Termination Clauses in Employment Contracts

Following the landmark Supreme Court of Canada case called Machtinger v. HOJ Indutries Ltd., it became far more common for employers to require new employees to sign written employment contracts outlining the terms and conditions of the employment relationship. Why? Because as with any relationship, parties can minimize the risk/expense of a potential dispute by agreeing from the outset on the terms that will govern their respective rights and obligations.

In labour/employment law, a major aspect of the contractual relationship is the employer’s financial obligation to its employee not only during the work relationship (i.e., what salary and compensation they will provide), but at its conclusion – what we as employment lawyers refer to as a “termination of employment.”

As discussed previously, the default rule under Canadian common law (the rules made by judges when they rule in court cases) is that an employee is entitled to reasonable notice of termination if they are terminated “without cause.” However, this default rule can be set aside, but only if there is an enforceable employment contract between the employer and its employee that clearly provides otherwise – that is, contains a lawful termination clause that complies with basic employment standards legislation.

What is an employment contract termination clause?

A termination clause is an important section found in employment contracts that discusses the circumstances in which an employee may be terminated and what prior notice or severance compensation the employer must provide to the employee as a result. Given the financial impact on employee severance compensation, whether or not a termination clause is legally enforceable is a hotly contested issue in the area of employment law.

Generally, the legality of an employment contract termination clause will depend on its wording (i.e., what it says about an employee’s termination and severance pay). This is why it is important for both employers and employees to seek legal advice on their employment contracts, including to review termination clauses.

The consequences of a termination clause being found invalid by a court are significant: the employee is entitled to receive pay in lieu of notice (severance package) for the common law notice period, as opposed to minimum termination pay and severance pay.

What makes an Employment Contract Termination Clause Illegal and Unenforceable?

The typical attack on a termination clause is that its language violates the basic legal requirements under the Employment Standards Act, 2000 (the “ESA“).

The ESA establishes basic employment standards that must be provided by an employer to their employees, especially upon termination of employment. For instance, an employer must provide notice of termination (or termination pay), benefits continuance and statutory severance pay reflecting the employee’s years of service at the time of termination. These requirements are called minimum “employment standards” that an employer cannot avoid and are intended to protect employees.

As employment lawyers, what we often find is that a termination clause “gets it wrong” on a number of fronts, usually by attempting to provide the employee with less than the minimum employment standards. Over the many cases where employees have successfully challenged the legality of employment contracts, the courts have established rules that have clarified how a termination clause should be structured in order be legally minimize an employee’s severance compensation.

While predicting with absolute certainty whether a termination clause is legally enforceable is impossible (it is a decision that only a court can make), the evolving caselaw has helped provide some general guidance as to what termination language will likely be upheld by a court in a wrongful dismissal claim.

As the court stated in one leading case:

Contracting out of even one of the employment standards and not substituting a greater benefit would render the termination clause void and thus unenforceable.”

This is true even if the employer actually provides an employee with their minimum employment standards under the ESA after termination. Accordingly, the legality of a termination clause is determined by the wording of the clause alone, not by an employer’s conduct after termination.

Some Examples of Termination Clauses in Employment Contracts Found Unenforceable by the Courts

Whether or not an employment contract termination clause is legal and valid will always depend on how a court analyzes the specific facts/circumstances of each case, including the termination language. From a general overview, there have been several court decisions where the courts have found employment contract termination clauses illegal and invalid by improperly restricting an employee’s rights and entitlements on termination, such as:

- a termination clause which excluded the employer’s obligation to contribute to the employee’s benefit plans during the notice period and pay statutory severance pay.
- a termination clause allowed the employer to terminate, without cause, an employee without notice in the event that she had been continuously employed for more than three months (the ESA sets a minimum standard to termination pay/severance pay after an employee completes a 3-month probation period).
- a termination clause allowed an employer to terminate an employee by providing severance compensation based only on an employee’s “base salary”.
- a termination clause allowed an employer to terminate an employee without any notice or pay in lieu of notice for cause, while the ESA requires the employer to provide notice or pay in lieu of notice unless the employee has engaged in “wilful misconduct, disobedience or wilful neglect of duty.”

Contact

The issue of whether an employment contract termination clause is valid and enforceable is a legal determination that only a court can make as part of a legal proceeding for wrongful dismissal. However, it is prudent to speak with an experienced employment lawyer to get helpful guidance and analysis on the terms of a specific employment contract.

If you are an employee whose employment was terminated by your employer and you would like to understand whether your severance is limited by your employment contract, feel free to contact Bune Law at 647-822-5492 to get legal advice regarding your specific rights and options.

If you are an employer and would like to discuss or review your employment contracts, including preparing new termination clauses, contact Bune Law for assistance and detailed analysis of your workplace needs and solutions.

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