The (In)Validity of Termination Clauses in Employment Contracts

Employment standards legislation grants employees statutory minimum rights, the common law can grant greater rights to employees than the legislated minimums, but valid provisions in employment agremeents may be able to limit an employee’s common law entitlements to the statutory minimums.

This article discusses the various sources of law governing employee terminations and the (in)validity of exclusionary clauses in employment agreements that purport to oust common law rights to limit an employee’s entitlements to the common law minimums.   

• • Legislation:  Statutes and Regulations

• • Common Law:  Decisions Issued by the Courts

• • Contracts:  Individual Employment Agreements

LEGISLATION

Legislation such as the Alberta Employment Standards Code (the “Code”) and Employment Standards Legislation in Other Provinces Establish the Minimum Standards for Termination of Employment.

In Alberta, the Code mandates the following, among other things, when terminating the employment of an employee:

• • Under section 55 of the Code, an employer must provide either minimum notice or termination pay to an employee in accordance with the minimums prescribed in that section of the Code as described below.

• • Under section 4 of the Code, an employment agreement or provision that does not supply these minimum requirements is contrary to public policy and void.

• • Under section 3 of the Code, all remedies under the common law or agreements that guarantee rights at least equal to the Code are preserved.

The Code is a floor, not a ceiling.

Minimum Notice Required Pursuant to Section 55 of the Code:

To terminate an employee, an employer must provide minimum written notice based on the duration of the employment of the individual as follows:

• • Less than 90 days of service: no notice

• • 90 days to 2 years of service: one week of notice

• • 2 years to 4 years of service: two weeks of notice

• • 4 years to 6 years of service: four weeks of notice

• • 6 years to 8 years of service: five weeks of notice

• • 8 years to 10 years of service: six weeks of notice

• • 10 years or more of service: eight weeks of notice

Breaching this provision of the Code (or similar provisions in other employment standards legislation across Canada) will render a termination clause that purports to limit the rights of an employee to the minimum requirements under the legislation as void, and may permit a terminated employee to pursue greater remedies under the common law, as discussed below.

Termination Payment Pursuant to Section 57 of the Code.

Instead of providing notice for the minimum period, an employer may provide pay equal to the wages the employee would have earned working regular hours for the duration of the applicable notice period.

Under subsection 57(2), an employer may also provide a combination of termination pay and notice. The employer must then pay the employee pay equal to the period not covered by the duration of the notice period.

COMMON LAW

Implied Term of Common Law Reasonable Notice in Employment Agreements

The “common law” implies a term of reasonable notice in employment contracts that generally entitles dismissed employees to greater notice than required by the Code or other employment standards legislation.

A dismissed empoylee is generally entitled to common law reasonable notice if:

• • there is no clause in an employment agreement with respect to termination of employment, or

• • the presumption of reasonable notice is not rebutted by valid, clear and unambiguous language in the employment agreement (Machtinger v HOJ Industries Ltd, [1992] 1 SCR 986).

Typically, the duration of reasonable notice under the common law will be longer than the prescribed minimum notice under the Code or other employment standards legislation.

Calculating the Common Law Reasonable Notice Period.

Reasonable notice is based on all of the circumstances relevant to finding alternate work.

The main considerations, among others, in determining the reasonable notice period are:

• • The character of the employment,

• • Length of service by the employee,

• • Age of the employee, and

• • The employee’s ability to find new employment considering their experience, training and qualifications (Keays v Honda Canada Inc, 2008 SCC 39)

The foregoing factors are known as the Bardal factors. Based on the Bardal factors, the courts usually calculate the applicable common law reasonable notice period, unless the common law notice period has been ousted by a contractual provisions in an employment agreement.

 CONTRACT

Validly Drafted Termination Clauses May Oust the Implied Term of Common Law Reasonable Notice

The presumption of common law reasonable notice will be rebutted if the employment agreement clearly specifies a different notice period that is compliant with the legislated minimum notice requirements (Machtinger v HOJ Industries Ltd, [1992] 1 SCR 986)

Ousting the presumption of reasonable notice via contract largely depends on:

• • Compliance with minimum standards prescribed by the Code or other pertinent employment standards legislation; and

• • The clarity of the termination clause in the employment agreement.

A Termination Clause in an Employment Agreement that Violates the Minimum Requirements of Employment Standards Legislation will be Unenforceable

Under section 4 of the Code, and under the provisions of other employment standards legislation across Canada, and pursuant to the law set out in Machtinger, a termination clause will be void if it does not comply with the minimum standards in the applicable employment legislation.

In particular, the termination clause must clearly account for all employer obligations during the termination notice period.

For example:

• • In Andros v Colliers Macaulay Nicolls Inc, 2019 ONCA 679, a termination clause was deemed invalid because it did not explicitly designate the “greater benefit”.

• • In Wood v Fred Deeley Imports, 2017 ONCA 158, a termination clause was held invalid because it excluded the obligation to contribute to employee’s benefit plan and the obligation to provide severance pay.

If a termination clause in an employment agreement violates the minimum standards set out in the pertinent employment standards legislation, the exclusionary termination clause may be invalid and employees may seek and be entitled to greater severance / compensation under the common law.

Ambiguity Can Render a Termination Clause in an Employment Agreement Unenforceable

A termination clause “must have a high degree of clarity and any ambiguity will be resolved in favour of the employee” (Nemeth v Hatch, 2018 ONCA 7).

Accordingly, a high degree of clarity is required for a termination clause to be enforceable.

A termination clause that simply indicates that termination will accord with minimum statutory standards will be interpreted as a “floor” for the minimum notice or payment that the employee will receive, but not a “ceiling” restricting the maximum notice or pay in lieu to statutory standards.

In other words, under such exclusionary termination clauses, employees may still be entitled to larger common law severance payments (Holm v AGAT Laboratories Ltd, 2018 ABCA 23).

A clause that simply indicates that an employee is entitled to severance in accordance with the Code or other applicable employment standards legislation across Canada will not exclude the ability to seek severance through a common law action (Kosowan v Concept Electric Ltd, 2007 ABCA 85), meaning that in such situations employees may seek greater severance / compensation under the common law.

PERTINENT CASE LAW

The above notions are not novel and the Ontario Court of Appeal as well as the Supreme Court of Canada have repeatedly reiterated this approach in prior years. The rationale for this approach was laid out by Iacobucci J. in Machtinger as follows:

• the terms of the employment contract rarely result from an exercise of free bargaining power. Individual employees on the whole lack both the bargaining power and the information necessary to achieve more favourable contract provisions than those offered by the employer, particularly with regard to tenure;10
• the ESA is remedial legislation, intended to protect the interests of employees. The objective of the ESA is to protect the interests of employees by requiring employers to comply with certain minimum standards, including minimum periods of notice of termination;11 
• 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;12
• if a contractual term is null and void, then it is null and void for all purposes, and cannot be used as evidence of the parties’ intention. If the intention of the parties is to make an unlawful contract, no lawful contractual term can be derived from their intention;13
• an interpretation of the ESA which encourages employers to comply with the minimum requirements of the ESA, and so extends its protections to as many employees as possible, is to be favoured over one that does not;14
• 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;15 and
• one of the purposes of the ESA is to ensure that employees who are discharged are discharged fairly. If an employer has attempted, whether deliberately or not, to frustrate the intention of the legislature, it would indeed be perverse to allow the employer to avail itself of legislative provisions intended to protect employees, so as to deny the employees their common law right to reasonable notice.16

The Ontario Court of Appeal continued building on the legal principles set out in Machtinger, including the following:

• the question of the enforceability of a termination clause turns on the wording of the clause, the purpose and language of the ESA, and the jurisprudence on interpreting employment agreements;17
• 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;18
• if a termination provision’s application potentially violates the ESA at any date after hiring, it is void;19 and
• it is not possible to simply void the part of a termination clause that offends the ESA. If a termination clause purports to contract out of an employment standard without clearly substituting a greater benefit in its place, the entire termination clause is void.20

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