A recent decision of the Alberta Court of Appeal adds further confusion to the issue of the enforceability of termination clauses. In Holm v AGAT Laboratories Ltd, 2018 ABCA 23 (“Holm“), the Alberta Court of Appeal (“Court”) held that explicit language must be included in a termination clause to oust an employee’s common law rights. This decision runs directly contrary to Nemeth v. Hatch Ltd., 2018 ONCA 7 (“Nemeth“), wherein the Ontario Court of Appeal ruled 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.” We addressed the Nemeth decision in our recent blog post and Law Times interview.
These conflicting decisions bring more uncertainty to the law, and reinforce the need for jurisdiction-specific employment agreements. Additionally, read together, Holm and Nemeth serve as a reminder of the tendency of courts to interpret employment agreements, and employment law generally, in an employee-friendly manner.
The Holm decision reasserts the principle that contracting out of common law notice entitlements needs to be explicit. Using clear and unequivocal contractual language remains the best way to exclude an employee’s entitlement to common law reasonable notice. In particular, the wording describing the employee’s entitlements upon termination must not allow for alternate interpretations since such ambiguities will likely be resolved in the employee’s favour or render the clause void. In addition, employers should take care to identify where contractual language has been added for clarity since redundancies may otherwise be used against the drafter. Finally, employers operating in multiple jurisdictions will be best served by drafting their employment agreements to reflect not only differences in applicable employment standards, but also judicial rulings in the particular province.
AGAT Laboratories Ltd. (“AGAT”) appealed a chambers judge’s interpretation of its employment agreement with the plaintiff, Michael John Holm (“Holm”). Holm was seeking damages from his employer for wrongful dismissal. The key provision in the termination clause read:
2(2) In the event we wish to terminate your employment without just cause, we agree that we will give you notice of the termination of your employment, or at our absolute discretion, we will pay you, in lieu of such notice, a severance payment equal to the wages only that you would have received during the applicable notice period. This will be in accordance with the provincial legislation for the province of employment.
AGAT argued that the chambers judge had erred in holding that the employment agreement did not contain sufficiently restrictive language to limit Holm’s claim to the minimum notice requirements set out in Alberta’s Employment Standards Code (the “Act“). While the chambers judge found that Holm’s notice entitlement was limited to s. 2(2) above, the requirement that the notice period be “in accordance with the provincial legislation” did not set the statutory minimum notice period as a ceiling.
Interestingly, the chambers judge recognized that the employer may have intended to limit the employee’s entitlements to the statutory minimum but he refused to give effect to that intention. Rather, the chambers judge held that any ambiguity in the contract’s language should be interpreted in the employee’s favour since the employer had drafted the language.
The Court agreed with the chambers judge that the termination clause did not clearly restrict the applicable notice period to the statutory minimum set out in the Act. The Court stated that “an enforceable employment contract must contain clear and unambiguous language to extinguish, or limit, an employee’s common law rights”. In upholding the initial ruling, the Court took a deferential approach and found that there was no palpable and overriding error in the chambers judge’s interpretation of the termination clause.
The Court held that the use of “only” in s. 2(2) (“… equal to the wages only …”) did not serve to limit the notice entitlement, since it related to the calculation of Holm’s entitlement (i.e., wages only) and not the length of the notice period. Similarly, the sentence “This will be in accordance with the provincial legislation for the province of employment” failed to limit the notice entitlement, since the Act allows for greater common law rights and the legislative provision refers to “at least” a specified number of weeks. As a result, the statutory minimum entitlement is not the only situation that would be “in accordance” with the Act. As in the Ontario Court of Appeal’s decision in Nemeth, the Court found that the contractual wording established a floor in the form of the statutory minimum notice requirement. However, because the employer had failed to clearly establish a ceiling that would limit Holm’s termination entitlements, he was free to pursue his common law right to reasonable notice.
The Court also specifically noted that uncertainty in employment law ought to be resolved in favour of the employee and that, at best, the wording of the termination clause was ambiguous. The contra preferentum principle, commonly applied in the interpretation of employment agreements, supported the chambers judge’s interpretation of the agreement.
Finally, the Court confirmed that a specific provision must be read in the context of other relevant provisions in the agreement. The Court noted that three additional provisions in Holm’s employment contract were relevant in determining the meaning of s. 2(2). Two of the provisions confirmed that Holm was not entitled to any additional compensation, damages, pay in lieu of notice or further notice of termination upon termination without cause, other than what was provided by s. 2(2). The other provision confirmed that if the employment relationship was terminated for cause, but cause was not established, Holm would only receive the amounts set out in s. 2(2). Although the three additional provisions were likely added only to increase clarity and confirm the parties’ intention as stated in s. 2(2), the Court concluded that most of these provisions would have been redundant if the employer’s interpretation of s. 2(2) was accepted, thereby lending further support to the Court’s conclusion that s. 2(2) did not clearly limit Holm’s entitlement. This conclusion may have been avoided by the employer omitting the redundant provisions or simply indicating that they were included for the sake of clarity.
– With thanks to Ben Sakamoto for his assistance with this article.