For an employer, one of the most important – and unfortunately, often noticeably absent – provisions in any written employment contract is a clause outlining what notice or pay in lieu an employee is entitled to on termination. These provisions are usually enormously valuable for employers, both in knowing in advance what is necessary to terminate an employee (and therefore minimizing the cost of expensive wrongful dismissal litigation), and in significantly reducing the amount of notice or pay in lieu that an employee would otherwise be entitled to under the common law.
In order to be valid, a termination clause must be clear and unambiguous, and must provide at least the minimum standards outlined in applicable employment standards legislation. Increasingly, Canadian courts have enforced such clauses, as demonstrated by a recent case, Wernicke v. Altrom Canada Corp.1, in which the British Columbia Supreme Court upheld a termination provision in a senior employee’s contract that limited him to the minimum notice provisions in the B.C. Employment Standards Act.
This case demonstrates the significant value of such clauses when properly drafted and appropriately negotiated with the employee. The plaintiff, Morris Wernicke, was a 43-year old chartered accountant who had worked for the defendant company for 12 years at the time of his termination. He began his employment as Controller and was later promoted to Chief Financial Officer and Vice-President of Finance. In a summary trial, Mr. Wernicke argued that the termination provisions in his employment contract were unenforceable because they were ambiguous, and because his employment relationship had changed so significantly that the substratum of the contract had eroded and the defendants could not rely on the provisions on this basis.
In making its decision, the court considered evidence that when the plaintiff received the first draft of the employment contract he reviewed it carefully, and understood the termination provisions.The court noted that Mr. Wernicke was a sophisticated individual who often prepared employment letters for other employees with similar termination provisions. In fact, Mr. Wernicke had negotiated several changes to other provisions in his contract, and had obtained legal advice before signing the final version. He also confirmed that he understood provisions in the agreement that stated that if there was a change in his remuneration, the balance of the letter agreement would still apply, and that the entire agreement term meant that any changes to the terms of his employment had to be in writing.
The court found that the termination provisions were clear and unambiguous, and that Mr. Wernicke’s own evidence was that he understood what they meant. The court also rejected the plaintiff ’s arguments concerning the effect of the changes in his employment, noting that the contract expressly reserved the right for the company to require Mr. Wernicke to assume new and varied duties, and that such changes would not affect other parts of the contract. In the court’s view, the changes in his position from Controller to Chief Financial Officer were not fundamental, but rather, were "incremental and predictab;e" and reflected the "normal evolution of a professional's job." On this basis, the court found that Mr. Wernicke was bound by the termination provisions and was only entitled to pay in lieu of notice in accordance with the provisions of the B.C. Employment Standards Act. Accordingly, his claim was dismissed.
The court’s decision in Wernicke is consistent with other recent decisions by Canadian courts that have enforced termination clauses in situations where the provisions themselves are clear, and where employees have been provided these contracts prior to commencing employment, and with the opportunity to obtain legal advice. The Wernicke decision demonstrates the importance of ensuring that contractual language expressly provides that the employer may change an employee’s duties and obligations during the employment relationship without these changes affecting the remainder of the agreement. Ultimately, the practical value of properlydrafted termination clauses is best illustrated by the difference between the employee’s termination entitlement in this case, $18,461, and his potential damages based on common law reasonable notice, which could be conservatively estimated as over $260,000, based on 12 months of his compensation. Employers should always consider such clauses in preparing employment agreements, and ensure that standard employment agreements are kept current, and reviewed by legal counsel whenever possible.