Your Employer might have to Pay You More than the Termination Clause in your Employment Contract States

By Lance Soskin, principal lawyer at “Contracts, Law and More”

Before accepting any termination pay or severance pay from your employer when you are fired or laid-off or your employment is terminated, read the termination provision of your employment contract carefully. There is a possibility that it does not comply with the Employment Standards Act (“ESA”) and it is, therefore, void and unenforceable. In which case, you will likely be able to negotiate a larger termination/severance payment than your contract states, since the more generous “common law” will apply instead of your contract (“common law” refers to laws that the courts develop through their precedent decisions in cases).

 

According to two recent cases in the Court of Appeal for Ontario[1], an employment contract's termination provision is void and unenforceable unless it meets the very strict requirements of the Employment Standards Act (Ontario’s ESA for purposes of this article). I will explain more of this below, but for now, read the following termination clause and compare it to the termination clause in your employment contract. It seems like it would be enforceable since it provides more “Notice” (pay for work after being informed you are being terminated) or “pay in lieu of Notice” (a lump sum “termination payment” instead of Notice) than is required by the Employment Standards Act. But given the decisions in the two recent cases, it is highly unlikely to be enforceable:

During the first year of employment, after the first six months have been completed, and thereafter for every year of completed service with the Company, you will receive four weeks’ notice, or pay in lieu of notice, or any combination thereof, to a maximum of 52 weeks, depending on your length of service with the Company. Payment to you under this agreement in excess of statutory termination pay shall be inclusive of any statutory severance pay you may be entitled to receive

 

Read this carefully since it is important:  It is slightly more complicated than this, but basically the Court in these two cases stated that, if a termination provision proves to be void for any hypothetical employee - for instance, someone who has been employed by the company for 25 years - it is void for every employee who signed a contract with the same clause, regardless how long they have been employed. So even though this termination provision above states that an employee will only receive termination pay if she is past the “probationary period” (usually 3 months, but in this example it is 6 months), since the provision is void, the common-law standards apply for her too, under which she has a right to termination pay and damages if there are any (assuming she was not fired "for cause" - i.e., for some egregious behavior).

 

The issues with the termination provision above, and the reasons why it contravenes sections 54, 57 and 58 of the ESA and is, therefore, void for ALL employees who signed a contract with a similar provision, are:

  1. It lumps the severance pay, termination pay and Notice together, rather than treating severance pay separately; and
  2. It limits the total severance pay plus termination pay plus Notice to 52 weeks.

According to this termination provision, if an employee is terminated after 10 years with the company, the employee will receive 40 weeks of working “Notice” (paid work after being informed their employment is being terminated), or a lump sum payment in lieu of Notice, or a combination of the two. And it states that whatever amount is paid in excess of that required by the ESA for Notice or pay in lieu of Notice, will be the employee's “severance pay”. The ESA requires that Notice be equivalent to 1 week for every year of employment to a maximum of 8 weeks. For employees who have been employed for longer than five years, the ESA also requires that the company pay “severance pay” equal to one week’s pay for every year of employment, to a maximum of 26 weeks. Termination pay and severance pay are separate requirements; the severance payment must be a payment that does not require the employee to work for it; it is different to working Notice.

 

Part of the issue with the termination clause above is that it allows the company to decide how to divvy up the termination pay between working Notice and a lump-sum payment in lieu of Notice. The company might decide to give the employee 32 weeks' working Notice, plus 8 weeks' pay in lieu of Notice, or 31 weeks’ working Notice, plus 9 week’s pay in lieu of Notice. Since the employee would only receive a payment equivalent to 8 weeks’ work, or 9 weeks’ work - a payment which can be considered severance pay since it is a payment that does not require the employee to work for it - it does not meet the statutory requirement of 10 weeks' severance pay (one week’s pay for every year of service). Therefore, it contravenes the ESA; not only for that one employee, but for all employees who signed a contract with the same provision; even for employees who have been working for less than 3 months.

 

Typically the common law standards for Notice or termination pay and severance pay are more generous since courts take into account factors surrounding the employee's employment and termination when deciding on an amount a company must pay, including the manner in which the employee was dismissed and the emotional distress it caused if it was not handled professionally and without undue insensitivity, the circumstances leading up to the dismissal, whether the employee was dealt with fairly, openly and honestly, whether it was a management position, whether the job required specialized skills, the employee’s age, the years of service, how difficult it is to find a similar position, how the circumstances of the dismissal affect the employee’s chances of finding a similar position, and the bonus the employee likely would have received had she still been employed when bonuses are paid to others who are still employed.

 

Here are a few points that are important to note:

  1. The enforceability of the termination clause depends only on the wording of the clause itself, and not on what the employer pays the employee at the time the employee is dismissed/fired/laid-off/ terminated; i.e. an employer’s later voluntary compliance with its statutory obligations does not remedy the illegality of the termination clause. 
  2. Another requirement under the ESA is that your employment contract must state that if your employer chooses to pay a lump sum in lieu of Notice, your employer will continue to make whatever benefit plan contributions are required to be made to maintain the benefits to which you would have been entitled had you continued to be employed during the period of Notice that you would otherwise have been entitled to receive if your employer did not pay you a lump sum in lieu of Notice.
  3. Once your termination is no longer governed by the termination clause in your employment contract, in addition to claiming reasonable notice under common law, you also can claim “damages” you suffered as a result of the termination, if you were terminated “without cause” and in a manner that was not proper.
  4. You also might want to keep in mind that an employer cannot ask you to sign a revised employment agreement without providing some additional benefit to you in return.
 

[1] Covenoho v. Pendylum Ltd., 2017 ONCA 284; and Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII).

 




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