Ruling on termination clauses causes confusion

Some lawyers say a recent Court of Appeal decision concerning the interpretation and enforceability of termination clauses may actually bring more confusion than clarity to the issue.

In Nemeth v. Hatch Ltd., Joseph Nemeth appealed the dismissal of his action against his former employer for damages arising from the termination of his employment without clause. Hatch Ltd. had employed Nemeth for 19 years before he was fired.

He was given eight weeks notice, 19 weeks severance pay and continued benefits during the notice period.

While this was consistent with the appellant’s minimum entitlements under the Employment Standards Act, Nemeth argued that the termination clause in his contract was deficient because it did not specifically exclude his common law rights.

The Court of Appeal found that the termination clause did not need to explicitly state the parties intended to limit Nemeth’s common law notice entitlement and that the clause’s plain language made the parties’ intention to do so clear.

“It suffices that the parties’ intention to displace an employee’s common law notice rights can be readily gleaned from the language agreed to by the parties,” wrote Justice Lois Roberts in the decision.

Jennifer Bernardo, a lawyer with Baker McKenzie LLP, says the decision is the latest that shows the court is willing to relax some of the interpretive rules regarding termination provisions.

She says there have been a number of Court of Appeal decisions in recent years that have taken a more flexible approach to the enforceability of termination clauses.

While there might be some benefit for employers in the flexibility the court showed in Nemeth, it might not bring any more certainty for employers drafting clauses, she says.

“The benefit of rules is that you know that if you follow the rules, you’ll be fine. And if you’re taking a more relaxed approach to interpreting these termination provisions, then there could be some confusion as to whether or not your termination provision meets this more flexible test or if it doesn’t,” says Bernardo, who was not involved in the case.

The termination clause at issue in Nemeth was: “The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.”

The Court of Appeal found that the clause provides that Nemeth is entitled to receive one week’s notice for every year of service.

Bernardo says that the Court of Appeal has indicated in the decision that while a termination clause doesn’t need to explicitly oust the common law, it does need to be clear enough to signal that intention, while not excluding an employee’s statutory rights.

“Employers may find that to be a fine line from a drafting perspective, with the result that they may not always be sure whether or not their contracts are enforceable,” Bernardo says.

“Given that uncertainty, we still recommend that employers be explicit about what employees are and are not entitled to upon termination, so that there’s no ambiguity later on.” 

Dorian Persaud, who represented Nemeth, says he was arguing for the law in the area to be advanced so that when an employee signs a contract, they know exactly what they’re getting, including the provision of severance and benefits, as well as what they’re giving up.

Persaud says there have been some Ontario Superior Court decisions that have seemed to evolve the law in that direction. The Court of Appeal agreed that a high degree of clarity is required, but it held that the parties can agree to any period of notice as long as they do so clearly and do not offend the Employment Standards Act.

He says the court’s decision still leaves some confusion, as it could be argued that a clause is simply required to say that, upon termination, the employer will comply with its obligations under the ESA.

“The fact that the employer is saying we are going to comply with the ESA — that doesn’t tell you anything that you don’t already know, and you would not be alert to the fact that in accepting this agreement that you are giving up your entitlements [under the] common law,” he says.

This is a deficiency in this area of law as it stands right now, says Persaud.

For the time being, it is a best practice for lawyers to draft clauses that do not offend the ESA and make it clear to the employee what they are receiving, which will minimize litigation, Persaud says.

Bernardo says the decision means that courts may be more willing to uphold termination provisions than they were in the past.

But the safest bet for employers is still to be as explicit as possible in their wording about what employees are and are not entitled to upon termination.

“Clarity is always going to be the key element of drafting these types of clauses,” she says.

William Anderson, the lawyer who represented the employer, was not available for comment.