Over the past several years, Canadian courts have taken a proactive stance in scrutinizing restrictive termination provisions in employment contracts. This judicial trend stems from a commitment to ensuring that employees are not deprived of their common law entitlements upon termination.
It is well-established law that an employer is permitted to displace the common law presumption of reasonable notice and, specifically, to limit an employee's entitlements upon termination through clearly drafted termination provisions in employment contracts. These provisions are valid and enforceable provided (i) they do not run afoul the minimum requirements of applicable employment standards legislation in the province in which the employee works, and (ii) the language is clear and unambiguous.
Judicial Tension
There exists a notable tension between Canadian appellate courts and trial judges regarding the enforceability of termination provisions that seek to displace the presumption of reasonable notice. While appellate courts have affirmed that employers can utilize such contractual provisions, emphasizing the importance of clarity and mutual agreement, trial judges frequently adopt a more protective stance for employees.
This divergence reflects a broader judicial philosophy: appellate courts focus on upholding the freedom to contract, while trial judges emphasize safeguarding employees' rights against potential exploitation. As a result, employers face a complex landscape where their efforts to limit severance obligations may be challenged in lower courts, ultimately leading to inconsistent outcomes across jurisdictions.
Why Bother?
Given the increasing scrutiny and frequent invalidation of termination provisions by trial judges, many employers question the value of including such clauses in employment contracts. The challenge lies in the realization that trial judges often prioritize employee protections and common law entitlements over contractual intent. This creates uncertainty and the potential for costly disputes, which leads some employers to wonder whether such provisions are worth the effort.
Notwithstanding this uncertainty, it is still worthwhile for employers to include restrictive termination provisions in employment contracts as there are numerous examples of courts upholding the language when properly drafted. Courts have consistently reinforced that clear, unambiguous clauses that comply with minimum employment standards can effectively limit an employee's entitlements.
Bertsch v. Datastealth
The latest example comes courtesy of Justice Stevenson of the Ontario Superior Court of Justice in Bertsch v. Datastealth[1].
The plaintiff, Gavin Bertsch, was employed by the defendant, Datastealth Inc., for 8.5 months. Mr. Bertsch’s employment agreement purported to limit his rights on termination to the statutory minimum amounts prescribed by the Ontario Employment Standards Act, 2000 (the “ESA”). The provision even provided that the plaintiff was contracting out of common law notice requirements.
The plaintiff argued that the termination clause was not enforceable because it was ambiguous and failed to properly reference the statutory exemptions from compensation on dismissal, as prescribed in O. Reg. 288/01 (the “Regulation”) under the ESA.
The plaintiff argued that the termination provision was void because it purported to allow a termination for cause whether or not there was “wilful misconduct, disobedience or wilful neglect”, meaning the agreement established a different threshold for a termination without notice than the one referenced in the Regulation. The termination provision has been reproduced at the end of this article.
The defendant maintained that the provision was compliant with the ESA and that there was no ambiguity whatsoever.
Decision
Justice Stephenson held that the termination provision did not fun afoul the ESA and concluded that was no reasonable alternative interpretation of the clause that might result in an illegal outcome. While Justice Stephenson acknowledged the presumptive power imbalance between an employee and employer, he also noted that where the proper meaning of the provision is clear, as was the case here, the normal power imbalance that exists in a employment relationship is irrelevant and ought not to change the outcome.
With respect to the argument that the provision created a different standard for a termination without notice than the one prescribed in the Regulation, Justice Stephenson had no trouble distinguishing this termination provision from the one that was at issue in Waksdale v. Swegon North America Inc.[2]
Whereas the provision in Waksdale defined “cause” more broadly than does the ESA, the verbiage in this instance did not. It simply provided that where the employee’s employment was terminated, he would receive only the minimum payments and entitlements owed to him under the ESA. In fact, the provision even cautioned Mr. Bertsch that there could be circumstances in which he would have no entitlements under the ESA. This was an express recognition of the “cause” standard established within the Regulation.
Finally, Justice Stephenson remarked on the difference between a “failsafe” clause and a “severability clause”, which has been found to be ineffective in saving an otherwise invalid termination provision.
Unlike a typical severability clause, which provides that if a contractual term is found to be unenforceable, that finding will not affect the validity of any other provision in the agreement, the failsafe clause relied upon by the defendant in Bertsch provided only said that the terminated employee would receive at least the minimum entitlements under the ESA. If anything, this provision confirmed that the parties had no intention of contracting out of the minimum requirements of the ESA.
In the end, the termination provision was upheld as valid and binding and the plaintiff’s claim was struck.
Takeaway for Employers
The decision in Bertsch serves as a useful reminder that when it comes to the use of termination provisions that aim to displace the right to common law notice, the juice is still worth the squeeze.
By ensuring that these provisions are carefully constructed and clearly articulated, employers can navigate the complexities of employment law and potentially secure significant benefits in terms of predictability and reduced severance obligations, making the effort to include them a strategic advantage.
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About the authors
Andrew Bratt is the National Practice Group Leader – Employment, Labour & Equalities at Gowling WLG in Toronto.
Drew McArthur is an associate at Gowling WLG in Ottawa.
Rachel Corwin is an associate at Gowling WLG in Ottawa.
This article has been reproduced with the kind permission of the authors and Gowling WLG.
[1] 2024 ONSC 5593 (as of the time of publication, this decision is not yet on CanLII)
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