to contract out of the employer’s minimum requirements under the ESA. At best, the Court of Appeal held that the termination clause was ambiguous, warranting interpretation in the sense most favourable to Wood.  The fact that Fred Deeley Imports had actually continued to contribute to the applicant’s benefits plan during the notice period was not relevant to a consideration of the termination clause’s enforceability. Given the Court of Appeal’s findings, Wood was awarded the equivalent of nine months’ notice.

As can be seen from the Wood case, the Courts’ views on the enforceability of contractual termination clauses is constantly evolving.

A properly drafted and enforceable termination clause in an employment contract can provide both the employer and the employee with a degree of certainty as to what the employee’s entitlements will be upon termination. If you require assistance in an employment law matter, the lawyers in LMR’s Employment Law Group can assist you.

By: Tess Brown, B.Soc.Sc., J.D. – Litigation Lawyer, Low Murchison Radnoff LLP