Termination Clause in Employment Contract Deemed Unenforceable Due to Potential Contravention of Minimum Statutory Requirements

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A recent decision from the Ontario Superior Court, Wright v. The Young and Rubicam Group of Companies (Wunderman), highlights the importance of making sure that a termination clause in an employment contract meets or exceeds the requirements of applicable employment standards legislation in all circumstances. 

The Court set aside the termination clause, because the clause did not refer to benefits during the statutory notice period and in certain circumstances – which did not apply in this situation – the termination payment fell slightly below the minimum notice and severance pay requirements of the Ontario Employment Standards Act, 2000 (the ESA). It is not possible for an employee to waive his or her minimum rights under the ESA. 

Wright held various executive positions with The Young and Rubicam Group of Companies (Y&R) over a five year period.  In 2010, his employment was terminated pursuant to the termination clause in his employment agreement, which provided in part: 

              

The employment of the Employee may be terminated … by the Company upon payment in lieu of notice, including severance pay as follows:

e) five years or more and up to ten years after commencement of employment - thirteen (13) weeks’ Base Salary, plus one (1) additional week of Base Salary for every year from 6-10 years of service up to a maximum of 18 weeks. 

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.

Wright was terminated and paid 13 weeks of base salary, and given benefits coverage and other perquisites and entitlements plus disability and life insurance coverage for the duration of his statutory notice period. This exceeded Wright’s statutory entitlement under the ESA, which, in light of his years of service, was five weeks of termination pay and five weeks of severance pay for a total of 10 weeks.

Wright sued Y&R for wrongful dismissal, arguing that the termination provision in his employment contract was unenforceable due to two deviations from the ESA: (i) it did not provide for benefits; and (ii) under certain circumstances (though not applicable in the present case) the amount of pay in lieu of notice stipulated would be less than the notice and severance pay required by the ESA.

The Court reviewed the termination clause and noted that it only referenced “base salary”, which “if treated as inclusive of all entitlements to compensation, means that there will be no other compensation flowing to the employee - in short, no benefits.” As a result, the Court concluded that the clause excluded benefits in violation of the ESA.

Further, the Court found that while the 13-week payment in the present case exceeded the statutory minimum, the termination clause could have contravened the ESA if Wright had continued working for Y&R.  For example, if Wright had worked for 8.5 years, under the termination clause, he would be entitled to 16 weeks of base salary.  This would not meet the statutory minimum of 16.5 weeks (assuming that the conditions triggering an obligation to pay severance pay continued, which would require the employer to pay 8 weeks of termination pay and 8.5 weeks of severance pay.)

In light of these findings, the Court concluded that the termination clause was unenforceable: 

             

There is, in my view, no particular difficulty in fashioning a termination clause that does not violate either the minimum standards imposed by the Employment Standards Act or the prohibition against waiving statutory minimum requirements and there is no compelling reason to uphold a termination clause which the draftsman may reasonably be understood to have known was not enforceable either at all or under certain circumstances.

Taking into account Wright’s age and position at the time of his dismissal, the Court found that Wright was entitled to 12 months’ notice, four times the amount specified in his employment contract.

Our View:

Many employers have used employment contracts to limit severance obligations and to provide certainty, rather than leaving the courts to decide what is reasonable notice in the circumstances.  However, this case underscores how important it is to ensure that employment contracts contain termination clauses that clearly meet the minimum requirements of the applicable employment standards legislation in all circumstances. 

Courts seem to be very unwilling to enforce clauses which they consider to be flawed – even if such defects do not actually affect the employee’s specific circumstances.  Employers who believe that they have limited their obligations on termination of employment to statutory notice and severance entitlements may find that, in fact, they must provide reasonable notice as required under the common law.

If you would like to discuss potential solutions, or have any questions regarding your organization’s employment contracts/letters, please contact any member of the Osler Employment & Labour Department.

Published In: Administrative Agency Updates, Civil Remedies Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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