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Court of Appeal Strikes Down Termination Clause

In a recent decision, the Ontario Court of Appeal ruled that a termination clause was not enforceable because it failed to clearly provide for the continuation of benefits during the notice period and because it failed to clearly provide that the employer would pay severance pay alongside termination pay.

Facts

Julia Wood (“Ms. Wood”) was terminated from Fred Deeley Imports (“Deeley”) following restructuring. As per the employment contract, Deeley could terminate Ms. Wood’s employment without cause by providing “2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company.” The termination clause further stated that, “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.”

Deeley provided Ms. Wood with 13 weeks of notice, plus a lump sum payment equivalent to eight weeks’ pay for a total of 21 weeks, which is actually more than what Deeley owed under the contract, since Ms. Wood had been working for Deeley for 8 years. Technically, under the termination provisions of the contract and under the Employment Standards Act (ESA), Deeley only needed to provide Ms. Wood with 16.3 weeks’ (8 weeks’ termination pay and 8.3 weeks’ severance).

Nevertheless, Ms. Wood sued Deeley for reasonable notice under the common-law, which is substantially higher than the minimum notice periods required by the ESA. Ms. Wood argued that the termination clause in her employment contract was unenforceable because it failed to provide for the continuation of benefits during the notice period as required by the ESA. While Ms. Wood initially lost on a motion for summary judgment brought by Deeley, the motion judge’s decision was overturned on appeal and she was ultimately awarded 9 months’ salary (about $75,000) plus the costs of the motion and appeal (about $39,000 combined).

The Court of Appeal found that the termination provision precluded the employer’s obligation to continue Ms. Woods’ benefits during the notice period. Even though Deeley actually did continue to pay for Ms. Woods’ benefits during the notice period, the court found that this had no bearing on the enforceability of the termination clause.

The wording of the clause, as outlined above, is completely silent on the issue of continuation of benefits. Deeley attempted to argue that the word “pay” is broad enough to include benefits. The Court of Appeal found this was not sufficient. The Court of Appeal explained that, in order to contract out of common-law reasonable notice, the employment agreement must do so in clear and unambiguous language. This is due to the imbalance in bargaining power between employers and employees and the fact that employers are generally more sophisticated when it comes to drafting employment contracts.

Our Thoughts

Employers can reduce the risk of unsuccessful litigation by drafting properly worded termination clauses in their contracts with employees, avoiding the requirement of paying common-law reasonable notice and legal fees that arise following termination. This case serves as an important reminder to employers to ensure that their termination clauses comply with the ESA, lest they risk having to pay their employees for reasonable notice. In order to do so, it is advisable that employers use language which clearly outlines that the employer will continue to pay benefits during the notice period set out in the ESA.

For employees, it is always important to pay attention to a termination clause prior to entering into an employment relationship. Where an employer attempts to contract out of common-law reasonable notice, the employee must seriously consider the insecurity this provides to the employment relationship and perhaps negotiate a notice provision that better reflects the employee’s need for longer notice, especially in industries where finding a job takes some time.
 
Please See: Wood v Fred Deeley Imports Ltd., 2017 ONCA 158

The above article is for general information purposes only and does not constitute legal advice. If you have concerns with regard to the foregoing issues, please make an appointment with one of our lawyers or a qualified legal practitioner elsewhere.