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Posts tagged: termination clause

Will a Judge Enforce the Termination Clause in Your Employment Contract?

By , August 14, 2018 10:27 am

A Termination Clause can Save an Employer a lot of Money

An employer can significantly reduce the amount of termination pay that it would otherwise owe an employee by including a termination clause in an employment contract.

Accordingly, most employers require that all new hires sign an employment contract with a termination clause.

Often the employer tries to limit the employee’s entitlement on termination to the minimum notice of termination required under Ontario’s Employment Standards Act (“ESA”).

Employee Lawyers Attack Termination Clauses

Employee lawyers often claim that these ESA termination clauses are not enforceable and there have been a myriad of court cases dealing with this issue.

Three Termination Clauses That have Been Litigated

Here are three termination clauses that were litigated and an indication as to whether or not the judge concluded the clause was legally enforceable:

  1. Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000, as amended from time to time. (Not enforceable)
  2. In the event Hampton wishes to terminate your employment without cause they may do so by paying you the minimum amounts required pursuant to the ESA in force at the time of termination; no further compensation shall or will be provided. You agree by signing this agreement that such amounts are the total compensation you will receive if terminated without cause. (Not enforceable)
  3. If you are terminated by IBM other than for cause, IBM will provide you with notice or a separation payment in lieu of notice of termination equal to the greater of (a) one month of your current annual base salary or (b) one week of your current annual base salary, for each completed six months worked from your IBM service reference date to a maximum of 12 months of your annual base salary. This payment includes any and all termination notice pay, and severance payments you may be entitled to under provincial employment standards legislation and Common Law. Any separation payment will be subject to applicable statutory deductions. In addition, you will be entitled to benefit continuation for the minimum notice period under applicable provincial employment standard legislation. In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (“statutory entitlements”) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment. (Originally not enforceable but decision reversed on appeal)

As you can see, although it is theoretically possible to limit an employee’s rights on termination to ESA minimums it is difficult to do so in practice because trial judges are reluctant to enforce them.

Lessons to Be Learned

  1. Every employment contract should have a termination clause.
  2. If an employer wants to limit an employee’s rights on termination to ESA minimums then the termination clause should be drafted extremely carefully.
  3. Because trial judges have not adopted a uniform approach to interpreting ESA termination clauses and new decisions on this issue are being released regularly, every organization should have an employment lawyer review its termination clause regularly.

For over 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416-317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

The Benefits of Failsafe Provisions

By , July 17, 2018 8:53 pm

The Ontario Court of Appeal recently released a decision on the enforceability of termination clauses in employment agreements that contain failsafe provisions.

Background

A “failsafe provision” is a portion of a termination clause that provides that, regardless of what the termination clause provides, an employee who is terminated on a without cause basis will always receive at least the minimum notice of termination, benefit continuation and severance pay the employee is entitled to receive under employment standards legislation.

Amberber v IBM Canada Ltd.

Mr. Amberber’s employment contract contained a termination clause that entitled him to notice of termination equal to the greater of (a) one month’s salary, or (b) one week of your current annual base salary, for each completed six months worked since his start date, up to a maximum of 12 months’ salary. This amount expressly included all payments to which the employee might be entitled under employment standards legislation and at common law. This part of the clause, which the motion judge termed as the “options provision,” was followed by a failsafe provision.

After he was terminated, Mr. Amberber sued IBM Canada Ltd. (“IBM”) for wrongful dismissal and claimed he was entitled to pay in lieu of notice at common law. At the motion, Mr. Amberber advanced three arguments. The motion judge only gave effect to one of the arguments: the termination clause failed to rebut the presumption of common law reasonable notice of termination.

The motion judge found that although the termination clause was one paragraph, it broke down into two parts. The inclusive payment provision immediately followed the options provision, so the motion judge interpreted that the provision applied to the first part. Because the inclusive payment provision was not repeated at the end of the clause, it was not clear that the inclusive payment provision was meant to apply to the failsafe provision. The motion judge found that the inclusive payment provision could just as easily have been included at the end of the paragraph and could have just as easily been specified to apply to both scenarios.

On appeal, the motion judge’s decision was overturned. The Ontario Court of Appeal found that the motion judge made a fundamental error when she subdivided the termination clause into what she regarded as its constituent parts and interpreted them individually. Rather, the clause must be interpreted as a whole, and when read as a whole, there could be no doubt as to the clause’s meaning. To hold that the inclusive payment provision applies to only one part of the clause but not the other, gave the clause a strained and unreasonable interpretation. The Ontario Court of Appeal reminded judges that the court should not strain to create an ambiguity where none exists.

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

Employer Alert: Termination Clause UPHELD by Ontario’s Court of Appeal in Nemeth v. Hatch Ltd

By , January 12, 2018 2:20 pm

On Monday, Ontario’s Court of Appeal concluded in Nemeth v. Hatch Ltd., 2018 ONCA 7 that the following termination clause was legally enforceable and that the terminated employee who had been employed for 19 years was entitled to 19 weeks termination pay:

The Termination Clause

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.

My guess is that most employment lawyers who have read this decision are scratching their collective heads, and asking, “What?”

This decision will result in many plaintiff side lawyers taking pause and re-evaluating their cases.

Until this case was released many trial judges were bending over backwards to find uncertainty and ambiguity in termination clauses and striking them down which benefited employees. For a summary of some of these cases click here

The decision in Nemeth v. Hatch Ltd. is a good case in point. An enforceable termination clause meant the employee was entitled to 19 weeks termination pay. If the clause had been found to be unenforceable however then the employee would have been entitled to closer to 19 months notice.

Lesson To Be Learned

At the moment, it is extremely difficult if not impossible to guess whether or not an Ontario trial judge will enforce a termination clause in an employment contract. The Court of Appeal has found a number of such clauses to be enforceable however for the last few years trial judges have been finding ways to get around these cases or as, lawyers say, have concluded these decisions are distinguishable.

In Nemeth v. Hatch Ltd. the Court of Appeal may have been trying to bring more certainty to the law as it relates to the enforceability of termination clauses. In the short term, however, I predict that this decision will create more uncertainty in this area of the law.

Case Study: Why You Need to Periodically Review Your Employment Contract

By , October 11, 2017 9:08 am

A well-drafted employment contract is the best employment law investment an employer can make. It protects an employer from significant liability and will usually save thousands of dollars in termination costs.

An employment contract should be reviewed periodically because judges are refusing to enforce termination clauses if they are not drafted properly.

In a recent case, Covenoho v. Pendylum Ltd.,2017 ONCA 284, Ontario’s highest court concluded a termination clause was not legally enforceable because it might breach the Employment Standards Act (“ESA”) in the future.

The Facts

Joss Covenoho signed a one year fixed-term contract with Pendylum Inc. The employer terminated her agreement without advance notice when she had been employed for less that 3 months. The termination clause stated in part that the contract could be terminated before the end of the fixed-term “if the Pendylum Client to which you have been contracted terminate[s] its contract with Pendylum for your services”.

Decision by Motion Judge

The motion judge concluded that since the employee had been employed for less than three months, she was not entitled to any notice of termination. Under the ESA an employer is not required to provide any notice of employment to an employee during the first three months of employment.

Decision by Court of Appeal

The Court of Appeal reversed the motion judge’s decision and found that the termination provisions were void. It ruled that “the terms must be construed as if (the employee) had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void”. In this case, if Ms. Covenoho had been terminated after three months of work, then the termination clause would have violated the ESA because she could have been terminated without any notice of termination (or any payment in lieu of notice) contrary to the ESA.  The court also ruled the employee was entitled to receive the salary that she would have earned for the balance of the fixed-term contract.

Lessons for employers:

1)   Employers should periodically review their termination clauses to ensure they are properly drafted and do not provide shorter notice than required by the ESA.

2)  As we have written about before, it is generally a bad idea to enter into a fixed term contract. If a fixed term contract must be used, it must include an enforceable early termination clause.

On October 16 and October 20 MacLeod Law Firm is holding seminars in Toronto and Barrie that will cover three topics. One topic is why employment contracts need to be reviewed periodically. Cases like this one is one reason but there are other reasons. Information on the seminar can be found here.

For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

Employer Alert: Ontario Judges Are Refusing to Enforce Employer Friendly Termination Clauses

By , October 24, 2016 5:36 pm

On October 18, 2016, I spoke to a room full of lawyers about the state of the law concerning the enforceability of termination clauses in employment contracts. In particular, I discussed termination clauses that attempt to limit an employee’s termination pay to the minimum notice of termination provided for under the Employment Standards Act (“ESA minimums clause”). This blog is a brief summary of my paper.

Why Does This Issue Matter?

For an employee earning $ 52,000 a year who is terminated after 25 years’ service, an enforceable ESA minimums clause could mean the difference between receiving $ 8,000 or $ 104,000 in termination pay. Conversely it means a potential $ 96,000 cost saving for the employer.

The Law

The Supreme Court of Canada has stated that an employee is entitled to receive reasonable notice of termination unless the contract of employment clearly specifies some other period of notice, whether expressly or implicitly, as long as the employee receives the minimum notice of termination set out in employment standards legislation. Further, absent considerations of unconscionability, there is nothing legally objectionable with an ESA minimums clause.

So the battleground is whether an ESA minimums clause clearly overrides the employee’s right to receive reasonable notice of termination.

Four Ways to Attack A Termination Clause

Employee lawyers have attacked the legal enforceability of ESA minimum clauses in different ways, such as:

  1. The Termination Clause is Ambiguous

In one case, a judge found the following clause to be ambiguous and therefore not enforceable:

“Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario.”

In another case, a judge of the same court came to the opposite conclusion in connection with an ambiguous ESA minimums clause.

  1. The Termination Clause May Violate the ESA in the Future

In one case, an employee signed a termination clause that met the minimum standards set out in the ESA at the time it was signed but if the employee worked for a certain number of years it would no longer meet those standards. The judge found that a potential violation of the ESA rendered the clause unenforceable. Three years later a judge of the same court came to a different conclusion when interpreting a similar termination clause.

  1. The Termination Clause does not Satisfy the Minimum Requirements of the ESA

In one case, an employee signed an ESA minimums clause but it did not state that his group employee benefits would be continued during the ESA minimum notice period as required by the ESA. A judge concluded the clause was not enforceable because it did not satisfy the minimum standards set out in the ESA.

  1. The Termination Clause does not Explicitly Override an Employee’s Right to Receive Reasonable Notice of Termination

In 2016, a judge concluded the following clause was not enforceable because it did not clearly state the employee was giving up his right to receive reasonable notice of termination:

“Termination: Start date to three months: this length of service is a probationary period and the employee is not entitled to any notice or salary in lieu of notice…Three months to one year – one-week notice. One year to three years – two weeks’ notice. Three years and over – one week notice for each year of employment to a maximum of eight weeks. This policy shall be maintained in accordance with the ESA.”

This judge refused to follow an earlier decision by a judge of the same court that reached the opposite conclusion when interpreting a similarly worded clause.

Lessons to Be Learned

  1. Employee lawyers closely review ESA minimums clauses and often attack them in legal proceedings.
  1. Judges refuse to enforce ESA minimums clauses for many reasons.
  1. Because judges of the same court are disagreeing on whether termination clauses are enforceable it is extremely difficult to predict how a particular judge will interpret a particular termination clause.
  2. Employers should always require a new employee to sign an enforceable termination clause.
  1. Existing ESA minimums clauses should be carefully reviewed by an employment lawyer to determine whether they need to be amended to withstand judicial scrutiny.

For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

 

 

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