Employers should review the termination provisions in their employment agreements following a recent decision of the Ontario Superior Court of Justice. In Wright v. The Young and Rubicam Group of Companies,1 the Court held that "all inclusive" termination provisions that do not specifically account for the continuation of benefits or that could result in an employee receiving less notice or severance pay than required under the Employment Standards Act, 2000 (the "ESA") are void and unenforceable.
John Wright was dismissed without cause from his position with Young & Rubicam ("Y&R") after five years of service. Wright's employment agreement with Y&R contained a termination provision which capped his entitlement to pay in lieu of notice and severance pay in the event of a dismissal without cause. The termination provision also contained "all inclusive" language as follows:
This payment will be inclusive of all notice, statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.
The termination provision was silent as to Wright's benefits entitlements.
termination provision void
Wright brought an action against Y&R alleging that the termination provision was void on two grounds. First, he argued that the provision was unenforceable because it did not provide for continuation of benefits during the notice period as required by section 61(1)(b) of the ESA. Second, he argued that the provision was unenforceable because the limits imposed by the provision could – in certain circumstances – be less than the combined amount of notice and severance pay required by the ESA.
In response to Wright's first allegation, Y&R claimed that benefits implicitly continue during the notice period in accordance with the requirements of the ESA. Therefore, a termination provision need not specifically address the question of benefit continuation. As to Wright's second allegation, Y&R argued that the payment to Wright was in excess of his entitlement to notice and severance under the ESA.
The Court sided with Wright on both counts.
The Court held that the termination provision was void because it violated section 61(1)(b) of the ESA, which states that an employer who terminates an employee's employment with pay in lieu of notice must continue an employee's participation in all benefit plans during the statutory notice period.
According to the Court, when pay in lieu of notice is characterized as being inclusive of all entitlements to compensation, it follows that no other forms of compensation (such as benefits) will flow to a dismissed employee. The Court added that even if an employer does continue to pay benefits during the notice period – which Y&R in fact did – the meaning and effect of the provision is not changed. In other words, an "all inclusive" termination provision that does not account for the continuation of benefits is void and unenforceable regardless of whether benefits are continued post-termination.
The Court further found that because the language of the termination provision could, under certain circumstances, provide for less notice and severance pay than the statutory minimums under the ESA, it was unenforceable even though Wright received more than the statutory minimums. In the Court's view, if a termination provision could provide for less than the statutory minimum, it is unenforceable even if the formula for a particular employee at the time of dismissal results in a greater benefit.
In the end, the Court ordered Y&G to provide Wright damages on account of 12 months pay in lieu of notice.
what this means for employers
It is imperative that when drafting an all inclusive termination provision, employers in Ontario2 specifically account for the continuation of benefits during the notice period. It is also crucial that employers in all jurisdictions ensure that their termination clauses provide for the minimum amount of notice and severance, if applicable, under applicable legislation at all times. An employer should ensure that the termination language in its employment agreements provides that in no event will an employee receive less than his or her statutory entitlement. This may be of particular concern for employees who receive bonuses or commissions, as the calculation of pay in lieu of notice or severance pay under employment statutes may capture incentive compensation over and above base salary. Failure to take either precaution may result in an unexpected pay day for a dismissed employee.