The Ontario Court of Appeal just released another decision on the interpretation and enforceability of termination clauses – the latest chapter in a less-than-clear set of guidelines. Generally speaking, a properly drafted termination clause can be used to limit an employee’s entitlements on dismissal. To be enforceable, a termination clause must meet minimum statutory entitlements. Moreover, drafters must be mindful of how the clause interacts with common law entitlements. Until fairly recently, these principles have been interpreted as requiring termination provisions that specifically oust the common law right to reasonable notice, provide employees with continued benefits, and address entitlements to severance pay.
However, as explained in our earlier blog posts, here and here, the Court of Appeal’s recent decisions on termination clauses seem to be turning some of these principles on their heads. This week, in Nemeth v. Hatch Ltd., 2018 ONCA 7, the Ontario Court of Appeal (“Court”) clarified that termination clauses do not need to contain specific language to oust the common law, as long as the “intention to displace an employee’s common law notice rights can be readily gleaned from the language agreed to by the parties.” The Court also concluded that the termination provision’s silence on severance pay did not make it void and unenforceable.
The Court held that a termination clause does not need to explicitly state that an employee’s entitlement to common law reasonable notice is displaced – it is sufficient that the language clearly indicates an intention to displace the common law. Employers should nonetheless continue to be prudent in their drafting. Failing to use explicit language leaves the door open for differing views as to whether the language indicates the requisite intention. Employers must also avoid clauses that allow for alternate interpretations, as courts will resolve drafting ambiguities in the employee’s favour. Finally, while the Court’s decision in Nemeth suggests that silence on entitlements such as severance pay and benefits continuation may not always be fatal to a termination provision, it may still be wise to err on the side of inclusion. Obtaining legal advice is strongly recommended when drafting termination clauses.
Joseph Nemeth (“Nemeth”) appealed the dismissal of his claim for damages arising out of the termination of his employment without cause. Nemeth was employed by the respondent, Hatch Ltd., (“Hatch”) for over 19 years. On termination, Hatch provided Nemeth with 8 weeks’ notice of termination, paid him approximately 19 weeks’ salary as severance pay, and continued his benefits, including pension benefits, during the 8-week notice period. The termination provision in his employment agreement read:
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.
Nemeth argued that the motion judge had erred in finding that the contract excluded the right to claim common law reasonable notice, and that the termination clause was void, as it purported to contract out of the minimum statutory entitlement to severance pay. Alternatively, Nemeth claimed that he was entitled to 19 weeks’ notice in accordance with the termination provision.
The Court indicated that specific language contracting out of common law notice requirements is not necessary where the “intention to displace an employee’s common law notice rights can be readily gleaned from the language agreed to by the parties.” On the facts of the case, the Court found that there was no ambiguity and the parties intended and agreed to displace the common law notice entitlement.
The Court also rejected Nemeth’s argument that the clause was void under the Employment Standards Act (“ESA”). Where a termination provision is silent with respect to severance pay, this does not denote an intention to contract out of the ESA, and the statutory minimum standards remain in place. The Court referred to the comments in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, wherein Justice Laskin noted that the absence of language in a termination clause with respect to continued contributions to a benefit plan did not indicate an intention to exclude the obligation.
In assessing Nemeth’s alternative argument, the Court found that the termination provision was capable of two interpretations – one that gave Nemeth 9 weeks’ notice and one that gave him his minimum entitlements under the ESA. Given the ambiguity, Nemeth was entitled to receive 19 weeks’ notice of termination. There was no language in the clause restricting Nemeth’s entitlement to only the minimum notice required under the ESA. As a result, the effect of the clause was to recognize the ESA minimum of 4 weeks, and to then provide an additional “one week per year of service”. The Court noted that Hatch was free to draft the clause differently to convert the statutory floor into a ceiling.
– With thanks to Ben Sakamoto for his assistance with this article.