Ontario Court of Appeal Confirms Employment Termination Provision is Enforceable

Termination provisions are the most frequently litigated contractual clause within any employment agreement. This is because of the money that can be at stake.

Where successfully challenged as unenforceable, the affected individual usually stands to accrue a significantly increased severance entitlement. Conversely, a finding of this nature may set an unwanted precedent for the employer in question and result in substantial and unintended expense. Thus, parties end up in litigation as a result.

Most employers use termination provisions to limit liability and create certainty. The goal is to allow them to know, in advance, what is required should they end the relationship at some future date. The most common method of achieving this goal is to draft a provision that allows for the relationship to be terminated by providing only the minimum entitlements required by the Employment Standards Act, 2000 (the “ESA”).

While an employer cannot provide less than the ESA mandates, where there is no written enforceable termination provision in place, the courts will instead imply a “common law” obligation to provide reasonable notice of termination (or payment in lieu thereof).

Reasonable notice is assessed with reference to prior cases and four main factors (e.g. the employee’s age, their length of service, the type of role they held, and the likelihood of finding new comparable work). The common law regime is often more generous than the ESA and as such there is an incentive for dismissed employees to argue that their termination provision is inoperative to displace presumed common law rights.

By way of example, it is possible that the same 10-year employee is entitled to 8 weeks of pay under the ESA and yet has a common law right to receive 12 months’ compensation. This example highlights the potential gains at issue, and why these provisions are the frequent subject of dispute.

Lessons from Datastealth

As our firm noted in an earlier article, it can be challenging to draft a termination provision which successfully rebuts presumed common law rights. A number of recent decisions (see: Baker and Dufault) underline this reality. That said, the Court of Appeal for Ontario’s recent decision in Bertsch v. Datastealth Inc. offers guidance for employers in how to successfully draft a termination provision.

In Datastealth, the plaintiff was dismissed from his role as a Vice-President earning $300,000 per year after 8.5 months of service. The plaintiff had signed an employment contract which included language purporting to limit his termination entitlements to those minimally required by the ESA. He argued, however, that the provision in question was void and that, as a result, he had a common law right to receive 12 months’ pay in lieu of reasonable notice (rather than the 1 week mandated by the ESA).

The provision in dispute read as follows:

Termination of Employment by the Company: If your employment is terminated with or without cause, you will be provided with only the minimum payments and entitlements, if any, owed to you under the [ESA] and its Regulations,…including but not limited to outstanding wages, vacation pay, and any minimum entitlement to notice of termination (or termination pay), severance pay (if applicable) and benefit continuation.  You understand and agree that, in accordance with the ESA, there are circumstances in which you would have no entitlement to notice of termination, termination pay, severance pay or benefit continuation.

You understand and agree that compliance with the minimum requirements of the ESA satisfies any common law or contractual entitlement you may have to notice of termination of your employment, or pay in lieu thereof.  You further understand and agree that this provision shall apply to you throughout your employment with the Company, regardless of its duration or any changes to your position or compensation.

In considering the above provision, the Court of Appeal noted the plaintiff’s argument was essentially that the employer failed to properly reference its obligation to provide statutory amounts unless the employee “engaged in wilful misconduct, disobedience or wilful neglect of duty” and, as a result, the provision was unlawful.

The Court of Appeal rejected this argument and found the language in question to be clear and unambiguous, noting that:

The termination provision specifically states that an employee who is terminated “with or without cause” will receive the minimum payments and entitlements under the ESA and its regulations. We see no error in the motion judge’s conclusion that the termination provision in the employment agreement is unambiguous, and that, when reasonably interpreted, it does not depart from the minimum standards guaranteed by the ESA. As such, the termination provision is enforceable and precludes the appellant’s claim for common law damages for wrongful dismissal.

Takeaway for Employees and Employers

There are three main takeaways from the court’s decision in Datastealth.

First, it is possible to draft an enforceable termination provision to displace common law rights. This process may be challenging. It is thus critical, given the potential liability at play, to ensure that language is carefully written with the assistance of legal counsel. Where mishandled, the employer may find itself exposed to significant unintended liability.

Second, the law around termination provisions continues to evolve. A model clause drafted in 2020 may no longer be considered enforceable in light of shifts in the law. As such, employers would be best served to regularly review their employment agreements to ensure they remain fit for purpose.

Third, think carefully before proceeding to litigation with an all-or-nothing proposition. While there was a significant potential gain here, the risk of losing the argument that the common law applies may come with a hefty price tag – having to pay legal fees to pursue the matter and being ordered by the courts to contribute to the defendant’s legal costs.

Finally, this article is focused on the importance of careful drafting to ensuring enforceable contractual provisions. That said, an employer may have the best drafted document in the world; however, without proper implementation, it is meaningless. Employers need to give thought to how and when they issue employment contracts – ensuring the individual receives consideration and, in the case of a new worker, that the contract is signed and returned prior to starting work.

Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with a lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca.