Termination clauses may be the most litigated clause of employment agreements. Drafted correctly and updated regularly, termination packages can be limited to employment standards minimums. Drafted incorrectly or not regularly reviewed, and the employer relying on that clause is in for a costly surprise!
Because employment agreements, including termination clauses, are drafted by employers, any ambiguity or lack of clarity will be interpreted as a matter of law in favour of employees.
Why is this important? One of the most common misunderstandings about termination pay is the belief that as long as the termination package is in accordance with the Employment Standards Act, 2000 (“ESA“), employers have fulfilled their obligations with respect to termination pay under the law. That is not necessarily true. A good employment lawyer could prove that ESA terms are not enough because many termination clauses do not stand up in court. This can quadruple damages. What was 8 weeks termination pay could turn into 8 months.
In addition to an employers’ statutory obligations upon termination under the ESA, employers also have an obligation under the common law. Upon termination, the common law requires an employer to give employees sufficient common law reasonable notice or pay in lieu thereof. This is usually much higher than the minimum obligations under the ESA. A long-term employee may be owed up to 24 months of salary and benefits. There is no straightforward equation to calculate the amount owing under Common law. It is a case-by-case decision with multiple factors to be considered. As a result, its exact length or amount becomes another source of dispute upon termination.
This is where the termination clause comes into play.
The importance of the termination clause
Common law requires more than the minimum entitlements under the ESA, and it is less certain. However, a well-drafted employment agreement can set up a straightforward equation to calculate termination pay via the termination clause. It provides certainty that reduces the possibilities of dispute, and it may help the employer to reduce termination costs significantly. That is why an enforceable termination clause is important to employers. You want to pay 8 weeks, not 8 months or 24 months for a long-term employee.
Well drafted termination clauses limit employees’ entitlements under the common law. As employees are perceived as the weaker party in employment negotiations, judges have been scrutinizing termination clauses under a microscope. Vaguely written termination clauses could easily be nullified if they are inconsistent with the ESA. In many cases, this increases employee entitlements exponentially.
Termination clauses tested in the courts
One of the most recent examples where a termination clause did not hold up in court is the Waksdale decision. In this case, the court ruled that if the termination for cause provision is invalid, it will nullify the entire termination clause, including otherwise perfectly drafted termination without cause provisions. This shows any mistake made in the termination clause could jeopardize the entire clause and will cost employers unexpectedly upon termination.
The expenses upon termination may become even more unexpected when an employee has group benefits and other kinds of compensation in addition to salary, such as commissions, bonuses, incentive payments, options, deferred benefits sharing plans, or otherwise. If the termination clause is not properly drafted, employees will be entitled to those compensations or damages for those compensations, even if the employee is not actively employed during the notice period.
In a recent case, Rahman v. Cannon Design Architecture Inc., the judge decided that the employee was more sophisticated because they had the assistance of legal counsel while negotiating the employment contract. In this case, the court gave more leeway to the employer and enforced the termination clause. However, this decision is an outlier of the court’s long-standing position, and another judge has already refused to follow it.
Recent changes to note
We also remind you that the Ontario government passed Bill 27, Working for Workers Act, 2021 (Bill 27). Bill 27 outlines an employee’s “right to disconnect” and essentially prohibits the use of non-compete clauses in employment agreements with two limited exceptions. Employers will need to create “right to disconnect” policies. It is also necessary to review all post-termination restrictive covenants to ensure that they have enforceable provisions. This ensures protection of legitimate interests if the non-compete covenant is no longer enforceable.
If you need guidance from an experienced employment lawyer, call Hum Law today at (416)214-2329 or email info@thehumlawfirm.ca.
[…] The key takeaway for employers is that the best way to protect against costly wrongful dismissal claims is by reviewing and updating your employment agreements, or face the consequences. […]
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