One of the most important clauses in any employment contract is the Termination Clause. This provision sets out the terms under which both parties may end the employment relationship at some unspecified future point in time.
As an employer, failing to include a provision of this kind can significantly increase your exposure to liability. Specifically, you lose the opportunity to limit the amount of severance an employee can seek upon termination. The absence of an enforceable termination provision results in the dismissed employee being entitled to 'reasonable notice' of termination.
Reasonable notice of termination is assessed based on the person's age, length of service, the type of job he/she did, and the availability of comparable positions in the local market. Other factors may also be taken into consideration. As a rule of thumb, reasonable notice will almost always be significantly more than the amount that an employer can legally provide for with an enforceable termination provision. For an in-depth review of this dichotomy, read our article onSeverance Packages.
The recent case of Garreton v. Complete Innovations Inc. provides a useful reminder of the requirements of a binding termination clause, and the cost for employers who fail to implement them.
Ms. Garreton was employed as a trainer by Complete Innovations ("CI") pursuant to a written employment agreement for just over two years. She was fired for cause after grabbing a colleague by the wrist for trying to take a bagel during a training seminar. At the time of termination, Ms. Garreton was 43 years old and earning an annual salary of approximately $63,000.00.
The Divisional Court ruled that CI did not have just cause to dismiss Ms. Garreton and further found that the termination provision was unenforceable, thus entitling her to reasonable notice.
In reaching this conclusion, the Court accepted Ms. Garreton's argument that the termination provision was rendered unenforceable because it "potentially" violated the minimum requirements of the Ontario Employment Standards Act, 2000 ("ESA").
Justice Patillo determined that the termination provision in question failed to make appropriate provision for the payment of statutory severance pay (a requirement of the ESA for those in the appropriate workplace with at least 5 years' service). Thus, while Ms. Garreton was not entitled to receive severance pay given her length of tenure, the termination provision would have been unenforceable for a CI employee with 5 or more years of service.
Thus, Justice Patillo asked if "the termination clause is therefore void and unenforceable for a CI employee of more than 5 years, is it so for Garreton who was an employee of less than 3 years?"
In answering this question in the affirmative, Justice Patillo disagreed with the verdict reached in the earlier case of Ford v. Keegan that an employment contract is valid if it "conforms[s] to the provincial employment standards legislation for the particular employee, in the particular circumstances."
Justice Patillo instead stated that:
"The employment contract must be considered at the time it is executed. If the termination provision is not onside with notice provisions and severance provisions (if applicable) of the Act at the outset, then it is void and unenforceable. Potential violation in the future is sufficient."
In light of Garreton, employers are best advised to ensure that they have in place a termination clause that will comply in all circumstances with the requirements of the ESA. The risk of a hypothetical breach is sufficient to render a termination clause unenforceable.