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So You Think You Have A Good Termination Clause?

By February 4, 2019November 5th, 2019Employment Law

The next installment of “So You Think You Can…” blog series alerts dentists to a relatively new case where an Ontario Judge took the time to review, in detail, whether a termination clause is good or bad. Check out the previous series posts here and here.

As many dentists know, the termination clause is a standard part of any employment contract and specifies the amount of notice or pay in lieu an employee will receive if terminated without cause. It is completely legal and reasonable for these clauses to limit an employee’s entitlement to the minimums as set out in the ESA. But, it is important that the clauses are carefully drafted. If they aren’t, a Judge could say that the clause is void and unenforceable and the employee could be entitled to a huge payout.

Luckily for lawyers and employer alike, the Ontario Divisional Court took the time in the case called Movati Athletic (Group) Inc. v. Bergeron to provide guidance on what makes a termination clause “just” right (pardon the pun).

The Court was asked to review a termination clause that said this (read it and compare it to your current termination clauses):

Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000, as amended from time to time.

The employee sued the employer and two levels of Ontario courts said the employer could not rely on the termination clause because it was not clear enough. The reason? The words in the termination clause did not specifically displace the employee’s entitlement to common law reasonable notice; it only stated the company would give the employee what the ESA would give her. In other words, the contract said “pursuant to the ESA”, but it did not limit entitlements to what is provided for in the ESA.  The clause created a “floor” or minimum entitlement, but not a “ceiling” or a cap or maximum entitlement.

The Divisional Court then took the time to specifically outline the principles to be considered in determining if a termination clause does or does not displace the presumption of common law termination notice entitlement, in 8 steps:

  1. All contractual provisions must meet the minimum notice requirements for termination without cause set out in the ESA;
  2. There is an automatic presumption that an employee is entitled to common law notice upon termination of employment without cause;
  3. Provided minimum legislative requirements are met, an employer can enter into an agreement to contract out of the provision for reasonable notice at common law upon termination without cause;
  4. The presumption that an employee is entitled to reasonable notice at common law may be rebutted if the contract specifies some other period of notice as long as that other notice period meets or exceeds the minimum requirements in the ESA;
  5. The intention to rebut the right to reasonable notice at common law “must be clearly and unambiguously expressed in the contractual language used by the parties”;
  6. The need for clarity does not mean a specific phrase or particular formula must be used, or require the contract to state that “the parties have agreed to limit an employee’s common law rights on termination”. The wording must however, be “readily gleaned” from the language agreed to by the parties;
  7. Any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause in accordance with the principle of contra proferentum; and
  8. Surrounding circumstances may be considered when interpreting the terms of a contract but they must never be allowed to overwhelm the words of the agreement itself.

The law on termination clauses is constantly evolving. It is always best to consult with an employment lawyer before including a termination clause in any employment agreement. Let us know if you have any questions about this case or your own  employees!

DMC