In Canada, if an employer wishes to terminate an employee without cause, it must provide notice or pay in lieu thereof. In other words, unlike in the United States, Canada does not have employment at-will. American businesses operating in Canada may find that Canadian employees whose employment has been terminated without cause will be entitled to no less than one month per year of service if a judge is left to decide an employee’s severance package. For this reason, employment contracts—and, specifically, the termination clauses in those contracts—are essential to controlling severance costs in Canada.
Two regimes govern the entitlement to notice of termination in Ontario: the Employment Standards Act, 2000 (ESA) and the common law (i.e., case law). If terminated without cause, an employee is presumed to be entitled to common law notice (or pay in lieu thereof), unless there is an enforceable termination provision in the employee’s contract of employment that ousts this presumption. While an employer cannot contract out of the ESA to provide less than what the legislation prescribes, an employer can contract out of the common law. It is often prudent to do so.
The common law notice period can be difficult to predict with precision, as it depends on a myriad of factors, and generally exceeds the minimum entitlements under the ESA by a large margin. As such, some employers seek to limit their obligations to terminated employees to the less costly and more predictable minimums under the ESA. (Of course, employers can use termination clauses that exceed the minimums under the ESA, but the focus of this article is on “ESA-only” type termination clauses.)
Limiting employees’ entitlement to the ESA minimums requires clear and precise drafting. The validity of such provisions in employment contracts has been litigated intensely in recent years. Unfortunately, the resulting case law does not clearly prescribe the precise language to be used by employers in every case, but it does identify some drafting pitfalls.
An effective “ESA-only” termination clause makes explicit reference to all types of entitlements that could possibly be owed to an employee under the ESA, and explicitly displaces any additional entitlements under the common law. Judges interpret these provisions carefully, resolving any ambiguity in favour of employees (because they were not the drafters).
A termination clause must not violate the ESA. If a termination clause is valid presently but has the potential of violating the ESA at some later date, it will be declared null and void from the outset. For example, an employee may not be entitled to statutory severance pay under the ESA because the employee was terminated after less than five years of employment. However, if the entitlement to statutory severance is not addressed in the termination clause, it could render the clause void, since the employee could have been entitled to statutory severance at some point in the future.
Judges are likely to scrutinize “ESA-only” termination clauses. Recently, the Ontario Court of Appeal (Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679) confirmed that courts are still quite unforgiving in their interpretations of termination clauses, stating that: “If a termination clause purports to contract out of an employment standard without clearly substituting a greater benefit in its place, the entire termination clause is void.”
Termination clauses, especially “ESA-only” type clauses, are an extremely useful tool in limiting liability to a dismissed employee in Ontario and the legal costs that are associated with litigating how many months the common law affords employees. However, employers may want to draft these clauses very carefully and review them periodically to ensure that they remain current with the law.
Does your company’s termination clause measure up?
- Does it specifically address all ESA entitlements, including employment standards that might not be applicable presently but could be applicable in the future? For example, well-defined termination clauses typically address mandatory benefits continuation during any statutory notice period even if the employee isn’t currently eligible to enroll in the company’s benefits plan because, for example, he or she is part-time.
- Does it use the word “only” (or words to that effect) correctly to make it clear that the employee has accepted that he or she will receive nothing more than what the ESA provides? It is not enough to merely say that an employee will receive ESA entitlements upon termination—that goes without saying—and it is therefore meaningless unless the termination clause clearly states (and repeats!) that is all the employee will receive.
- Does it clearly show an intention to contract out of the common law? Judges are likely to examine a termination clause to see whether it specifically mentions the words “common law.”
- Does it include “saving” language to express an intention to comply with the ESA in every way and at all times? Employers may want to consider stating in a termination clause that they intend to comply with the ESA even if (and when) it is amended in the future.
Enforceable termination clauses can save employers enormous amounts of time and money. However, employers may expect that judges will be even less forgiving of imprecision and ambiguity as termination clauses are increasingly scrutinized.