Employment Contracts Series: Termination Provisions

One of the most important features of the employment relationship, which is often left out of an offer letter, are the terms and conditions upon which the employment relationship can be terminated.   The ESA establishes certain base requirements of notice of termination where an employee is being terminated without cause.  If there are no further terms in the written employment contract which establish the required notice of termination, a common law determination of notice will be required.   This post examines what can and should be addressed in a comprehensive termination clause.

The common law notice can be as low as the ESA requirement for notice, but it can also greatly exceed it.  The common law notice period will be increased when the employee has worked for the company for a number of years, is performing a skilled or technical job, or where factors exist which will make it more difficult for the employee in question to find a new job, such as where the employee is older or the job market is limited.  Common law notice liability should always be limited in the employment contract by specifically addressing how much notice will be required for the employer to terminate the employment contract.

Notice provisions are some of the most negotiated clauses in employment contracts.  Employees leaving long-term, stable employment will want additional security in the form of longer notice periods.  Some employers take the approach of keeping contractual notice provisions very minimal: either at ESA minimum levels or barely above.  Many of these employers actually provide more generous notice at the time of termination, however they can fall back upon the minimal notice in cases where they don’t quite have the requisite proof to terminate the employee for cause but, due to the conduct of the employee which led to termination, are not comfortable with an extended period of notice.  Some employees negotiate minimum notice periods of a set amount of months with additional notice accruing through time.  This approach is particularly common with employees leaving stable, long-term employment with another employer.

A popular way to limit employer exposure is through a “re-employment claw back”.  The principle of notice of termination is that an employee should be provided with a certain amount of time to locate a new job.  Notice is not intended to be a windfall for employees who locate new employment shortly into the notice period and are still paid the notice from the previous employer.  In fact, in the common law an employee may be found to be entitled to a certain amount of notice of termination but that notice is subject to a duty to mitigate losses through searching for alternate employment and, once alternate employment is located the requirement for the previous employer’s notice ceases.

By default, “notice” means just that: notice of the employer’s intention to terminate the employment relationship.  The legal assumption is that the employee will working during this notice period.  If the employer chooses, it can instruct the employee to not attend at work during the notice period, or it can pay out the financial consideration for the notice period in a lump sum.  This does not need to be spelled out in the employment contract but can be decided upon at the time of termination.

Another issue which can be addressed in a written employment contract is what will constitute “just cause” for dismissal without notice.  Under the common law, “just cause” is very difficult to establish.  An employment contract can establish that certain behaviour on the part of the employee will constitute just cause.  I will discuss termination for cause in a subsequent blog post.

Termination clauses should address the calculation of any bonuses or commissions which the employee is regularly entitled to during the employment period.  If employee entitlement to a bonus is regularly completely at the discretion of management of the company, then a termination clause can stipulate that no bonus is payable during the notice period.  If, however, bonus calculations are based on objective factors and the employee would have qualified for a bonus during the notice period, but for the fact that it was during the notice period, that bonus will be payable.  This is a factor to consider when structuring bonus provisions and is discussed in Employment Contracts 101: Compensation blog post.

Thought should be turned to whether a bonus will be payable for a period of entitlement prior to the notice period for which no bonus has yet been paid.  Consider, for example, a decision to terminate an employment contract in December of a given year.  The bonus calculation period for the employer is the calendar year, bonus decisions are made in January and paid out in February.  The employee’s entitlement to the bonus arises out of the year of employment for which the employee was actively employed.  The entitlement to that bonus will depend upon the wording of the bonus provisions in the contract as well as past practice of the employer regarding bonus awards.  A termination clause can address the past bonus entitlement if it fits with the rest of the employment contract.

Termination clauses should address the provision of benefits during the notice period.  The  ESA requires that all employer benefit contributions be paid during the ESA notice period.  Case law has recently dictated that benefits must also be extended during any additional notice period, whether it be contractual or based on common law entitlement.

Finally, any provision for notice which exceeds the employer ESA notice obligations should make payment of the additional notice conditional upon the employee executing a full and final release of all claims against the employer, including human rights claims.  If the employee chooses to not execute the release then the employee is entitled to only ESA minimum notice.