Employment Contracts Saving Clause in Wrongful Dismissal Claim

As employment lawyers in Ontario, we are regularly called upon to review employment contracts. Oftentimes, employment lawyers assisting with looking over an employment contract in the context of negotiating its terms (especially severance pay) before an employee begins their new job, while at other times, it occurs in the context of a wrongful dismissal claim or negotiating a severance package.

One of the typical disputes involves whether a termination clause in an employment contract is legally valid and enforceable. In short, a termination clause is a paragraph in an employment contract that establishes both an employer and employee’s rights, obligations and expectations at the time the employment relationship is terminated. Specifically, it informs an employee exactly what they can expect in the form of a potential severance package, such as whether they are limited to the receiving only the minimum amount of notice of termination (or termination pay in lieu of notice) required by the Ontario Employment Standards Act, 2000 (“Employment Standards Act“). Otherwise, without a termination clause limiting a wrongfully dismissed employee’s entitlements, that employee could otherwise ask for more notice or more payment in lieu of notice based on the common law (typically much more than the minimum termination pay or severance pay under the Employment Standards Act.

From the employer’s side, it nearly always benefits employers to limit what employees can claim when their employment is terminated without cause. So, by including a termination clause, the employment contract can prevent employees from claiming large sums and can save an employer significantly expenses in the context of a wrongful dismissal.

However, not all termination clauses are legally enforceable, usually as a result of improper language that violates the legal rules under the ESA. In other words, the mere fact that a termination clause is included in a signed employment contract does not mean it will automatically be something employers can rely on to limit an employee’s severance package entitlements.

When will a court find that an employment contract termination clause is illegal? Typically, one of the important ways would be for a wrongfully dismissed employee (through an experienced employment lawyer) demonstrating that the termination clause is vague and ambiguous (i.e., difficult to understand what it means), or limits the rights of an employee below the minimum standards required by the Employment Standards Act, the courts will usually find that the clause void and unenforceable.

In defending a wrongful dismissal claim, employers will often rely on a section of a termination clause called a “savings clause” (or “failsafe provision”), which employers use as a sort of last ditch effort to convince courts that the employer’s aim is to always comply with its legal requirements under the Employment Standards Act (which is rarely ever persuasive). Put simply, a savings clause states that an employee will receive their minimums standards under all circumstances, which is used to “save” an employment contract from being deemed legally unenforceable.

In many cases, Ontario courts have found that these saving provisions will not necessarily cure other provisions that are deemed legally unenforceable in an employment contract, particularly the termination clause that is usually in dispute in a wrongful dismissal case.

Rossman v. Canadian Solar Systems

For instance, in Rossman v. Canadian Solar Solutions, the employment contract had a clause that stated, “benefits will cease 4 weeks from the written notice”, which could violate the Employment Standards Act had the employee ultimately worked long enough to be entitled to more than four weeks’ notice. In its defence, the employer argued that the potential violation of the Employment Standards Act was remedied by a saving provision in the contract which stated:

“In the event the minimum statutory requirements as at the date of termination provide for any greater right or benefit than that provided in this agreement, such statutory requirements will replace the notice or payments in lieu of notice contemplated under this agreement. The Employee agrees to accept the notice or pay in lieu of notice as set out in this paragraph as full and final settlement of all amounts owing by the Employer on termination, including any payment in lieu of notice of termination, entitlement of the Employee under any applicable statute and any rights which the Employee may have at common law, and the Employee thereby waives any claim to any other payment or benefits from the Employer. Benefits shall cease 4 weeks from the written notice.”

In this case (like in another one called Waksdale v. Sweden North America), the Ontario Court of Appeal found that the saving provision could not remedy (save) the termination clause language covering the issue of when health benefits would cease for the following reasons:

the language of the employment contract was vague and ambiguous because it was unclear whether the saving provision also applied to the limitation on health benefits, since that language was placed after the reference to the section of the paragraph that said it was a “full and final settlement of all amounts owed”.
saving provisions in termination clauses cannot save employers who attempt to contract out of the Employment Standards Act’s minimum standards.
the Court was concerned with employers who might to take advantage of the unequal bargaining power in contract negotiations and try to slip in illegal provisions include illegal clauses knowing that most employees would not challenge them.

Campbell-Givons v. Humber River Hospital

In another recent case called Campbell-Givons v. Humber River Hospital, the court found that the just cause section of the termination clause in the employment contract was legally unenforceable as it violated the Employment Standards Act. As we have seen, employment contracts that allow for the termination of employees for “just cause” have frequently been found unenforceable (see here) for violating the Employment Standards Act, which requires a higher standard of misconduct on behalf of an employee than the “just cause” standard implies.

Specifically, the courts have found that when it comes to a termination clause, the circumstances in which employers are able to terminate employees without notice under the Employment Standards Act are much narrower than the common law standard of just cause would permit. Under the broader common law standard, a wide range of employee misconduct may disentitle them from reasonable notice under common law, yet the same conduct is typically not enough to deny them of their entitlements under the Employment Standards Act (i.e., severance package). This is precisely the reason a “just cause” termination clause is illegal as a violation of Ontario employment law.

In this case, the employer attempted to save their termination clause from being found unenforceable by pointing to the following language contained within:

“At all times the Employee will receive all employment standards entitlements owing to her in accordance with the Ontario Employment Standards Act, 2000.”

As such, the employer argued that this saving clause provided the employee with a “guarantee” in the termination clause that she would always and inevitably receive their ESA entitlements. However, the Court rejected this argument. Among other things, it highlighted the risk that employers could unfairly attempt to indirectly violate their legal obligations by sneaking in language simply to make it appear they are complying with Ontario employment law:

“Implicit in that guidance, and brought to bear in the numerous cases that have refused to enforce termination clauses that contain any provision that violates the ESA, is the notion that, given the power and knowledge imbalance between employers and employees, there is a risk that an employer might “slip in” to an employment agreement a provision or provisions known to be beyond the narrow parameters of O. Reg. 288/01 of the ESA. That employer might hope or even expect that the employee will not be aware of the contents of that regulation. As others have noted, the mischief of a “saving” clause is that in the face of such a clause an employee might conclude that the offending provisions must be in keeping with the ESA requirements.

Tan v. Stostac Inc., 2023 ONSC 2121

In this case, the court was asked to determine whether an employment contract termination clause was legally unenforceable.

“The Employer may end the employment relationship at any time without advanced notice and without pay in lieu of such notice for any just cause recognized at law.

The provisions of the Ontario Employment Standards Act, 2000, as they may from time to time be amended, are deemed to be incorporated herein and shall prevail if greater.”

In finding that the termination clause was illegal, the court stated the following:

[11] In my view, the termination clause in this case suffers from the same flaw identified in the line of cases cited above by giving the defendant the right to terminate the plaintiff’s employment without notice or payment for just cause that might fall short of non-trivial willful misconduct. I do not accept that the attempt to incorporate the ESA’s provisions in the final sentence of the clause’s “without cause” portion detracts from the clear assertion of a right to terminate without notice for any just cause.

As the above discussion should make clear, employers should be cautions when having employees sign employment contracts by ensuring they are taking the time to properly draft and review their employment contracts with an experienced employment lawyer. Among other benefits, this will help minimize the risk of having a court set aside (cancel) the employment contract altogether in a wrongful dismissal claim, entitling the employee to an expensive financial severance package.

In several cases, the courts have repeatedly found that that illegality in termination language found anywhere in an employment contract cannot be “saved” (or ignored by a court to deem it legal). Most importantly, an employer cannot take solace simply on the fact that the employment contract contains a “saving clause” declaring an employer’s intention to “always” comply with its legal obligations under the Employment Standards Act.

Put simply, the courts have been clear that all termination-related language in an employment contract must be legal and comply with the Employment Standards Act. It is unacceptable for employers to write out an termination clause in an employment contact that on plain reading is illegal, and then give themselves a second kick at the can by throwing in a caveat: “we will always comply with the ESA” or “you will always be paid the minimum requirements of the ESA“. Why?

As the Ontario Court of Appeal has often emphasized, employers enjoy a significant power imbalance over employees, making them far more likely to have knowledge and awareness of legal requires under the Employment Standards Act:

“A termination clause will rebut the presumption of reasonable notice only if its wording is clear. Employees should know at the beginning of their employment what their entitlement will be at the end of their employment.”

As the Court similarly stated in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158:

“allowing employers to rely on their conduct at the time of termination of employment would also be inconsistent with one of the important considerations governing the interpretation of termination clauses: these clauses should be interpreted in a way that encourages employers to draft agreements to comply with the ESA. If employers can always remedy illegal [page494] termination clauses by making payments to employees on termination of employment, then employers will have little incentive to draft legal and enforceable termination clauses at the beginning of the employment relationship.”

Employment Lawyer in Toronto

If you are an employee who believes you have been wrongfully dismissed, please speak with our experienced employment lawyer in Toronto regarding your options, including negotiating your severance package to obtain the severance compensation you deserve, as well as wrongful dismissal claim.

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