Contract Clarity Serves Employers Well
Traditionally, it has been difficult to convince courts to enforce termination clauses in employment contracts. This has been particularly difficult in the Province of Ontario. Commenters have suggested that most of the difficulty for employers stems from the fact that Ontario’s employment standards legislation requires benefits continuation and, in some cases, statutory severance, in addition to notice or pay in lieu requirements. If these requirements were not all specifically provided for, Ontario courts have found termination clauses contrary to the Employment Standards Act, 2000, and unenforceable. As a result, employers have had to pay damages in lieu of reasonable notice.
Courts Addressing Imperfections
This may have now changed. A recent Ontario Court of Appeal decision will give employers some additional ammunition to enforce imperfect termination clauses. In Nemeth v. Hatch Ltd., 2018 ONCA 7, the Court of Appeal considered the case of a 19 year employee who was terminated on 8 weeks’ advance notice, plus 19.42 weeks of statutory severance pay and benefits continuation for 8 weeks (the required statutory notice period). The termination clause at issue read as follows:
The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.
This clause is imperfect for a number of reasons: it does not specifically provide for benefits continuation, it does not mention statutory severance, it uses a generic reference to “labour legislation” rather than a reference to the applicable Employment Standards Act (ESA), and it does not expressly limit the employee’s entitlements to the formula in the clause. To top it off, the clause is potentially ambiguous in that it does not explain when the “applicable labour legislation” would apply, as opposed to the formula of one week per year of service.
The trial judge found the clause was enforceable and limited the employee to ESA minimums. The employee appealed and was partially successful, but the decision is still helpful.
Appealing to Common Law
On appeal, the employee argued that the clause did not expressly limit his entitlements on termination to that set out in the clause, and, accordingly, the contract was not clear enough to displace the presumption of reasonable notice of termination (which is implied in every Canadian employment contract).
The Court of Appeal disagreed and found that there were no magic words necessary to displace the common law; all that was necessary was to clearly specify some other period of notice. This is very helpful for employers. The stakes were high in this case because reasonable notice for a 19-year employee could exceed 19 months, depending on the age of the employee and nature of the position.
The employee also argued that since the clause did not require severance pay, it was an attempt to contract out of the ESA and therefore void. The Court of Appeal disagreed with this argument as well. It found that since the contract only provided for “notice” and was silent with respect to “severance”, it did not contradict the ESA. This is inconsistent with some earlier decisions, but certainly helpful for employers.
As a final argument, the employee said that since the clause provided for one week per year of service or ESA minimums, it was ambiguous and ought to be interpreted against the drafter of the contract (the employer) and in favour of the employee. This is a well-established principle of contract law. The Court of Appeal agreed, and found that on the most favourable reading of the clause, the employee was entitled to 19 weeks of pay in lieu of notice, and ordered the employer to pay a further 11 weeks.
Clarity in Contracts Key
This case will be very helpful for employers across the country. The key takeaways for employers are as follows:
- It is not necessary to use any particular words to displace the common law presumption of reasonable notice. What is needed is a clear statement of some other period of notice; and
- Even if an Ontario contract does not expressly provide for benefits continuation or statutory severance, it may still be enforceable if it only limits an employee’s entitlement to “notice.”
While this case is helpful, employers should seek advice to ensure that any contract will achieve the desired result. A clearly-drafted termination clause may have saved this employer thousands of dollars in legal fees through the appeal.
Chris Munroe is an associate and Graeme McFarlane is a partner at Roper Greyell LLP, a firm focused on partnering with companies to find solutions workplace legal issues.
(PeopleTalk Spring 2018)