Over the past several years, numerous court decisions in Ontario have helped shed light on (although some would say confound) the issue of what it takes to uphold a termination clause in an employment contract. Slowly but surely, the courts have poked holes in the ability of employers to establish the circumstances in which they could terminate an employee’s job by minimizing (or completely removing) their right to receive termination pay, severance pay and benefits continuance. As a result, the ability of employment lawyers to predict whether a termination clause in an employment agreement (or employment contract) would be found legally valid and enforceable has become, simply put, more of a “shot in the dark” or “moving target.”
The recent case of Perretta v. Rand A Technology Corporation is the latest in a salvo of decisions that only adds to the ongoing uncertainty regarding termination clauses in employment contracts.
But first, a quick discussion of some building blocks for understanding the topic at hand – termination clauses.
What is a Termination Clause in an Employment Contract?
A termination clause is a section (either one or a few paragraphs) in an employment contract that attempts to limit the employer’s financial obligations when terminating their employment without cause. So, if the employment relationship comes to a point where the employer decides to terminate the employee’s job, the termination clause becomes crucial, as it will dictate the employee’s entitlements and the employer’s responsibilities (i.e., financial severance pay entitlements). In other words, the employer will attempt to rely on a termination clause to reduce the financial cost of firing an employee from their job.
What happens if an employer cannot rely on a legally valid and enforceable termination clause?
The short answer is: the employee is protected by a common law rule requiring the employer to provide the employee with prior reasonable “notice of termination” (or pay in lieu of notice). What this means is that the employer must advise the employer of their last day of work before their employment officially comes to an end. During this time period, the employee continues to work their regular hours and perform their regular duties at the same rate of pay until their last day of work.
How much prior reasonable notice (or pay in lieu of notice) is the employer required to provide when terminating an employee’s job?
When determining an employee’s entitlements under common law, the courts will consider various objective factors that impact the employee’s ability to replace their lost job, including the employee’s age, salary, length of service, compensation and, of course, whether they have an employment contract establishing their termination entitlements.
What makes an employment contract termination clause legally invalid and unenforceable? There are various reasons why a court will refuse to recognize a termination clause to limit an employer’s financial severance pay obligations to an employee, with a primary reason being a violation of the Ontario Employment Standards Act, 2000 (i.e., a failure to follow the minimum standards)
Perretta v. Rand A Technology Corporation
In Perreta, the Ontario Superior Court of Justice held that an employer’s behaviour at the time it carries out the termination of employment – that is, whether it complies with its basic contractual obligations to the employee under the employment contract – will influence a court’s determination of whether the employment contract is legally valid and enforceable in a wrongful dismissal claim.
If you are an employer or employee with a termination clause in an employment contract that attempts to minimize severance pay entitlements, read on. In this blog, we discuss why the Court refused to enforce an employment contract termination clause.
What Happened?
In this case, the employee worked as customer sales representative and had previously signed an employment contract. As with many employment contracts, it said that the employer could terminate her employment without cause, but only if it paid her 2 weeks of notice (or pay in lieu of notice), plus the minimum notice or pay in lieu of notice, benefits and severance pay required by the Employment Standards Act, 2000 (“ESA“). In other words, the employer had a contractual obligation (i.e., it was legally required) to provide the employee with at least 2 weeks of weeks of pay plus her minimum statutory entitlements under the ESA, which depend on her years of service.
After 5.5 years of service, the employer terminated the employee’s employment that same day by providing her with a termination letter. As often occurs in employment disputes, the employer asked the employee to sign a legal release. However, the problem in this case was that the employer refused to provide the employee with her 2 weeks of pay (on top of her minimum statutory entitlements under the ESA) unless she agreed to sign the legal release.
After some severance package negotiations between employment lawyers, the employer eventually apologized for not following its contractual obligation to provide the employee’s full severance pay entitlements with the agreed-upon 2 weeks’ termination pay – and then provided her with the payments required by the employment contract. However, the employee sued the employer for wrongful dismissal, and sought damages for wrongful dismissal (pay in lieu of reasonable notice under common law). In support of her claim, the employee argued:
- the employer could not rely on the employment contract (and its termination clause), due to its repudiation by failing to follow its contractual obligations
- the termination clause in the employment contract is unlawful and unenforceable as it violates the ESA.
What Did the Court Decide?
In its decision, the Court agreed with both of the employee’s arguments.
First, the Court found that the employer’s refusal in the termination letter (and during severance package negotiations) to provide the employee with 2 weeks of termination pay (in addition to entitlements provided under Ontario employment law) unless she signed a legal release constitutes a repudiation (or intention that will not follow the terms of the employment contract). As such, the employee was entitled her to treat the employment relationship as at an end and sue for wrongful dismissal. Most importantly, the employer’s repudiation also meant the employer was unable to rely on the employment contract’s termination clause to limit the employee’s entitlements.
Second, the Court held that even if the employer had not repudiated the employment contract, it would still refuse to enforce the employment contract anyway, because the termination “with cause” section violated the ESA. Why? Because it listed several circumstances in which the employer could terminate the employee’s employment without providing her with notice of termination (or termination pay), severance pay and benefits continuation that fell below the standard set by the ESA – that is, only if the employee is “guilty of wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer.” Further, the Court refused to apply the “saving provision” of the employment contract (“subject to the ESA”) to avoid invalidating the entire termination clause (instead of only the offending parts).
Take-Home Lessons:
1. Employers should have experienced employment lawyers draft employment contracts, especially termination clauses, to ensure full legal compliance with the ever-changing Ontario employment law.
2. If your employment contract requires paying the employee only their minimum ESA entitlements, plus an additional amount, it is important to ask the employee to sign a legal release and indemnity for only that additional amount.
3. This case emphasizes once again (as was the case in Wood v. Fred Deeley Imports) that an employer cannot rectify an unlawful employment contract, or a repudiation (failure to follow its contractual obligations) with post-termination conduct, as Ontario courts remain unsympathetic to employers who repudiate employment contracts, even if they do so unintentionally or by mistake. As the Court noted:
“If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship.” Similarly, if the only consequence to Rand for its imposition of new demands at the time of termination that deprived its employee of the benefit of the contract is to apologize and pay the amount that it was lawfully required to pay, there would be little or no incentive to comply with its termination provision.”
4. Finally, the Court focused on the fact that the employee’s employment was terminated in the wake of the COVID-19 pandemic, which was a time of increased vulnerability and economic uncertainty. As it also noted:
“Ms. Perretta’s employment was terminated at the onset of a pandemic. She was denied the monetary benefit owed to her at the time of employment termination and was put to the expense of retaining a lawyer to identify Rand’s breach of contract. But for Ms. Perretta taking this step, it is likely that the unlawful demands made by the Defendant would have gone undetected and uncured, considering Mr. Markowitz’ sworn evidence that Rand learned of its mistake from its employee’s lawyer.”
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If you are an employee who believes your employment was wrongfully terminated by your employer, and would like to discuss the law of wrongful dismissal and severance packages, it is important to speak with our employment lawyer to determine your legal rights and options. Similarly, if you are an employer wondering how to handle or defend a wrongful dismissal claim by a former employee, feel free to contact Bune Law to learn about your legal rights, obligations and entitlements.
It is important for both employers and employees to negotiate the terms of a termination of employment and severance package with the assistance of an employment lawyer, and to comply with negotiated terms of settlement. If you would like legal advice on your own situation as an employee (or an employer), please contact 647-822-5492, or book a consultation today.