Audit, Compliance and Risk Blog

Employment Contracts and Employee Termination Rights

Posted by Jon Elliott on Tue, Nov 27, 2018

Empty cubicleThe Canada Labour Code and provincial employment standards acts generally specify a minimum notice period before such terminations (the “statutory notice period”), and generally allow the employer to pay compensation to the employee instead of giving the employee notice. (e.g., CLC ss. 54-67) This compensation is usually called “severance pay”; it replaces advance notice of termination. In general, the severance pay must equal the salary and benefits that the employee would have earned if permitted to work until the end of the notice period. Courts interpret and defend these prohibitions against “contracting out” termination benefits.

An employment contract may specify the terms for termination notices and/or severance payments (including those offered in lieu of notice). But how should these clauses be written? Recent decisions remind employers that any ambiguities should not even appear to contract out a terminated employee’s termination benefits.

Recent Court Guidance

In May 2018, In Burton v. Aronovitch McCauley Rollo LLP, the Ontario Superior Court of Justice interpreted a termination without cause clause between a law firm and one of its legal assistants (2018 ONSC 3018). In consideration of her 12 years with the firm, it applied Ontario Employment Standards Act (OESA) criteria and paid her $39,372.92, covering:

  • $10,000 representing the plaintiff’s bonus for 2014.

  • $10,769.24 for eight (8) weeks of termination pay in lieu of notice.

  • $16,557.51 for twelve and a third (12.33) weeks of severance pay.

  • $2045.97 for unused vacation pay for 2015, plus four percent (4%) of termination pay (in accordance with the requirements of the Act).

The firm also continued to pay her employment benefits, ultimately until January 2016. After her termination, Althea Burton sued her former employer claiming that the termination clause was void and legally unenforceable since it appeared to abridge her legal right to receive benefit plan contributions from the employer during the notice period. She sought additional common law-based payments, including 14 months’ salary, plus over $40,000 in other expenses and compensation.

As quoted by the court, Clause H, entitled “Termination by AMR Without Cause” (the “Termination Clause”), provided as follows:

“(a) AMR may, at its sole discretion, terminate your employment without cause (a “Non-Cause Termination”). In the event of a Non-Cause Termination, AMR shall provide you with severance pay in accordance with the Employment Standards Act, as amended, and any successor legislation, if so required as at the time of a Non- Cause Termination; and 

“(b) Notwithstanding the foregoing, and for greater certainty, if the amounts which you would receive upon a Non-Cause Termination, as set out above, are less than the amounts to which you would be entitled under the Employment Standards Act, as amended or any successor legislation, then you shall be entitled to notice, severance pay, and any other payment required by the relevant legislation in force as at the time of the termination.”

As parsed by the court, this dispute came down to whether the words “severance pay in accordance with the Employment Standards Act” can reasonably interpreted to include the OESA’s requirement for continuation of benefit contributions. The court decided it does, since the language does not attempt to “contract out” the benefit requirement, and rejected Buron’s claim. In doing so, the court contrasted this clause’s language with one from a 2017 case (Wood v. Fred Deeley Imports Ltd. (2017 ONCA 158), which read:

“[The Company] is entitled to terminate your employment at any time without cause by providing you with the 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph… The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.”

The clause in Wood explicitly attempted to restrict payment to the pay it mentioned, and therefore was interpreted, as an attempt to contract out the other benefit payments.

What To Make Of This?

This recent decision, and its contrast with the 2017 decision, both point to employer flexibility in drafting termination clauses. It appears that employers, at least in Ontario, can cite their intention to comply with Employment Standards Act requirements, and do not need to provide an exhaustive list of all those requirements. Since requirements are subject to change over time, this flexibility seems to me to be, not just welcome, but appropriate. For further information on the requirements and restrictions associated with employment contracts—and particularly with terminations—see Canadian Directors’ Liability, Chapter 2, “Liabilities Relating to Employment Law,” Section 2, Subsection 2.3 “Wrongful Dismissal and Termination Pay.”

Specialty Technical Publishers (STP) has just published an update to its publication Directors' Liability in Canada and provides a variety of single-law and multi-law services, intended to facilitate clients’ understanding of and compliance with requirements. These include:

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About The Author

Jon F. Elliott Esq., MPP, JD, is the author of over a dozen books and many articles, and has worked in public agencies, non-profit groups, and private businesses. He has an engineering degree from Princeton and his public policy graduate degree (MPP) and law degree (JD) are from the University of California, Berkeley. For over 20 years he has been the primary author of STP’s Directors’ and Officers’ Liability publication, analyzing and explaining common law, statutory and regulatory provisions in the U.S. For more than 10 years, he has also contributed extensively regarding Canadian requirements. See www.stpub.com for a full bio of Jon Elliott.

 

 

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Tags: Business & Legal, Employee Rights, Employer Best Practices, directors & officers, directors, Canadian