Legal Blog

Clarity

Prudent employers enter into written employment agreements with each of their employees. These agreements set out the terms of employment. They deal with ongoing employment matters, such as vacations and sick days, as well as with termination issues. Smart employers try to ensure that their agreements are somewhat reasonable. Overreaching employers enter into employment agreements, which are either so one-sided or nasty that the courts go out of their way to strike them down as unenforceable. The dichotomy between smart and overreaching was demonstrated in Howard v. Benson Group Inc. (2016), 129 O.R. (3rd) 677 (C.A.)

 

Essence

A five-year employment contract had a provision stating that the employer could terminate the employee’s employment by paying an amount set out under the Employment Standards Act (E.S.A.). The motions judge held (at 2015 O.J. 2029) that this provision was too vague to be enforceable and that the contract should therefore be interpreted as if it were a contract for reasonable notice subject to mitigation. The Court of Appeal held that the motions judge’s interpretation was an extricable question of law and that, as a question of law, once the termination provision was set aside, the contract remained a contract for a five-year fixed term. The employer therefore had to pay the employee to the end of the term without benefit of mitigation.

Susanne Balpataky has written more fully, regarding the Court’s reasoning, in an article to be published in HR Professional, a publication of the Human Resources Professionals Association. Her article deals with the Court’s decision to quantify damages based on the full term of the employment contract.

Although the Court of Appeal reversed the motions judge regarding the consequences of his finding that the termination provision was unenforceable, the employee certainly did not appeal that finding and the employer did not cross-appeal it. The Court of Appeal therefore took it as a given. We now comment on the enforceability issue that was not before the Court.

Background

The termination clause read,

“8.1. Employment may be terminated at any time by the Employer [the defendant] and any amounts paid to the Employee [the plaintiff] shall be in accordance with the Employment Standards Act of Ontario.” (emphasis added)

We quickly summarise some important E.S.A. provisions:

Section 5 – parties cannot contract out of the E.S.A.
Section 54 – employers cannot terminate employment without giving written notice according to section 57 or complying with section 61.
Section 57 – notice of termination starts at one week if the employment length is between three months and one year and increases by one week per year thereafter to a maximum of 8 weeks.
Section 60 – during the section 57 notice period, the employer cannot reduce the wage rate or alter other employment terms and must pay the regular wages and make normal benefit plan contributions.
Section 61 – employers can terminate without notice or less than the requisite notice by paying a lump sum equal to the employee’s entitlement during the notice period.

In effect, the employer attempted to enable itself to break a five-year employment agreement and limit its damages to the amount that it was already obliged to pay by law. Not only is this amount far less than what is usually payable under common law for wrongful dismissal, it could be, and in this case was, miniscule in comparison to the monies due to the end of the term of the agreement. The employer wanted the benefits of a five-year contract with minimal obligations.

When an employer inserts an unreasonable termination provision and blows it by the employee at the start of the employment relationship because of an inequality of bargaining power, the employer should expect some push back from the courts if it attempts to enforce the provision. To be effective, the provision has to be drafted with absolute clarity.

Attack

The employee contended that the termination clause was ambiguous. He attacked each of the words “any amounts paid” as rendering the entire provision too ambiguous to be enforced.

• Does “any” mean that the employer retains a discretion to decide whether it will provide the employee with any payments upon dismissal of his employment? If so, this discretion would be contrary to the E.S.A.
• Does the payment of the “amounts” extinguish all of the employer’s termination obligations; are the payments in full satisfaction of the employer’s obligations arising out of statute, common law, or otherwise, including benefits and bonuses?
• Does “amounts paid” include the employee’s base salary as well as benefits or any bonuses or are they limited to base salary alone? If the latter option is true, this runs afoul of sections 60 and 61 of the E.S.A. in failing to maintain benefits and remuneration to the end of the notice period.

The employee relied on Dwyer v. Advanis Inc., [2009] O.J. No. 1956 (Ont. S.C.J.). The clause in the Dwyer case provided as follows:

“…should it be determined at any time that there is not a fit between your skills and the requirements of the job your employment with Advanis [the employer] will be terminated [i.e. without cause] and you will receive severance as determined by the applicable provincial employment standards act.[Emphasis added.]”

The judge in Dwyer concluded that

“…the clause is at least ambiguous as to whether it limits the Plaintiff’s entitlement to ‘the applicable Employment Standards Act’ and nothing more. Any ambiguity should be construed against the Defendant as the author of the document, particularly given the disparity in the bargaining position of the parties: para 36, in part”

and
“Therefore, I find the written Employment Contract does not oust or limit an implied term created by common law requiring “reasonable notice” for the termination of the Plaintiff’s employment.”: para 38.”

Finding

The motions judge rendered his decision by setting out the arguments of both counsel. Unfortunately, instead of setting out which arguments he preferred and why, he merely concluded that the termination clause was ambiguous. He said:

“58 I am persuaded that having regard to the context of the plaintiff’s employment with the defendant, the provisions of the Employment Contract as a whole subject to the provisions of the E.S.A. and the language used in clause (8.1) in particular do not support the proposition put forward by the defendant. I regard the language used in clause (8.1) to be sufficiently ambiguous as to the true extent of the plaintiff’s entitlement under the E.S.A. and in the result, that ambiguity must be construed against the defendant again having regard to the power imbalance that exists between an employer and employee as a matter of course. Although an employment contract in most instances, such as the present, is not a contract of adhesion in the same way a policy of insurance is a contract of adhesion, I am not prepared to find that the Employment Contract as a whole and clause (8.1) in particular operate to nullify, or detract from, an implied term under the common law requiring “reasonable notice” for the termination of the employment of the plaintiff.”

Moral

Do not overreach when drafting a termination clause for your employer clients. It could come back to haunt them – as happened to the employer in Benson.

Since all of you probably have one or more employees and therefore, of course, being prudent lawyers, all of you have employment contracts with them, do not overreach when drafting termination clauses in these contracts.

As an aside, the employer has applied for leave to appeal to the Supreme Court of Canada.

 

 

Image courtesy of Maryhere.

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.