It has long been established that employees without a valid termination clause in a written employment agreement are entitled to “common law” reasonable notice of termination, or pay in lieu thereof.
Since common law principles will often result in lengthy notice periods for employees, well in excess of their minimum entitlement under the Employment Standards Act, 2000 (the “ESA”), many employers will attempt to limit their exposure by including termination clauses in their employment contracts.
These termination clauses will sometimes limit the employee to only the minimum amounts under the ESA, or sometimes provide a little more than the ESA minimum, but still less than the employee’s common law entitlement to reasonable notice.
While it is certainly possible to have an enforceable termination clause, the law in this area changes from time to time and courts have shown a willingness to strike down termination clauses, and thereby award pay in lieu of reasonable notice based upon common law principles to employees, wherever possible.
The court’s fairly recent decision in Stevens v. Sifton Properties Ltd. highlights this risk and reinforces the need for employers to have their employment agreements reviewed by counsel from time to time to ensure that their termination clause remains enforceable as the law evolves.
In Stevens v. Sifton Properties Ltd., the employer had a fairly common termination clause in its standard employment agreement which allowed for termination of employment upon payment of only ESA minimum notice (or pay in lieu of notice) and severance pay and also included language which said that the employee accepted those amounts in satisfaction of all claims against the employer.
This type of clause was previously thought to be enforceable, but the court in Stevens disagreed and found the clause unenforceable because it did not specifically mandate the continuation of benefits during the notice period, which is required by the ESA.
In the Stevens case, the employer actually continued the employee’s benefits. However, since the employment agreement did not specifically mandate the continuation of benefits, and included the clause which said that the employee accepted the payments set out in the agreement in full satisfaction of all claims, the court held that the employment contract violated the ESA (since the employer could have theoretically relied upon it and not continued benefits) and was, therefore, unenforceable.
As a result of this decision (and similar decisions in recent years) employees with these types of unenforceable termination clauses in their employment contracts will be entitled to reasonable common law notice instead of the ESA minimum amounts. Depending on an employee’s length of service and other factors, this can represent significantly increased liability for employers.
Given that the law in this area continues to evolve, employers are wise to review their standard employment contracts regularly and make changes as necessary to ensure that the termination provisions are enforceable.
© Morrison Brown Sosnovitch LLP, 2014 All rights reserved.