Since the Supreme Court decision in Machtinger v HOJ Industries Ltd, it has been well established that employers in common law provinces can contractually limit the amount of common law notice or pay in lieu to which an employee may be entitled on termination. However, the case law on drafting such clauses is ever evolving and the courts are wary of enforcing these provisions, except in the clearest cases.
In Holm v AGAT Laboratories Ltd the majority of the Alberta Court of Appeal found that a clause purporting to limit an employee's common law notice by simply stating that termination pay would be calculated in "accordance with the provincial legislation for the province of employment" was not specific enough to contract out of common law reasonable notice. Although the employment agreement stated that the employee would be entitled to only such amounts, the majority of the court found that the wording did not clearly restrict the applicable notice period to the statutory minimum set out in the Employment Standards Code. The court held that the reference to the applicable employment standards legislation created a floor, but in no way created a ceiling that limited the employee's notice to the minimum requirements under the code.
Concurring with the result, Justice O'Ferrall engaged in a discussion about how a lay person reading the impugned termination provision may be forgiven for thinking that the parties intended to limit the notice or pay in lieu to the minimums prescribed by the Employment Standards Code. He noted that historically the courts have not been interested in discerning the parties' intent from the language of the contract, but rather in applying certain interpretive tools that are designed to protect employees as a result of the perceived inequality of bargaining power between themselves and their employers. He identified the following interpretive principles which, among others, were operative in this case:
- Termination provisions will rebut the presumption of reasonable notice only if they are absolutely clear.
- When faced with a clause in an employment contract that could reasonably be interpreted in more than one way, the court should prefer the interpretation which most benefits the employee.
He summarised these principles as "what it takes to satisfy a court that presumptions in favour of the employee, as mandated by previously-decided jurisprudence, have been rebutted".
The courts will find any reason to hold that the language in an employment agreement is not specific enough to limit the employee's common law notice. As such, employers should give careful consideration to their agreements and seek legal advice. The following considerations, at the very least, bear close attention when drafting termination provisions:
- Any limitations must meet the minimum prescribed by the applicable employment standards legislation in order to be valid (including in future years of employment). An employer cannot contract out of the statutory minimums prescribed by the applicable provincial employment standards legislation. If this occurs, the entire provision will be void and the employee will be entitled to full common law notice. Employers should make clear that the employee will be provided the minimum entitlements set out in the applicable employment standards legislation. These entitlements include notice (or pay in lieu) and, in some jurisdictions, severance and benefits continuation.
- Termination provisions should specifically state that the employee has the right to those entitlements (whether the statutory minimums or any other greater entitlement that the employer offers) and no other amount.
- Employers should consider including language explicitly rebutting the application of the common law, such as: "For clarity, the employee is not entitled to any common law, or other notice or pay in lieu thereof."
- If the employee receives multiple streams of compensation (eg, profit-sharing plans or performance-based compensation), the plans or policies governing those streams of compensation should similarly limit the employee's entitlements and comply with the applicable employment standards legislation. The termination provision should take those into account.
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