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Don’t Take a Chance on it: The Uncertainty of ESA-only Termination Clauses | The HR Space

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Labour, Employment and Human Rights Bulletin

In January 2017, the Ontario Superior Court of Justice released its decision in Cook v. Hatch (PDF) ("Cook") upholding a less than perfect termination clause that failed to reference statutory severance pay or provide for continued health benefits during the statutory notice period. A month later, the Court of Appeal for Ontario ("ONCA") responded with its decision in Wood v. Fred Deeley Imports Ltd. (PDF) ("Wood") where it overturned a motion judge's ruling upholding a similar termination provision. And so, the age old debate about the enforceability of ESA-only termination provisions rages on.

Cook v. Hatch

The issue in Cook was the validity of the following 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.[our emphasis]

In other words, the parties agreed that the Plaintiff's entitlements upon termination would be limited to the minimum requirements of the Employment Standards Act, 2000 (the "ESA"). 

The Plaintiff argued that the termination clause was not enforceable and that he was, therefore, entitled to common law reasonable notice. He relied on Machtinger v. HOJ Industries Ltd. (PDF), wherein the Supreme Court of Canada ruled that a termination provision that does not comply with the minimum requirements of the applicable employment standards legislation (the ESA in Ontario) is invalid. Simply put, if the termination clause provides for a less generous entitlement than does the applicable law, the clause is not enforceable.  

The Court, however, relied on the more recent decision in Oudin v. Centre Francophone de Toronto (PDF), wherein the ONCA upheld a termination clause based on the intention of the parties rather than the ambiguity in the language. In fact, in Cook, the Court was highly critical of the Plaintiff's attempt to create ambiguity out of common words such as "applicable labour legislation".

Ultimately, the Court held that the termination provision was enforceable as against Mr. Cook even though it failed to reference the ESA specifically or to provide for statutory severance pay or the continuation of health benefits during the statutory notice period.  What mattered most was that the parties intended to limit the Plaintiff's entitlements in the event of termination to the minimum requirements of the ESA. Put another way, the parties intended to remove the Plaintiff's implied right to common law reasonable notice and, in the Court's view, a technical argument about the alleged ambiguity created by certain common words should not interfere with the true intention of the parties. 

Wood v. Fred Deeley Imports Ltd.

Just when we thought we finally had some clarity on this issue, the ONCA released its decision in Wood.

At issue in this case was the validity of the following without cause termination clause:

[The Company] is […] by providing you with 2 weeks' notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. 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 […]. 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. [emphasis added]

The motion judge concluded that the termination clause was enforceable and declined to award damages for pay in lieu of reasonable notice. The ONCA disagreed and ruled that the termination provision contravened the ESA and was, therefore, invalid.

On appeal, the employee argued that the employment agreement was unenforceable because, among other things, it did not provide for the continuation of health benefit coverage during the minimum statutory notice period, nor did it provide for severance pay as required by the ESA. The ONCA agreed.

Notably, the ONCA's decision was based, in large part, on the language in the termination clause that said the payments made pursuant to the clause "are inclusive" of the employee's ESA entitlements. The silence in regards to benefits and severance pay, coupled with the "all inclusive" language proved fatal for the employer as it effectively allowed the employer to not pay the employee her statutory severance pay or to maintain her benefit coverage for the statutory notice period in violation of the minimum requirements of the ESA

Lessons for Employers

The law regarding the enforceability of termination provisions is constantly evolving. The one constant is that these provisions will be heavily scrutinized by adjudicators. As a result, employers should exercise caution when drafting restrictive termination provisions and should ensure that these clauses address (and provide for) all minimum statutory entitlements, including termination pay, benefits continuation and severance pay.

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