Termination Term in Employment Contracts

The recent decision of Nogueira v The Second Cup raises once again the issue of how, or more precisely in this instance, how not to, draft an employment contract to limit an employee’s entitlement to reasonable notice of termination.

There are many nuances to this subject.  While the issues seem complicated on first review, the drafting of an effective termination clause is really quite simple.

Caselaw on this issue shows three major categories of challenges to the contractual term. These are as follows:

1. The Contract Offends the Statute Directly

This was the context in the leading case of the Supreme Court of Canada in Machtinger v HOJ. The wording purported to give the employer the right to terminate at any time without notice, clearly in violation of the statutory minimum. The contract was held unenforceable and the employee was entitled to reasonable notice.

2.      The Contract is Silent on the Statutory Obligation

In this context, the court will look for words in the agreement to assess whether the contract intends the questioned defined termination sum to be in full satisfaction of all statutory mandate. If so, the contract will fail. Should the contrary be true, the court will read into the agreement the duty to comply with the statute, the contract will be upheld and the employee will receive the statutory entitlement. This was explored in Nagribianko v. Select Wine Merchants Ltd.

3.      The Contract is Ambiguous

These words strike fear in the employer’s position  since the employer is typically the draftsperson. The rule of construction requires the ambiguity be read against the party with pen in hand. It is this category which caught the company in Nogueira v Second Cup. The wording in this instance required the employer to be compliant with the statute but failed to state that this sum was intended to be in full satisfaction of all claims. It was hence entered the realm of the uncertain and was read against the employer’s interest.

How to Write It Right: Best Practices

The leading case on an effective termination clause is the Court of Appeal decision in Clarke v Insight. In that instance, the contract limited the termination payment to the statutory sum and also stated that that “no further amounts will be due and payable to you whether under statute or common law”. This deceptively simple clause won the day.

Still More to Consider

There are, of course, many more issues which may be raised to challenge the contract in more substantive terms. These are as follows:

  1. Is there consideration (i.e. something of value) given for the contract? This issue usually arises when the newly hired employee is given the contract to sign soon after starting employment, when the questioned term had never been previously discussed. If there has been no value given, the contract will fail.
  2. Has the “substratum” disappeared? In other words, this means the employee has been given a more senior position, one not contemplated in the contract and hence the severance term ought to have been renegotiated. Failing this, the prior contractual term will fail.
  3. Is there a human rights claim? Human rights cases are not bound by the termination clause due to the concept that lost income claims are based on a “but-for” concept. Hence, “but-for” the unlawful termination, the employee would have remained employed through to the hearing date. The termination clause is of no consequence.
  4. Is there a claim of unfair or bad faith conduct at the time of termination? Claims of aggravated damages in such instance are unimpeded by a contractual term, no matter if the clause stands scrutiny otherwise.
  5. Is there a prior oral misrepresentation which gave rise to the employment contract? This was the argument made in Cognos v Queen. In that case, the plaintiff moved from Western Canada to Ottawa to develop a new software product. Soon after he arrived, he discovered the company had abandoned the project and he was terminated. A tort claim, a civil action based on his reliance on the company’s verbal representations, was allowed, even though the contract contained a limiting termination clause. In order to avoid such a claim, the contract must either specifically rebut the assertion (such as, we have made no commitment to this product) or contain an “entire agreement” clause. The latter will state that the terms in the contract are all the terms agreed to between the parties and generally deny any prior oral representations. Even where such a clause exists, it is difficult to enforce as noted in 2190322 v Ajilon, as the court will examine the context of the parties to determine if there is “unconscionability” or unfairness. When relying on such a clause, the employer should draw the employee’s attention to this clause and insist that he or she receive independent legal advice. Apart from the argument of inherent unfairness, there is also an independent public policy argument. Given many cases commenting on the inherent vulnerability in the employment relationship, this is another real argument which will surely follow.

Complicated Issues Require Clear Advice

The law on this subject is nuanced. The wording of a contract may seem very straightforward at first blush, but clearly the written word may not rule the day. Employment contracts can be difficult to navigate, depending on the circumstances.

The first step when considering entering into such a contract is to obtain clear and precise legal advice. When facing a termination decision and an existing contract, legal advice is critical to review the termination clause in detail and in context, to determine how to act and what remedy may be available, whether you are an employee or employer.

If you have questions about the language and the impact of a termination clause in an employment contract, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins. 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.