Termination clauses are commonly included in contracts to specify the amount of notice or pay in lieu an employee will receive if terminated without cause. It is legal for these clauses to limit an employee's entitlement to the minimums set out in employment standards legislation. But, the clauses have to be very carefully drafted. If they are not, the clause will not be enforceable and the employee will be entitled to reasonable notice of termination in common law provinces. The Ontario Divisional Court's decision in Movati Athletic (Group) Inc. v. Bergeron, 2018 ONSC 7258 provides guidance on what makes an enforceable clause.
The employee in this case had worked for the company for about 16 months when she was terminated without cause. The company relied on a termination clause in her contract and gave her the minimum entitlements under Ontario's Employment Standards Act, 2000 (ESA). The clause stated:
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.
The employee sued. The judge said that the company could not rely on the termination clause because it was not clear enough. The clause did not specifically displace her entitlement to reasonable notice. It merely stated the company would comply with the ESA.
The employer unsuccessfully appealed. In reaching its decision, the appeal court summarized the following principles to be considered in determining if a clause displaces the right to reasonable notice:
- All contract clauses must meet or exceed the ESA minimums for termination without cause;
- There is a presumption that an employee is entitled to reasonable notice of termination of employment without cause;
- The parties can contract out of that presumption if the ESA minimums are still met;
- The presumption of reasonable notice may be rebutted if the contract specifies some other notice period that meets or exceeds the minimum in the ESA;
- There are no magic words. But, it must be clear and unambiguous that the parties intended to limit the employee's right to reasonable notice;
- Any ambiguity in the clause will be resolved in favour of the employee and against the employer who drafted it; and
- Surrounding circumstances may be considered, but they cannot supersede the words of the agreement.
The court agreed the termination clause was not enforceable. The clause said entitlements would be "pursuant to the ESA", but it did not limit entitlements to what is provided for in the ESA. It created a floor -- or minimum entitlement. But, not a ceiling -- a cap on entitlement. This could be contrasted with the probation clause which used the words "only" and "minimum" to cap entitlement. The word "minimum" was also used to limit benefit continuation. The court also agreed there was ambiguity in the wording of the clause that should be resolved in favour of the employee.
Lessons for Employers
The principles from this Ontario case apply to all Canadian employers seeking to limit common law entitlement to reasonable notice. It reaffirms the need for careful drafting, and provides a step-by-step process to use to determine if a clause is sufficiently clear to displace entitlement to reasonable notice. Employers must, among other things, clearly spell out their intention to contract out of reasonable notice and to limit an employee's entitlement to some other amount.
The law on termination clauses continues to evolve. It is highly recommended that employers consult with their employment lawyers before including a termination clause in an employment agreement.