Employers rely on termination provisions in employment agreements to limit the financial costs of terminating employees by contracting out of lengthy common law notice periods. However, there is always the risk that a court will strike down these provisions as being unenforceable. The recent cases of Miller v. A.B.M. Canada Inc. 2015 ONSC and Howard v. The Benson Group Inc. 2015 ONSC reflect a continuing trend towards rendering termination provisions null and void for failing to clearly comply with employment standards legislation.
Miller v. A.B.M. Canada Inc.
Mr. Miller had been employed by A.B.M. Canada Inc. (“A.B.M.”) for approximately a year and a half in the position of Sales Development Manager at the time of his termination without cause. As Sales Development Manager, he received a base salary, a car allowance, and 6 percent pension contributions.
Prior to commencing employment with A.B.M., Mr. Miller signed an employment agreement with the following termination provision:
“Regular employees may be terminated at any time without cause upon being given the minimum period of notice prescribed by applicable legislation, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation”. [Emphasis added]
A.B.M. advised Mr. Miller in his termination letter that he was entitled to two weeks’ base salary in lieu of notice. Mr. Miller declined an “enhanced separation offer” of four weeks’ base salary plus car allowance, and commenced an action for wrongful dismissal. The Ontario Superior Court of Justice awarded Mr. Miller his common law reasonable notice on the basis that the termination provision was not enforceable.
A.B.M. appealed the Superior Court’s decision at the Ontario Divisional Court, arguing that the employment agreement’s silence in paying benefits during the notice period should lead to a presumption that benefits would be paid.
The Divisional Court upheld the Superior Court’s decision that the provision was null and void because it only referenced continuing his “salary” for the statutory period, not the totality of his remuneration, in contravention of the Employment Standards Act, 2000 (the “ESA”). The Divisional Court noted that the employment agreement distinguished between salary, pension contributions and car allowance. Accordingly, the Divisional Court stated that the provision was, in fact, not silent on paying benefits. At best, A.B.M.’s argument led to the conclusion that the termination provision was ambiguous. The Divisional Court applied the contra proferentem principle of contractual interpretation, which states that ambiguity ought to be read against the party who drafted the contract, particularly employment contracts where employees are vulnerable and need protection.
Howard v. The Benson Group Inc.
The Plaintiff, Mr. Howard, had entered into a five-year term employment agreement with The Benson Group Inc. (“The Benson Group”). The Benson Group terminated Mr. Howard’s employment without cause less than two years into his term, and provided him with two weeks’ pay in lieu of notice.
The termination provision in question read:
“Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario”. [Emphasis added]
In an action for wrongful dismissal, the Plaintiff argued that the termination provision had three ambiguities that were fatal to its enforceability: 1) the term “amounts paid” was unclear as to whether it included base salary as well as benefits or any bonuses, or base salary alone; 2) the word “any” in the phrase “any amounts paid” suggested that The Benson Group retained the discretion to decide whether or not it would provide any payments upon termination; and 3) the payment of “amounts” could extinguish all The Benson Group’s to Mr. Howard on termination, including full satisfaction of obligations arising out of the ESA.
The Ontario Superior Court of Justice found the termination provision to be sufficiently ambiguous as to the true extent of Mr. Howard’s entitlement under the ESA, and construed the ambiguity against The Benson Group. While the Court rejected Mr. Howard’s claim that he should therefore receive payment for the three year balance of his contract term, the Court did find that he was entitled to a common law reasonable notice period.
What does this mean for employers?
Terminations provisions must be drafted to clearly comply with all entitlements the employee has under the ESA. Even though the provisions above did not explicitly exclude any ESA entitlements, they were still held to be ambiguous, and were interpreted unfavourably to the employer.Courts have also found that ambiguous provisions cannot be saved by voluntarily providing all ESA entitlements upon termination.
All remuneration must be continued for the statutory notice period. Remuneration may include, but is not limited to, commission, non-discretionary bonus, group benefits, vacation pay accrual, pension contribution and car allowance.
Do not rely on the same old employment agreement template. The Court in Miller v. A.B.M. specifically noted that the employment agreement was prepared by a non-lawyer who used precedents obtained by a legal department. Employment agreements must be drafted with care during the hiring process, and reviewed periodically throughout the employment relationship to ensure compliance with legal developments.
“Even though the provisions above did not explicitly exclude any ESA entitlements, they were still held to be ambiguous, and were interpreted unfavourably to the employer. ”