Often an employer will require a written agreement by which it attempts to defeat the common law entitlement to reasonable notice of termination and minimize the sums due on termination without cause. Frequently these clauses are challenged for the reasons set out below.

Violations of the ESA Must be Affirmative

It is well established that an employment contract which violates, on its face, the minimum standards obligations required by the Employment Standards Act (ESA) will very likely be ruled to be unenforceable.

This applies to a termination clause which runs afoul of any minimum standard such as notice, severance, or even the benefits obligation for the minimum notice period.

If, however, the contract is silent on the issue of the ESA mandate, and the contract does not state its provisions are intended in full satisfaction of the ESA, the severance agreement will likely survive a judicial challenge.

For example, in one case the contract stated that the severance payment would be “not less than one month’s written notice”, a term which violated the statute. The trial judge’s decision to strike the severance clause was reversed by the Court of Appeal which reasoned that as there were no words in the agreement negating the ESA, the ESA sums must still be paid. The severance clause was upheld, even though, on its face, it was offensive.

Where an employment contract is disputed, a review begins to seek out any language in the contract which directly offends the ESA. A general clause inserted by the company which states words to the effect that “nothing in this agreement modifies or eliminates all statutory rights of the employee” will likely save the contract from challenge.

Additional Damage Claims where Binding Severance Clause

There are certain components of an employment relationship which will always survive any well-crafted agreement and rightly so. These include protection against human rights violations, the duty of good faith on termination and the Bhasin good faith obligations.

Aggravated Damages

Even if there is a binding severance clause, this will have no impact on a claim for aggravated damages. These damage sums may be claimed in addition to severance where there has been unfair or bad faith conduct at the time of termination. A good example of such awards are cases in which the employer has asserted grounds of termination for serious wrongdoing without having conducted an investigation to establish a realistic foundation for such actions. Awards have been made for aggravated damages such as $200,000^[1], $125,000^[2], $85,000^[3] $75,000^[4], $50,000^[5], $30,000^[6], and $20,000^[7] all due to the failure to conduct a proper investigative basis for the dismissal. All involved allegations of serious misconduct which was unproven at trial.

Human Rights Claims

Severance clauses will have no impact on a remedy sought by a human rights process. Human rights cases look to define lost income on a conceptually different basis on the theme of “but-for”. Hence “but-for” the unfair termination, the employee would have remained employed in a successful case. The severance clause is no consequence in this context.

The So-Called “Bhasin Duty”

In Bhasin v Hrynew, the Supreme Court of Canada  set out broad parameters of the nature of the duty to be expected of two contracting parties to one another. While this was not a decision interpreting an employment issue, the principles it set out are directly applicable to employment contracts.

The Court found that the “organizing principle of good faith” was a broad underpinning of the essential duties between the parties to the commercial contract.

This duty in  was subject to an overall obligation of honesty and good faith, which, in the circumstances, was an obligation not to mislead the other party about the contractual performance.

The damage award in Bhasin was made even in the face of an agreed termination provision.

Following the Supreme Court’s decision in Bhasin, the Nova Scotia Court of Appeal provided an interesting application of Bhasin principles in Industrial Alliance v Brine, a case involving the interpretation of the good faith requirement of a disability insurer. The principles outlined in that case are, again, applicable in the employment context.

One of the issues in dispute between the parties was the conduct of the insurer in providing rehabilitation services and then reversing its decision. While the policy had not mandated the provision of such services, but the insurer provided them nonetheless in view of the young age of the insured and the possibility that he may never work again.

Thirty months after the services had been provided, the insurer elected to terminate them, following receipt of an independent medical report. The trial judge was critical of the manner of this decision being made, which was contrary to the view of the medical report.

The issue presented on appeal was how could the insurer be determined to have acted in bad faith upon terminating a benefit which it was not contractually obliged to provide?

The Court of Appeal referenced the Supreme Court of Canada decision in Bhasin to determine that it was not necessary to find a specific contractual term which had been violated, but rather the court could look to the “independent implied contractual obligations”.

This was a liberal reading of the Bhasin theme. The reluctance of the Court to rely specifically on the contractual term and instead consider the relationship in its broadest concept is reflective of a generous interpretation of the obligations of the contracting parties to one another.

The duty of good faith has been firmly established with respect to the manner of termination. A remedial interpretation of employment statutes and contractual issues has been evident for years and hence the Bhasin decision should not be considered a dramatic overhaul of employment law concepts. It may well lead to a duty of good faith throughout the employment relationship.

Severance Terms Need a Thorough Review

The severance term which appears on a contract may not necessarily be enforceable. This article touches on only a few of the challenges that can be made to such a contractual term. The law on this subject is complex. It is strongly advised that both sides of the contract receive clear and reliable legal advice from a knowledgeable employment lawyer before signing such a contract and when it has been put into action on termination of employment.

Contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins. We regularly advise employees and employers on legal workplace issues. Contact us online or by phone at 416 364 9599 to schedule a consultation.

[1] Boucher v Walmart

[2] City of Calgary v CUPE 2013 2013 CanLII 88297 (AB GAA) The damages in this case were described as general damages but are to the same effect.

[3] Tl’azt’en First Nation v Joseph

[4] Pate v Galway Ontario Supreme Court, trial level 2009 on first instance

[5] Downham v Lennox

[6] Lau v Royal Bank of Canada 2015 BCSC 1639 (CanLII), later reversed on liability issue

[7] Chapell v CPR June 2010 29 Alta LR (5th) 380, 2010 ABQB 441 (CanLII)