Feb 12, 2020

Positive Developments Regarding Termination Clause Enforceability

Alarashi v. Big Brothers Big Sisters of Toronto, 2019 ONSC 4510 (CanLII)

As many employers know, enforceable termination clauses that limit employees’ termination entitlements are essential to minimize the costs involved with ending employment relationships. However, courts strictly scrutinize and frequently refuse to enforce such clauses, often for very technical reasons in relation to violations of the Employment Standards Act, 2000 [ESA].

Without enforceable termination clauses, employees are entitled to common law reasonable notice of termination of their employment, or pay in lieu thereof, which is generally higher than the minimum entitlements under the ESA. To prevent issues with enforceability, termination clauses must be drafted with great care and precision. The case law interpreting the type of contractual language that will be enforced is constantly in flux. However, the Ontario Superior Court of Justice’s recent decision in Alarashi v Big Brothers Big Sisters of Toronto [Alarashi] provides valuable guidance for employers regarding termination clause enforceability.

The Decision

In Alarashi, the employee brought a wrongful dismissal action against his former employer, despite the fact that his employment agreement contained a termination clause purporting to limit his termination entitlements to the ESA minimums. The employee challenged the enforceability of the termination clause on three separate grounds:

  1. in stating that group insurance benefits would be continued “for such period as the [ESA] shall require, provided such coverage is available from the insurer”, the clause made benefits continuation during the statutory notice period contingent on the insurer’s discretion, contrary to the ESA requirement that benefits continue throughout the statutory notice period;
  2. by providing that the employee could be terminated “'for cause’ and without pay in lieu of notice…for serious breaches of the terms of this Agreement and/or BBBST’s policies…and/or for any cause recognized at law” the clause disentitled him to pay in lieu of notice for “conduct that falls short of willful misconduct contrary to the ESA”; and
  3. the clause stated the employee's employment could be terminated without cause if he was provided with “such notice (or payment in lieu of notice) or severance pay” (emphasis added) as required under the ESA, which failed to account for the fact that employees are entitled to notice and severance pay under the ESA in certain circumstances.

Although the Court ultimately found the termination clause to be unenforceable, it rejected the employee's first two arguments. Under the common law, ambiguity in termination clauses will generally be interpreted in the way that is most beneficial to employees, so long as that interpretation is reasonable. However, courts should not impute ambiguity when interpreting termination clauses where the parties clearly intend to limit termination entitlements.

In rejecting the argument that the wording regarding benefits continuation was contrary to the ESA, the Court found that the language of the termination clause evinced a clear intention to comply with the applicable ESA requirements. In particular, the Court distinguished the impugned language in the termination clause, which merely recognized “the reality that the employer does not control what insurers offer as part of a group benefits plan”, from unenforceable termination clauses stating that benefit continuation is “subject to the consent of” the insurer. The Court found that the relevant language in the termination clause was not ambiguous, and was not contrary to the ESA because it did not stipulate that the insurer would have the discretion to deny any coverage to a dismissed employee that it would make available to other employees. Consequently, this provision of the termination clause did not violate the ESA.

The Court also rejected the argument that the language pertaining to termination “for cause” was contrary to the ESA, because the language was unambiguous and showed a clear intention to comply with the requirements of the ESA. More specifically, the only reasonable interpretation of the impugned provisions was that the employee's employment could only be terminated for cause “where the ‘serious breach’ of the employment agreement, the human resources manual and/or another law constituted willful misconduct”. The Court therefore concluded that this provision of the termination clause did not violate the ESA.

The Court ultimately accepted the argument that the termination clause violated the ESA because it provided that the employee was entitled to termination pay or severance pay (emphasis added). This violated the ESA because the ESA provides employees with both termination and severance pay in certain circumstances. While the employee was not entitled to severance pay under the ESA because he was employed for less than five years, the Court found that the impugned provision was ambiguous; therefore, the provision violated the ESA, rendering the termination clause unenforceable and entitling the employee to common law reasonable notice.

Takeaways

Overall, Alarashi is a relatively favourable decision for employers because it follows the principle from two recent Ontario Court of Appeal decisions that courts should not interpret a termination clause to be ambiguous based on technical arguments where the intentions of the parties are clear based on the language of the employment contract.

Although the Court found the specific language in the termination clause regarding benefits continuation to be enforceable, this conclusion depended on a fine distinction in relation to very similar language that courts have at other times found to be unenforceable. While Alarashi suggests that employers can provide in termination clauses that benefits entitlements during the termination notice period are contingent upon availability from their benefits insurer, employers should act with caution before adding such language to their termination provisions, as case law on the interpretation of benefit continuation provisions in termination clauses has not yet settled.

Another recent decision out of the Ontario Superior Court of Justice held that a clause that excluded short-term and long-term disability benefits from an employee’s notice entitlement was unenforceable, which entitled the employee to common law notice damages. Accordingly, employers should avoid including language in their termination provisions that expressly or potentially excludes certain benefit entitlements during the minimum notice period under the ESA.

Alarashi illustrates that termination clauses still need to be drafted with care and precision to ensure that they will protect employers when the employment relationship ends. When courts find genuine ambiguity in termination clauses, they will interpret such termination clauses in the favour of employees, which has significant potential financial repercussions for employers. Employers should continue to seek to reduce their potential liability at the end of their employment relationships by having their employment agreements carefully drafted and reviewed on a regular basis to protect against enforceability issues.

For more information on recent decisions regarding termination clause enforceability, check out our most recent Year in Review edition of In the Know. The Year in Review edition of our newsletter is designed to bring you the most significant HR law developments of 2019, as well as some important trends to keep on your radar for 2020.

This post is provided as an information service and summary of workplace legal issues. This information is not intended as legal advice.