Those of us who spend time worrying about the enforceability of termination clauses in employment contracts have been making much of a 2011 Ontario Superior Court decision, Wright v. The Young and Rubicam Group of Companies (Wunderman). The ruling in the case which has the broadest application is that not only employment contracts which have terms which violate the requirements of the Employment Standards Act, 2000 (Ontario) (“ESA”) but also those which don’t, at the time of termination of the employment relationship, violate the terms of the ESA but have the potential to violate at some future date, will be found to be not binding.
This strikes fear into the hearts of those of us who draft employment agreements. In his decision, Justice Low tells us that he sees “no particular difficulty in fashioning a termination clause that does not violate either the minimum standards imposed by the Employment Standards Act the prohibition against waiving statutory minimum requirements…”
In Wright the employment contract provided notice beyond the statutory requirements of the ESA, for the most part. At the time of termination, the employee, a 5 year executive was entitled to 10 weeks notice under the ESA (5 weeks termination notice and 5 weeks severance). Under his contract of employment he was entitled to 13 weeks notice, and this is in fact what the employer paid to him. The problem arose if the employee was terminated at 8.5 years service, 9.5 years service, 10.5 service and 18.5 years service. In each of those cases the notice calculated in accordance with the contract would be short 0.5 week’s notice.
Despite the fact that the severance obligations might not even apply at the time of the theoretical future dated termination, Justice Low found that the effect of the termination provision in the contract was to violate the ESA, that the ESA prohibited the contracting out of the statutory minimums and for these reasons the provision was not enforceable.
Additionally, the contract contained language following the notice calculation which limited any additional payments:
“This payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.” (emphasis added)
Those of us who review and draft employment contracts can speculate as to the intent of this language, having seen many clauses drafted in a similar way. It is likely that the intent of the restrictive language was to ensure that the contractual entitlements were not in addition to ESA entitlements and also, likely, to limit entitlements to bonus and other incentives during the notice period.
However, Justice Low did not grant such a liberal interpretation of the contract, and found that it violated the ESA requirement to provide benefits during the notice period. He made it clear that any payments which were considered “wages” pursuant to the ESA were required during the notice period and that this clause precluded the payment of health and other benefits. In fact, the employer in this case did extend benefits during the notice period. However, Justice Low ruled that actual behaviour of the employer post-termination could not cure a faulty contractual term.
In light of the striking out of the termination clause in the contract, Justice Low found the reasonable notice period for this 49 year old, 5 year executive employee to be between 12 and 15 months. As the employee obtained alternate employment after 12 months, that was determined to be the actual reasonable notice period.
Here we have a case where the employer has gone to great lengths to draft a comprehensive termination clause to set notice beyond the statutory minimums and the termination provisions were struck out for potential violation of the ESA. Notice went from 3 months to 12 months.
The Wright case illustrates why drafters of employment contracts should use extreme caution and examine termination clauses very carefully. If you have employment contracts currently in place, they should be reviewed. If your employment contract attempts to limit notice to that required by the ESA, the language should be very carefully examined. Payments made during the notice period should specifically address vacation entitlements, benefits, bonus entitlements (if any), stock options, RRSP or other pension plans and any other entitlements.
In short, you should probably engage a human resources lawyer to review your contract language. If your contracts were drafted by legal counsel but are a few years old, now is the time to dig them out and have them reviewed and updated.