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So You Think You Can Make A Termination Clause? Two New Cases in Employment Law

By January 17, 2018August 17th, 2020Employment Law

There were two brand new cases released by Ontario Courts that show that properly drafted contracts can save dentists money (but maybe not a headache or two…).

The two cases that were just released were:

Each of these cases dealt with employees suing their former employers; and in each of these cases, the employers were successful in proving that their termination clauses were legally valid.

Lopez v. EMD Inc. (Canada)

The Lawsuit

The plaintiff in this first case was employed as a Manager and Head of Quality Operations for just under 5 years when his employer terminated his employment without cause and with notice (the employer paid him 4 weeks of pay and continued his benefits for 4 weeks as under the Employment Standards Act).  Of note, prior to the lawsuit being heard by the judge, the employer made an additional payment to the Plaintiff of 12 weeks of pay and benefits.

The employee therefore took his employer to court in front of a judge for an additional 15 or so weeks, as well as punitive damages for the way the employer allegedly treated the employee before and after termination.

The employee lost his entire lawsuit and had to pay part of the employer’s legal costs.

The Decision

The plaintiff was 51 and a Manager and Head of Quality Operations at the time of termination, earning about $155,000.00 per year. In his employment agreement (that he signed before he started working), the termination clause said the following:

“EMD Serono may terminate your employment without cause upon giving you the applicable statutory notice, termination pay and/or severance pay to which you may be entitled.

You agree that EMD Serono may deduct from any payment of salary instead of notice under this provision your benefit plan contributions that were regularly made by you during the term of this Agreement in accordance with the terms of all benefit plans to be maintained under this provision for the minimum period prescribed by law.

You confirm that the termination provisions above, and specifically, the notice and pay in lieu of notice provisions above (sic) are fair and reasonable and are necessary to protect both parties.  You further agree that, upon termination of your employment under the provisions of this Agreement, you will not be entitled to any additional notice, pay in lieu of notice or compensation whether under statute, at common law or otherwise.  Therefore, you agree that upon termination of your employment under the provisions of this Agreement, you will have no action, cause of action, claim, complaint or demand against EMD Serono or any other person as a consequence of such termination and that you will not file or commence any such action, cause of action, claim or demand against EMD Serono.”

The employee argued that this termination clause in his employment contract was not enforceable because it was ambiguous and tried to contract out of the ESA, meaning he would be entitled to more than just the ESA minimum amount of notice of termination.

The judge confirmed that employers and employees can agree to a termination clause that is more than what the ESA gives employees, only where the clause is unambiguous and complies with the minimum requirements under the ESA. The judge also recognized the unequal bargaining power in contracts between employer and employee, in favour of the employer.

However, the judge did not find that the termination clause above was ambiguous nor did it try to contract out of the ESA. Specifically, the judge said that the principle (of ruling in favour of employees where there is ambiguity or trying to contract out of the ESA) “cannot be stretched to the point of finding ambiguity where none exists” (at paragraph 33.)

The judge relied on two pro-employer cases (Oudin from the Court of Appeal in 2015, and Cook v Hatch from early 2017), to state the Court can look to fair reading of the contract to see the intention of the parties to a contract in order to determine whether a termination clause is void.

For this employee, the judge found no ambiguity in the termination clause because it had to be read as a whole and not by looking at one paragraph.  Second, the judge found the references to the “minimum” and the “applicable statutory notice” showed the employer and employee intended for those words to be applied to both the termination pay in lieu of notice and the period of time during which benefits will continue to be paid.

Nemeth v. Hatch Ltd.

The Lawsuit

The plaintiff in this second case had been employed for over 19 years when his employment was terminated without cause. The employer gave the him 8 weeks of notice of termination and continued his benefits (including pension benefits) for that 8-week notice period (and also paid the employee severance pay since the employer had a payroll of over $2.5 million [don’t worry… Dentists rarely if ever have to pay this additional severance pay]).

The reason the employer gave the employee that amount was because the employee had agreed to a termination clause in his contract (signed before he started working), which read as follows:

“The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.”

The employee sued his former employer because the employee felt the above termination clause did not contain the right legal language to exclude common law entitlement to notice (which is about 1 month for every year worked), and also because the termination clause did not specifically mention that the employee would receive severance pay (which was already guaranteed to him under the ESA); therefore, the employee would be entitled to 19-24 months of pay. In an alternative argument, the employee said he was entitled to 19 weeks of notice of termination, because that’s how the employee read the clause.

The judge gave a 50/50 decision: the judge found in favour of the employer in that the termination clause was clear enough that the employer did not have to pay the employee 19-24 months of pay. But, the judge agreed with the employee that he was entitled to 19 weeks of pay (and not just 8 weeks as under the ESA).

The Decision

The Judge looked at the termination clause and decided that the clause properly excluded the common law entitlement to termination (which is about 1 month for every year worked).

As in the case above, the judge looked not only to the words in the contract, but to the intention of the parties to find out what the judge should decide.

The judge said that it was it was “clear from the plain language of the termination clause in the present case that the parties intended and agreed to limit the appellant’s common law notice entitlement.”  Since the clause used the term specified another period of notice that meets the ESA entitlements, the clause was not ambiguous.

Further, the judge found the termination clause did not try and escape the minimum entitlements of the ESA and give the employee something less than what the ESA guarantees him. Specifically, the termination clause limited the amount of termination notice, but did not specifically limit the amount of severance pay that would be given to the employee.

However, the judge’s reading of the termination clause was that the employee was entitled to not 8 weeks of pay and benefits, but in fact 19 weeks of pay and benefits. Specifically, the judge found that the second sentence of the termination clause gave the one week of pay for every year of work, but it was not limited by the terms after the words “with a minimum of four weeks or the notice required by the applicable labour legislation.”  The judge read that as the minimum requirement under the agreement, but importantly, not the maximum.

Discussion

In all of the DMC LLP contracts we prepare, we make sure the language in each contract is clear for both the employer and the employee, so that anyone reading the document can understand what the contract means and what the employer’s and employee’s intention was at the time the contract was signed.  We also ensure that any questions the employee has regarding the contract is answered fully so that there is no ambiguity before the contract is signed.

Contact us at DMC LLP to talk about your employment contracts and whether you think they would withstand a judge’s interpretation based on these two cases.

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