October 04, 2017

Changing Tides: Enforcement of Termination Provisions

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From the employer’s perspective, one of the most beneficial terms in an employment contract is a prescribed notice period in the event of a “without cause” termination. Parties to an employment contract are free to contract out of the implied obligation of reasonable notice in favor of a  “statutory minimum” notice period, provided the contractual wording is clear and does not offend employment standards legislation.

However, in recent years, Canadian courts have been unsettled on the necessary requirements of termination clauses which attempt to limit the notice period to the “statutory minimums”. In various decisions, such clauses were found to be unenforceable because of ambiguity or due to a lack of express language providing that the minimum statutory terms apply (with respect to notice periods, continuation of benefits, etc.).  However, a recent case from the Ontario Superior Court of Justice, in Farah v EODC Inc., 2017 ONSC 3948, is a welcome sign to employers that a reasonably well drafted clause limiting the notice period, will be upheld.

Facts

The Employee, Mr. Farah, was employed by the Company, EODC Inc., on a series of employment contracts over a period of more than six years.  During his employment, he signed five employment contracts with the Company and received a salary increase after signing each contract.  Each of the five employment contracts contained a contractual clause that intended to replace the Employee’s right to common law notice upon termination, with the statutory minimums, under Ontario’s employment standards legislation, the Employment Standards Act, 2000, S.O. 2000, c. 41 (the “ESA”). The relevant provision read as follows:

‘At any time, following the conclusion of the Probationary Period, the Employer may terminate the Employee without just cause simply upon providing him/her with the entitlements prescribed in the Employment Standards Act, 2000 (“the Act”) or any amendments thereto. The Employee hereby acknowledges that he/she had the opportunity to review the relevant portions of the Act and/or to consult with legal counsel about their impact on his/her current entitlements upon termination of his/her employment.”

Upon termination, the Company offered to pay Mr. Farah 6 weeks’ termination pay and 6.42 weeks’ severance pay1 as required under the ESA, plus one additional week’s notice in exchange for his execution of a full and final release.  Mr. Farah rejected the offer and brought an application for damages for wrongful dismissal.

At trial, Mr. Farah sought a declaration that the contract was unenforceable due to ambiguities in its language, specifically:

  1. the length of the probationary period was not defined; and,
  2. the phrase “with the entitlements prescribed in the Employment Standards Act, 2000,” failed to rebut the common law presumption of termination only upon the provision of reasonable notice.

Decision

With respect to the first argument, the Court found that the term “Probationary Period”, while undefined in the fifth employment contract, was unambiguous when read in the context of the employment relationship and how it was defined in the fourth employment contract.

Turning to the second argument, the Court found that Mr. Farah’s contract clearly outlined that the Company would provide notice as set out in the ESA.  There was no duty to spell out to Mr. Farah his entitlements specifically. The reference to “with the entitlements prescribed in the Employment Standards Act”, was sufficient and determined to be clear and unambiguous. Thus, the termination clause successfully rebutted the common law presumption of reasonable notice.

The Court also rejected the argument that the contract was void for lack of consideration. In exchange for signing the new contract, the Employee received a 2% pay increase following signing of the contract. This was held to be sufficient.

Lessons to Employers

The good news for employers is that the approach taken by the Ontario Court signals a continued shift away from the technical interpretation of termination provisions used in previous cases (see: Dodich v. Leisure Care Canada, 2006 BCSC 93, 47 C.C.E.L. (3d) 206 (B.C. S.C.). This decision also falls on the heels of the Ontario Court of Appeal’s decision in Oudin v. Centre Francophone de Toronto, Inc., 2016 ONCA 514 (leave to appeal to SCC refused) which confirms that contractual interpretation requires a consideration of the objective intentions of the parties. 

Although employers need to be diligent in drafting clear and unambiguous employment contracts and should seek legal advice on appropriate wording, this decision suggests that the first step in the analysis will be to determine the parties’ intentions and ascertain a true and fair construction of the contract.

Finally, this decision is a good reminder to employers to include a provision confirming that the employee was given an opportunity to review the employment contract with a lawyer.  In this case, the contract contemplated an opportunity to obtain legal advice and the court found that there was no evidence to suggest that Mr. Farah was prevented from dealing with a lawyer.


1 Termination notice or pay is required under PEI’s Employment Standards Act, however, “severance pay” is not.

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Changing Tides: Enforcement of Termination Provisions

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