The Ontario Court of Appeal recently upheld a lower court decision setting aside the terms of an employment contract. The case illustrates the importance of experienced legal advice when drafting such a contract if it has any hope of being enforceable.

What Happened Here?

The contract in question contained a clause granting the employer the right to terminate employment without cause by:

  1. Payment of the greater of  the “entitlement pursuant to the Employment Standards Act”; or at the discretion of the employer, either of the following:
    1. Two months’ working notice; or
    2. Two months’ payment in lieu of notice.

The contract was poorly drafted, as the options granted to the employer did not, in themselves, comply with the mandatory statutory payments. There was no reference in either option to severance pay obligations or the need to continue benefits for the statutory notice period.

The initial judge agreed with the employee that the contract was not enforceable. A notice period was set at 8 months. The Court of Appeal confirmed this decision. It found that the agreement was worded poorly, as it would have allowed the company to terminate, at its option, in a manner to avoid the statutory entitlements by the payment of only two months’ sum. The inconsistencies contained in the agreement were read against the company.

Bonus Payments

The contract also contained a term stating that in order to be eligible for a bonus payment, the employee was required to be an employee “in good standing” when the bonus sum was awarded. This led to two bonus issues. The first was the sum earned prior to termination and the second which would have been earned after termination.

The first question to be asked on this issue is whether the bonus is an integral part of the compensation structure. If this is the case, then the agreement will require clear and unambiguous wording to contract out of this claim. The requirement of “good standing” status, the Court ruled, would not allow for this conclusion.

Notable for employers, had the agreement said “in active employment” the argument would likely have succeeded, at least for the severance period. The issue of the bonus for the active period of employment would be a different issue, particularly when the bonus had been “earned” prior to termination, yet unpaid as of the termination date.

In this case, the employee was allowed the bonus earned prior to termination and that which would have been earned in the notice period.

Employers’ Take Away

Employment contracts are notoriously difficult to enforce. They require acute care in both drafting and delivery, which is an entirely different issue. This is the time for skilled legal advice.

Employees’ View

Challenges to employment contracts require precision and care. This is all said during a pending appeal of a case to the Supreme Court of Canada which no doubt will have a serious impact on the law on this subject. This is a dynamic area of law and we will continue to monitor developments in this area.

Get Advice Before You Act

Employment contracts present a myriad of complex issues. Get advice. If you have questions about this issue or any employment issue, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins LLP. We regularly advise employees and employers on issues in the workplace. Contact us online or by phone at 416-364-9599 to schedule a consultation.