“Severing” The Offending Term in Employment Contracts

Many companies still struggle to create an effective termination clause in an employment contract to limit the severance due on a not-for-cause termination.

One fixed guide post is that the sum to be paid on termination must always show compliance with the statutory minimum sums.

Severing the Offending Term

Apart from the general rules of constructing such a clause, often companies will also insert two clauses which are intended as fail-safe provisions.

The first term typically will contain words, which in substance, will say that if any term of this agreement is found to be unenforceable, then this term will be “severed” from the agreement, while the remaining terms of the agreement continue in force.

This provision is generally co-ordinated with a second clause which requires that all sums due on termination shall be in compliance, at least, with the statutory minimums.

If for example, the termination clause stated the sum due was to be based on base salary only and not gross compensation such as commissions and other monetary rewards, the clause would be offside the statutory minimum.

It is then anticipated that these two clauses would work in harmony to “excise” the offending term and replace it with the fail-safe requirement to honour the true statutory sum due.

The Ontario Court of Appeal Axes The Severability Clause

This exercise is not as simple as one might expect, certainly not as straightforward as Metaswitch Networks, the employer at the centre of a recent Ontario Court of Appeal decision, might have expected.

In North v Metaswitch Networks , the Ontario Court of Appeal considered this issue in detail. The agreement contained a termination clause which confined the termination payment to the sum due under the statute, which, was stated to be calculated on base salary only and excluded reference to commission earnings as the statute mandates. The same clause, however, promised compliance with the statute. This construction of the agreement, seemingly innocuous, ultimately ruled the day in this specific case. Importantly, the Court of Appeal, provided general principles of interpretation which effectively spelled the end of severability clauses to a termination term which violates the statute.

A separate clause contained the substantive severability provision. The original judge hearing the case found in favour of the employer, by severing the offending words as permitted by the contract and then interpreting the agreement in the absence of these words. The termination clause was then read as in compliance with the statute, meaning that the sums due were based on total compensation.

The Court of Appeal reversed the lower court’s decision noting that employment agreements are subject to a liberal reading in favour of the interests of the often-vulnerable employee, who lacks parity in bargaining power. Statutory protections are designed as remedial legislation.

A technical approach with substantive impact was used to interpret the severability clause. Such a clause should not be used, the Court stated, to strike simply the offending words of a given paragraph, but rather the entire paragraph must be struck.

However, the Court also notably offered its views generally on the ability of a severability clause to save an employment contract which has violated a statutory obligation. If such is the case, the Court determined, the offending clause is void and there is nothing to which the severability clause can be applied. This statement, motivated by the power imbalance in the employment relationship, took a further step in favour of employee rights. The Court reasoned that employers remain quite able to draft an effective termination clause without the need of a severability term.

The result was that the termination clause was struck and the employee was entitled to reasonable notice.

The Moral

Employment agreements with an effective termination clause, ironically, are relatively simple to construct. Employers should take care to obtain proper legal advice, not only on the construction of an effective employment contract, but also when and how to present it to the employee.

Employees facing termination and a limiting contractual provision should also be assured that often the words on the paper are not truly limiting. This is the moment to obtain well researched and competent legal advice.

Contractual Issues Require Clear Advice

The law on this subject is not straightforward. 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.