Termination Clauses in Employment Agreements: How a lack of care may lead to an unintended result
By Irvin Schein, Litigation Lawyer, Mediator, and Arbitrator
Originally published at irvinschein.com.
The recent decision of the Ontario Court of Appeal in Rossman v Canadian Solar Inc. provides an excellent summary of the law in Ontario on the enforceability of termination clauses in employment agreements.
Mr. Rossman signed an employment agreement with Canadian Solar containing a termination clause. The clause provided that the employer could terminate Rossman’s employment on giving notice for a period which is the greater of two weeks or that specified by the Employment Standards Act (Ontario) (ESA).
The clause went on to say that if the minimum statutory requirements at the date of termination provide for a greater benefit than as provided for in the employment agreement, those statutory requirements apply.
Strangely, the clause concluded with the following words “benefits shall cease 4 weeks from the written notice.”
Canadian Solar terminated Mr. Rossman’s employment less than two years later. Mr. Rossman sued, and both parties brought motions for summary judgment. The issue dealt with by the motions court judge had to do with the enforceability of the termination clause. He held that it was unenforceable and that Mr. Rossman was entitled to damages at common law. The matter then went to the Court of Appeal.
The Court of Appeal began by reiterating the well-known principle that an employer must provide reasonable notice of termination unless there is an employment contract clearly specifying some other period of notice. Parties are free to agree to any notice period in an employment agreement, but the agreed-upon period cannot be less than the minimum standard stipulated by the ESA. If it is, the clause will be void and the employee will be entitled to common law reasonable notice of termination. In other words, a termination clause in an employment agreement must provide a benefit that is at least equal to the applicable ESA standard.
If even one part of the termination clause contravenes the ESA, the entire clause will be considered void and unenforceable.
As a matter of overall context, the court pointed out that employment agreements are interpreted differently than other commercial agreements, both because work is a vital aspect of the human condition and also because employees are so vulnerable at the moment of termination.
As a result, among other things, the court will interpret a termination clause in a way that encourages employers to draft agreements that comply with the ESA, failing which the consequences will be serious.
Furthermore, and because employment agreements are interpreted in a manner that tends to be generous towards employees, any ambiguity in the termination clause will be construed in the employee’s favour. A termination clause must be clear and unambiguous. Employees are entitled to know at the outset exactly what their rights are in the event that their employment is terminated.
In this case, the Court of Appeal agreed with the motions judge that the termination clause was void because of its last sentence, which limited benefits to a period of four weeks. The Court of Appeal ruled that there were two reasons why this part of the provision rendered the entire clause void.
Firstly, it placed a four-week limitation on the amount of benefit that Mr. Rossman could expect in the event of termination. The ESA provides for a sliding scale of up to eight weeks in the case of an employee whose employment is terminated after eight years of employment. Therefore, capping the benefits at four weeks has the potential of providing the subsequently-terminated employee with less notice than that stipulated by the ESA.
Canadian Solar argued that Mr. Rossman’s employment was terminated before this last provision would be applied as he had worked for the company for less than two years. Accordingly, his ESA entitlement would not have been as much as four weeks.
The court dismissed this argument, pointing out that the validity of a clause is to be determined based on the situation at the time that the agreement is signed, not at the time that the employment is terminated. If a termination clause has the potential for contravening the ESA, that is enough to render it void.
Secondly, the court pointed out that the final words in the clause created an ambiguity. The clause stated initially that statutory benefits would govern if they provided benefits greater than otherwise specified in the clause. However, at the end of the clause, benefits are said to be restricted to four weeks. This is totally inconsistent with the earlier reference to the paramountcy of the statutory requirements.
As the clause was ambiguous, it would be considered unenforceable.
Accordingly, as the termination clause was struck down, Mr. Rossman was found to be entitled to common law notice.
The court concluded its reasons by reiterating that employees are entitled to know all of the conditions of their employment with certainty, and particularly their entitlement in the event of termination. Employees tend to be vulnerable when negotiating employment agreements with employers who hold unequal bargaining power in these negotiations. The purpose of the ESA is to protect employees and ensure that they receive fair treatment upon termination and, as a result, the court will be vigilant in striking down termination clauses that run afoul of the ESA.
There is no suggestion in the court’s decision that Canadian Solar acted deliberately in attempting to slip something past Mr. Rossman in the hope that he would not recognize the issue. However, even if one were to assume that the final words in the clause were inserted unwittingly, this case makes it clear that it is critically important for termination clauses to be drafted with the utmost care.