Legal Blog

Another Termination Clause Found to be Unenforceable

The long-awaited decision in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 has now been released and could have far-reaching implications for employers.

Facts

In April 2015, Wood’s employer, Fred Deeley Imports Ltd. (“Deeley”), sold its assets to Harley-Davidson and therefore gave notice to all its employees, effective May 1, 2015, that their employment would terminate on August 4, 2015. As at the date of termination, Wood was 48 years old and had been employed for 8 years and four months. In addition to being paid her salary and benefits for the 13 weeks of working notice, Wood was paid a lump sum amount equivalent to 8 weeks’ pay. Accordingly, Wood received a total of 21 weeks’ combined notice and pay in lieu thereof. During the 13 weeks’ working notice, Deeley also made the required contributions to Wood’s health and dental plan.

The day after she had commenced her employment, Wood signed an employment contract  (the “Contract”) containing a termination clause as follows:

“(The company) is entitled to terminate your employment at any time without cause by providing you with two 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.”

Following her termination Wood sued Deeley alleging that the Contract was unenforceable and that she was entitled to 12 months’ pay in lieu of notice. Wood brought a summary judgment motion that was dismissed. Wood then appealed the motion judge’s decision.

Issue

The main issue on appeal was whether the termination clause in issue contravened the Employment Standards Act (the “ESA”) and therefore was unenforceable. Although employers and employees can enter into an agreement regarding the applicable notice period on termination, such an agreement will only be enforceable if it complies with the minimum statutory requirements of the ESA.

Continuation of Benefits

Wood argued that the Contract did contravene the ESA because:

(i) it excluded Deeley’s statutory obligation to contribute to Wood’s benefit plans during the ESA notice period; and

(ii) it did not clearly satisfy Deeley’s statutory obligation to pay severance pay on termination.

Under the ESA, Deeley was required to pay Wood at least 8 weeks’ termination pay; to contribute to her benefit plans during the 8-week period; and to pay her severance pay equal to 8 and one-third weeks’ salary. Contracting out of even one of these statutory requirements would render the termination clause void and therefore unenforceable.

The Court began its analysis by setting out various considerations relevant to the interpretation and enforceability of a termination clause:

• Employees usually have less bargaining power than employers when employment agreements are made;
• Many employees are likely unfamiliar with the employment standards in the ESA and therefore may not seek to challenge unlawful termination clauses;
• The ESA is remedial legislation, intended to protect the interests of employees;
• Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA;
• A termination clause will rebut the presumption of reasonable notice only if its wording is clear; and
• Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee.

Although Deeley paid Wood significantly in excess of her ESA entitlement, the wording of the termination clause did not require it to do so. Indeed, the Court held that, on its plain wording, the clause excluded the employer’s obligation to continue her benefit contributions. The Court further rejected Deeley’s argument that the use of the word “pay” in the clause was broad enough to include both salary and benefits. The Court held that, although an employer and employee can contract out of common law reasonable notice, they must do so in clear and unambiguous terms. At best, the word “pay” was ambiguous and therefore the Court should adopt the interpretation most favourable to the employee.

The Court went on to find that the enforceability of a termination clause depends only on the wording of the clause itself and not on what the employer may have done on termination. An employer’s voluntary payment of additional benefits after the fact will not remedy an otherwise illegal and unenforceable termination clause.

The Court distinguished its earlier decision in Roden v Toronto Humane Society (2005), 202 OAC 351, on the basis that the clause under consideration in that case was drafted differently. In Roden the clause was silent on the issue of benefit continuation. By contrast, the Court found that the clause at issue in the Wood case excluded that obligation. Specifically, the payments that Deeley agreed to make were stated to be the only payments to which Wood was entitled and were stated to be inclusive of her entitlements under the ESA.

Severance Pay

Similarly the Court found that the clause as it related to severance pay was also unenforceable as it did not distinguish between notice of termination (or pay in lieu thereof) and severance pay. By combining its notice and severance obligations in the termination clause, the Court found that Deeley could have complied with the clause in one of three ways, only one of which would have clearly satisfied its ESA obligations. As a result, the termination clause was also unenforceable on the basis that it did not clearly satisfy Deeley’s obligation to pay Wood her statutory severance pay.

Takeaway

The decision clearly illustrates that the Court has chosen an approach to the interpretation of termination clauses that protects the rights of employees. Also significant is the Court’s conclusion that what an employer actually does on termination is irrelevant. The enforceability of a termination clause will be determined solely on the basis of the wording of the clause itself.

Written by Susanne Balpataky Susanne Balpataky is an experienced commercial litigator who has practiced at Speigel Nichols Fox LLP since joining the firm in 1991.