Ask any top Ontario employment lawyer with experience in handing wrongful dismissal claims and constructive dismissal claims, and they will tell you a termination clause in employment contract is the hot-button issue in the area of wrongful dismissal litigation.
What Makes Termination Clauses in Employment Contract Invalid in Ontario?
Employment contracts are intended to provide clarity and certainty for both employers and employees. However, there is one crucial element that happens to be a thorn in the side of not just employers, but employment lawyers across the province: the termination clause. In fact, it is usually at the centre of a wrongful dismissal dispute, since determining whether or not it is legal and valid will influence how generous the damages award or a severance package an employee is entitled to receive if successful in a wrongful dismissal claim. As a result, it is crucial for employers (and employees) to consult an experience employment lawyer for an employment contract review (preferably before it is signed).
What is an Employment Contract?
Put simply, it is a binding legal agreement between an employer and employee that outlines and governs the terms and conditions of employment, and is especially useful when handling a workplace dispute. That is why it is important for employees (even sophisticated executives) not to skip the final details before signing on the dotted line. Rather, employees should always first understand the contract terms, how they impact their employee rights, create legal obligations owed to an employer, and figure out aspects of the employment contract that should be negotiated with the help of an employment lawyer.
Beyond the financial terms of the employment contract, there are typically signifiant terms in the contract that impact, limit or reduce your legal entitlements, especially upon termination of employment (wrongful dismissal). More often than not, employees are not adequately informed about the legal consequences of signing the employment contract and how it can make-or-break their leverage in a severance package negotiation.
In Ontario employment law, the most contentious terms in employment contract are typically:
- Termination clauses
- Non-solicitation restrictive covenants
- Incentive or equity compensation, including bonus plans, restricted share units (RSU’s).
In this article, we discuss the first topic in more detail.
What is a Termination Clause in Employment Contract?
A termination clause is a section (or paragraph) of an employment contract that establishes an employee’s rights to notice of termination or termination pay (often called a “severance package”). Given significant financial implications, termination clauses are drafted by employment lawyers in favour of the employer to limit their employees’ rights to a severance package upon termination of employment.
Why do Courts Invalid Termination Clause in Employment Contract?
The short answer is because they are found to violate the minimum legal requirements under the Ontario Employment Standards Act, 2000. And when they do, an employee is usually left better off since they gain the much greater and more beneficial employment law protections under the common law (judge-made rules in previous court decisions involving wrongful dismissal claims or constructive dismissal claims).
In fact, in recent years, determining whether or not it is legally valid and enforceable has become more of a “moving target,” as the courts grapple with whether or not the specific language of the termination clause in employment contract violates or complies with employment standards legislation (typically around the termination pay and severance pay).
The typical scenarios involves a termination clause that offers less notice of termination (termination pay), severance pay or other employee benefits than the amount required by the Ontario Employment Standards Act, 2000, it is automatically invalid and unenforceable in defending an employer in a wrongful dismissal or constructive dismissal claim. For example, the Ontario Employment Standards Act, 2000 requires a minimum of one week of notice of termination (or termination pay) for every year of employment, up to a maximum of eight weeks of notice of termination (or termination pay). With that in mind, if an employment contract in Ontario stipulates the employee will only receive only two weeks’ notice of termination (or termination pay) upon a termination of employment, regardless of how long they work with the company, it would be legally invalid. In such cases, the common law principle of reasonable notice applies, which can be significantly longer than the minimums outlined in the Ontario Employment Standards Act, 2000.
In addition to the termination clause directly violating the basic minimum labour standards and requirements of the Ontario Employment Standards Act, 2000 by providing , some other reasons the courts will invalidate a termination clause in employment contract include:
- unclear or ambiguous wording
- the “termination for cause”
- “substratum doctrine” and changing job duties and responsibilities
Given the complexity of termination clause in employment contracts, it is important when drafting or reviewing employment contracts to ensure compliance with relevant legislation and avoiding potential pitfalls. This can include using clear and concise language in termination clauses, specifying notice periods, severance pay, and valid reasons for termination, and most importantly, regularly reviewing and updating employment contracts to reflect any changes in employee roles or relevant legislation. After all, having clear and well-drafted termination clauses will not only protect employers facing a wrongful dismissal or constructive dismissal dispute, but also foster trust and transparency in the employer-employee relationship.
A termination clause in employment contract is typically a a source of confusion and disagreement among employers, employees and employment lawyers, and it is crucial to review an employment contract with a qualified employment lawyer. If you are an employer or employee needing to speak with an experienced Ontario wrongful dismissal lawyer to discuss your options and next steps on how to deal with workplace issues, call Bune Law, employment law firm in Toronto. You will review and get guidance on your severance package before you agree to sign any termination documents, and help ensure that your severance package is fair and reasonable.