For years, lawyers have debated whether a termination clause has to specifically say the employee will not be entitled to common law reasonable notice in order to limit the employee's entitlements upon termination. According to the Court of Appeal for Ontario's recent decision in Nemeth v. Hatch Ltd., 2018 ONCA 7, (PDF) the answer is NO. The Court of Appeal also confirmed that the termination clause need not address all of the employee's statutory entitlements in order for it to be valid.
The Obligation to Provide Reasonable Notice Upon Termination
Implied in every employment contract is the obligation to provide reasonable notice of termination when an employer wishes to end the employment relationship without cause. Factors used to determine reasonable notice include the character of employment, the employee's length of service, the age of the employee and the availability of alternative employment.
The obligation to provide reasonable notice of termination can be modified (or removed entirely) within an employment contract, provided the language is clear and complies with the minimum requirements under applicable employment standards legislation. If not, the provision will be declared invalid and, therefore, unenforceable.
Nemeth v. Hatch Ltd.
In Nemeth v. Hatch Ltd., Mr. Nemeth had worked for 19 years when his employment was terminated. At the time of termination, his employer provided him with his entitlements under the Ontario Employment Standards Act, 2000 (the "ESA"), being eight weeks' notice of termination and 19.42 weeks' severance pay.
Mr. Nemeth's entitlements upon termination were specifically addressed within the following clause contained in his employment contract:
The Company's policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.
Mr. Nemeth alleged that he retained his common law right to reasonable notice because the termination clause did not include express language excluding his entitlements under common law. Mr. Nemeth further argued that the termination provision was invalid because it did not mention severance pay and, therefore, attempted to contract out of his minimum statutory entitlements under the ESA.
The Court of Appeal rejected both arguments.
With regards to Mr. Nemeth's right to reasonable notice, the Court held that an employee's right to reasonable notice can be modified or eliminated if the contract clearly specifies some other period of notice, whether expressly or impliedly, and provided that it complies with the minimum requirements of the ESA. It is not necessary for the clause to say that the parties intend for the contractual period of notice to replace the employee's common law right to reasonable notice. That is implied by virtue of the fact that the parties specified what the notice requirements would be if the employer ended the relationship on a without cause basis.
The Court of Appeal also rejected the argument that the clause was invalid because it failed to address Mr. Nemeth's entitlement to statutory severance pay. In this regard, the Court concluded that the termination clause in the contract only limited the entitlement to notice of termination. It did not purport to address (let alone deny) any other entitlements under the ESA, such as severance pay. It was implied that these additional entitlements would flow from the requirements of the ESA. Ultimately, the Court found that the termination provision did not offend the ESA and was, therefore, valid.
The Court did, however, find that the termination clause could be interpreted in a way that would entitle Mr. Nemeth to 19 weeks' notice, as opposed to the eight weeks' notice he would be entitled to under the ESA. The provision offered him one week of notice per year of service (19 weeks in his case) or the minimum amount of notice required by the ESA. The clause did not say that Mr. Nemeth would be entitled to the greater of the two, nor did it restrict his entitlements to only the minimum notice stipulated under the ESA. There were two possible interpretations of the provision and the Court concluded that the more generous reading of the clause should be preferred. Mr. Nemeth was, therefore, awarded 19 weeks' pay in lieu of notice. As the employer had already provided him with eight weeks' notice at the time of termination, Mr. Nemeth was awarded an additional 11 weeks' pay, bringing the total period of notice to 19 weeks.
Takeaway for Employers
Employers should ensure that the employment agreements they are using contain properly drafted termination clauses. Clear and unambiguous language that is compliant with the minimum statutory requirements can go a long way in reducing an organization's severance exposure and preventing costly litigation.