Ontario’s highest court recently released its decision on a case involving the interpretation of an employment contract containing a limiting termination provision. There is little doubt that the Court intended these reasons to be a bell-weather for the principles to be applied in the future analysis of termination clauses in similar agreements.

Entitlement Limitation Not in Violation Given Length of Service

The employer in the case at hand was a solar company. The employee had been initially employed as a Regional Sales Manager and was eventually moved into a project management role. The employee had signed to different employment contracts, one for each role.

Each contract had contained a termination provision that limited the employee’s benefits entitlement following termination to 4 weeks, an evident violation of the statutory maximum of 8 weeks when an employee has a service record of 8 years or more.

The agreement, however, also contained a “fail-safe” provision which mandated compliance with the Employment Standards Act (the “ESA”).

At the time of termination, the employee had not yet completed a full 4 years of employment and hence the stated sum of 4 weeks coverage actually exceeded his then entitlement.

Step 1: Potential Violation or Real Entitlement?

To this issue, the Court determined that the test to be applied is one at the time of the execution of the contract. The fact there was then a potential violation of the statute was all that was required. It mattered not what the employee’s real entitlement may be in the future at the time of his actual termination.

Step 2: Saving Provision

The Court distinguished an earlier decision that had found a similar saving clause to be effective. On this occasion, the Court saw a critical difference in the wording of the termination clause, which stated on these facts affirmatively that “benefits shall cease 4 weeks from the written notice” and expressed no intent to be somehow made compliant by the later saving clause. Had it done so, the result may have taken a different turn.

This context created a real ambiguity, given the saving clause, which led to the decision to regard the termination clause as in violation of the statute.

Higher Ground

More importantly, the Court spoke enthusiastically about the need to protect employees from tricky agreements containing a “get out of jail” card such as a saving provision. The Court’s reasoning offered important guideposts with respect to employment agreements and termination clauses going forward.

The Court stated that above all else, employees should know the conditions of their employment, including entitlements upon termination, with certainty. Allowing employers who deliberately attempt to contract out of the statutory minimums of entitlement to be saved by a provision that may never be enforced creates the risk that employers will take the chance that an employee will not challenge the terms they’ve agreed to. Such conduct is an attempt to exploit employees who hold unequal bargaining power in the negotiation of employment contracts. Moreover, it flies in the face of the intended purpose of the ESA, which is to protect employees and ensure fair treatment by employers.

General Principles of Construction

The Court also offered a summary of the factors to be considered in the interpretation and enforceability of agreements of this nature:

• When employment agreements are made, usually employees have less bargaining power than employers. Employees rarely have enough information or leverage to bargain with employers on an equal footing.

• Many employees are likely unfamiliar with the employment standards in the ESA and the obligations the statute imposes on employers. These employees may not seek to challenge unlawful termination clauses.

• The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible”, over an interpretation that does not do so.

• Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship.

• A termination clause will rebut the presumption of reasonable notice only if its wording is clear. Employees should know at the beginning of their employment what their entitlement will be at the end of their employment.

• Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee.

The decision hence supported the motion judge’s decision to set aside the termination provision. The reasons are clearly intended to provide a clear basis of the tests to be applied in this context and are evidentially sympathetic to the employee’s plight when presented with such a contract.

Take Away to Both Sides

While employment contracts can be constructed in a number of ways, Ontario courts will not permit employers to contract out of their minimum obligations under the ESA. Nor will they tolerate an employer’s clear attempt to do so while including a ‘saving provision’ which may or may not be discovered or enforced by an employee. Both employers and employees are advised to review employment contracts with an experienced employment lawyer to ensure fairness and compliance with the law.

Get Advice and Know Your Rights

This is a complicated and important issue. Whether you be the employer creating such a contract or the employee asked to sign one, get legal advice. For assistance and advice on employment contracts and indeed, on and all employment law matters, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins LLP. We regularly advise workplace parties on a wide range of legal workplace issues. Contact us online or by phone at 416-364-9599 to schedule a consultation.