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Decision clarifies termination clauses

Cover Story: Lower courts issued diverging opinions
Employment lawyers say a much-anticipated Ontario Court of Appeal decision has brought clarity to the issue of what makes contractual termination clauses enforceable.

Decision clarifies termination clauses
Landon Young says an Ontario Court of Appeal decision makes it clear that termination clauses will fail if they exclude a continuation of benefits.Photo: Robin Kuniski
The issue has been top of mind for the employment law bar in recent years as lower courts have issued diverging opinions on the issue, lawyers say.  

In Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the court declared an employment agreement’s termination clause as unenforceable because it contravened the Employment Standards Act. The court found that the clause did not include all of the employment standards that employees are entitled to under the ESA.

“Contracting out even one of the employment standards and not substituting a greater benefit would render the termination clause void and thus unenforceable, in which case Wood would be entitled to reasonable notice of termination of her employment at common law,” Justice John Laskin wrote in the decision on behalf of a three-judge panel.

Employment lawyers say they have been looking for clarification on whether the word benefits must be expressly used in contractual termination clauses, and this decision provides that.

“There has really been a division at the trial level for five years now on this issue,” says Sean Bawden, a partner with Kelly Santini LLP. Bawden was not involved in the case.

“And so it’s really the first time that the Court of Appeal has looked at those trial level decisions and picked a winner and really said unequivocally whether the word benefits must be used,” he says.

“The clarity from that decision alone is just priceless to be honest.”

In the case, Julia Wood, a sales and event planner, was terminated along with other employees after her employer, Fred Deeley Imports, was bought out by Harley-Davidson Canada in 2015.

The employer gave Wood, who had worked for the company since 2007, 13 weeks working notice and paid her base salary and benefits for that time. At the end of that period, the company also paid her an amount worth eight weeks’ salary as compensation for her entitlement to severance and a number of other payments.

Wood brought an action against the former employer, arguing that the termination clause was unenforceable, as it expressly excluded the employer’s obligation to contribute to her benefits plan during the notice period.

Wood’s appeal was of a failed summary judgment motion, in which she sought damages worth 12 months salary and benefits.

In its decision, the Court of Appeal found that the termination clause contravenes the act, as it excludes the company’s obligation to severance pay and also excludes the employer’s statutory obligation to contribute to the employee’s benefits plan during the notice period.

While the company and Wood had agreed to a different notice period, in which Wood actually got paid more than she would have under the minimum requirements of the ESA, the court found the company’s payments to the employee on termination “should have no bearing on whether the termination clause itself contravenes the ESA.”

The appeal turned on the wording of the clause, which said the company was required to give the employee “two weeks’ notice of termination pay in lieu for each year or partial year of employment.”

The clause also said that the company would not be obliged to pay anything other than what was in the clause, and that the payments and notice were “inclusive of [Wood’s] entitlements to notice, pay in lieu of notice and severance pay.”

The court found the clause was “not merely silent about Deeley’s obligation to contribute to Wood’s benefit plans during the notice period,” but it also used language that excluded that obligation.

Landon Young, a partner with Stringer LLP, who was not involved in the case, says that the decision makes it “crystal clear” that a termination clause will fail if it does not provide for continuation of benefits, and if it also includes language that says that everything the employee will receive is in the clause.

“It doesn’t matter what the employer actually does when he carries out the termination,” he says. “All that matters is what’s in the contract.”

The court also determined that the clause failed to satisfy the company’s obligation to pay her severance, as the company had combined separate obligations of notice of termination or pay, and severance pay. Under the ESA, Wood would have been entitled to eight weeks’ notice of termination, as well as severance pay, but the clause was not drafted to reflect both, the court found.

The Court of Appeal determined that Wood should receive damages equal to nine months, which the motion judge had determined would be the appropriate amount if he had ruled the clause was unenforceable.

Daniel Lublin, lead counsel representing Wood and a partner with Whitten & Lublin PC, says the Wood decision shows that the Court of Appeal has sided with an approach that interprets these clauses in a way that protects employees’ rights.

“The court set out this approach that should be viewed as the proper approach to interpreting a severance limiting clause and it’s a high standard,” Lublin says.

The lawyers representing the defendant did not respond to a request for comment.

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