Exit sign amidst a dark background representing termination

Termination Clauses in Employment Contracts

In recent years, restricting an employee’s severance entitlements to only statutory minimums via termination clauses became common practice for many employers.   The main advantage – a cost-saving measure to help employers lower termination costs instead of paying common law entitlements if and when the difficult decision is made to terminate without cause.  However, in looking at some recent case law, particularly:
 
 
Employees are increasingly challenging the enforceability of such clauses.  They have also been the subject of close scrutiny by the courts.   More often than not, judges have found them to be invalid for various reasons such as, lack of explicit wording for continuation of benefits and ambiguous language.
 
This then begs the question…
 
Could termination clauses actually cost employers more money than it is intended to save? 
(Especially after factoring in legal costs to defend/settle a claim) 
 
Of course one would need to look at the cost-benefit analysis for each particular situation.  However, in general, there is something to be said about providing a fair severance to employees at a time when they need it most.
 
An employee’s decision to sue is often emotionally driven.   It is usually the result of feeling unfairly treated in some way.  This sense of unfairness can be triggered simply by a severance package that provides only for ESA minimums.
 
The Ontario Employment Standards Act (ESA) is meant to give employers a baseline for which the termination and/or severance payout cannot go below.  The common law (or judge made law) is what employees are entitled to based on individual factors in the absence of a valid termination clause in the employment contract.  This can present a large range for employers and this is where the disconnect lie.  Many employers mistaken that a payout based on statutory minimums is the legal standard whereas the law expects employers to provide “reasonable notice” well exceeding statutory minimums as per common law standards.
 
Example #1:  In Miller v ABM Canada Inc. [2014, ONSC], Mr. Miller had 17 months of service to which the company only offered him 2 weeks of notice based on the ESA minimum.  At trial, the judge struck down the termination clause as invalid and ruled in the employee’s favour entitling Mr. Miller to 2.5 months of salary plus an additional $4300 for loss of benefits.     
 
Example #2:  In Wright v Young and Rubicam Group, [2012, ONSC], Mr. Wright who was the President of the company had over 5 years of service at the time of termination.  He was provided 13 weeks of severance as per the termination clause in his contract.  At trial, the termination provision was ruled unenforceable thus entitling Mr. Wright to 12 months of reasonable notice versus the 13 weeks offered by his employer.
 
In both cases, the employer’s attempt to limit severance costs through contractual language was ineffective.   Not only did the employees still receive reasonable notice according to common law (resulting in 4 times more in payout), the additional time, resources and legal costs incurred to defend such a claim can actually do more damage to a company’s reputation and bottom-line in the end.
 
Tips for employers:
A well thought out and executed termination strategy is critical. Termination clauses must be carefully drafted in the employment contract to ensure enforceability.  Perhaps a more holistic and cost-effective approach would be to balance the termination clause with a severance package that employees would feel less compelled to litigate, from the start.
 
It is very important that whatever termination strategy a business adopts, it is aligned with the company’s values and strategic vision.  Therefore, it is not a one-size fits all solution.  There needs to be a fine balance between meeting cost containment objectives and providing a severance that employees can still feel respected and valued by in order to effectively mitigate potential legal risk.
 

The content shared in this blog post is for general information only and does not constitute legal advice. 
 
At Strategywise HR, we understand the HR challenges businesses face and the workplace laws that affect you.  Our top priority is to help you make informed people decisions that optimize productivity while also reducing risk and costly exposures.