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Termination Clauses In Employment Contracts: Getting it Right

The essential reason for a formal employment agreement is to provide some certainty about numerous issues that arise during and after the employment relationship. A prime example of uncertainty relating to an employment contract is how much compensation an employee is entitled to if and when the employee is terminated without cause.

 

An employee that has been terminated without cause may be entitled to two sources of compensation.

 

First, the employee is entitled to the payment and benefits required by the Employment Standards Act. An employee’s right to salary and benefits pursuant to the Act is readily ascertainable. The Employment Standards Act provides one week's notice for each full year of service up to a maximum of eight weeks, or salary and benefits in lieu of notice.

 

The Act also provides an employee with five or more years of service to severance if the employer has an annual payroll of 2.5 million or more. Severance is one week's salary for each year and partial year of service up to a maximum of twenty–six weeks.

 

Second, the common law requires an employer to provide an employee with "reasonable notice" in advance of their termination. An employer who terminates an employee without cause, and without giving the employee reasonable advance notice, must pay the employee salary and benefits in lieu of notice. The problem is that the amount of notice to which an employee is entitled is unpredictable. Judge's ruling on such cases consider a variety of factors and their decisions seem to vary widely. For example, the amount of common law notice awarded to a three year employee at a trial can range between two and twelve months, depending on the circumstances and the judge.

 

Section 5 of the Employment Standards Act provides that an employee cannot contract out of their rights pursuant to the Act. Section 5 of the Act provides that any clause in an employment contract that reduces or eliminates an employee's rights under the Act is null and void:

 

No contracting out

 

5. (1) Subject to subsection (2), no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.

 

On the other hand, an employee can contract out of their right to common law damages. Employers can craft termination clauses in their written employment contracts that reduce or eliminate an employee's entitlement to common law damages if the employee is terminated without cause. However, such termination clauses are closely scrutinized by the Courts. As illustrated in Stevens v Sifton Properties Ltd, a poorly drafted termination clause may not be enforceable.

 

Stevens v Sifton Properties Ltd is a 2012 decision of the Ontario Superior Court of Justice. The issue in the case was the enforceability of the termination clause in the employee’s employment contract. The termination clause provided as follows:

 

13. With respect to termination of employment, the following terms and conditions will apply:

 

(a) The Corporation may terminate your employment for what it considers to be just cause without notice or payment in lieu of notice;

 

(b) The Corporation may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice, and/or severance pay, in accordance with the Employment Standards Act of Ontario.

 

(c) You agree to accept the notice or payment in lieu of notice and/or severance pay referenced in paragraph 13(b) herein, in satisfaction of all claims and demands against the Corporation which may arise out of statute or common law with respect to the termination of your employment with the Corporation.

 

The Court found that the termination clause was void pursuant to section 5 of the Employment Standards Act because, based on the strict wording of the clause, it eliminated any requirement on the employer to provide benefits in accordance with the Act. The employee was entitled to common law damages in addition to compensation pursuant to the Employment Standards Act since the termination clause was held to be void.

 

The information contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. Readers are advised to seek specific legal advice in relation to any decision or course of action contemplated.

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