Ontario Court of Appeal Judgment a Reminder of the Importance of Carefully Drafted Termination Clauses

10.3.17

In a recent decision, Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the Ontario Court of Appeal reversed a 2016 judgment of the Ontario Superior Court of Justice that had found a termination clause in an employee’s employment agreement enforceable. The consequence for the employer was that, instead of 13 weeks’ working notice and a lump sum equivalent to eight weeks’ pay, the employee was entitled to nine months’ reasonable notice.

Important takeaway from the decision:

  • a carefully drafted termination clause that provides an employee with at least his or her minimum entitlements under the applicable employment standards legislation is important where the employer wants to avoid the risk of having to pay the employee reasonable notice of termination at common law upon termination of the employee’s employment. 

Facts
 
Julia Wood, at 48 years old, had been employed with Fred Deeley Imports Ltd. (“Deeley”) as a sales and event planner for eight years and four months, earning approximately $100,000 annually when her employment was terminated. She had signed an employment agreement on her first day of employment with Deeley that contained the following termination clause:
 
[The Company] is entitled to terminate your employment at any time without cause by providing you with 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph… The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.
 
Deeley paid Ms. Wood her salary and benefits for her 13 weeks of working notice and additional compensation, including a lump sum equivalent to eight weeks’ pay. Nonetheless, Ms. Wood started an action seeking 12 months’ notice of termination on the basis that either her whole employment agreement or its termination clause was unenforceable. A motion judge dismissed Ms. Wood’s motion for summary judgment.

Court of Appeal
 
The Court of Appeal held that the termination clause was invalid and unenforceable because it violated the Ontario Employment Standards Act, 2000 (the “ESA”). Under the ESA, Ms. Wood was entitled to at least eight weeks’ notice of termination where Deeley was required to continue contributing to Ms. Wood’s benefit plans during the eight-week period. Further, because Deeley had a payroll of at least $2.5 million and Ms. Wood was employed for over five years, Deeley was required to pay  Ms.  Wood severance pay equal to eight and one-third weeks’ salary. Under the ESA, Deeley could not contract out of meeting these minimum requirements and any clause that did so would be void.
 
The Court found that although Ms. Wood had been compensated an amount on termination that exceeded the amount that she was entitled to under the ESA (21 weeks’ salary versus 18 weeks’ salary), and despite the fact that Deeley had made contributions to Ms. Wood’s benefit plans during her 13 week notice period, the termination clause was invalid because it excluded the benefit contributions during the notice period required by the ESA.
 
The language of the provision was clear that “the Company shall not be obliged to make any payments to you other than those provided for in this paragraph,” and “the payments and notice provided for in this paragraph are inclusive of your entitlement to notice, pay in lieu of notice and severance pay pursuant to the ESA.” Ultimately, the clause contracted out of the ESA requirement to maintain benefit payments and was therefore invalid.
 
Although not necessary to decide the appeal, the Court also found that the clause would be unenforceable because, under the ESA, notice periods and severance pay are separate obligations. The termination clause combined these obligations such that Deeley could fulfill its obligations under the termination clause in one of three ways, where only one of those ways would give Ms. Wood the severance pay to which she was entitled under the ESA.
 
The Court reversed the decision of the motion judge and held that Ms. Wood was entitled to reasonable notice of nine months or pay instead of reasonable notice.