For Canadian employers, one of the most important purposes of written employment contracts is to lawfully limit the amount of notice or compensation that they will owe to employees whose employment is terminated without cause.
Absent a written agreement with a valid termination clause, employees are entitled to “reasonable” notice or pay instead of notice. Depending on the employee’s age, position, length of service and ability to find a new job, employers may have to pay terminated employees anywhere from 3 months to as high as 24 months’ pay on a termination without cause. Contracts with valid termination provisions can dramatically reduce an employer’s obligation and risk in this regard.
Written contracts that do contain termination clauses will, however, be carefully scrutinized by our courts, who routinely make findings that such clauses are unenforceable. Some common reasons supporting a finding of unenforceability include:
- a lack of “consideration”, where an existing employee has signed a new contract of employment without receiving something of value (a raise or promotion, for example) in exchange;
- ambiguity in the contract or language that is not sufficiently clear to lawfully limit the employee’s entitlements; or
- a violation of employment standards legislation, where the termination provision is capable of providing for less than minimum statutory requirements on termination, whether at present or at some time in the future.
In recent years, our courts have also become increasingly prepared to invalidate termination clauses on an expanding variety of new technical grounds. This means that contracts with termination clauses that may have been considered enforceable in past years may require revision to catch up with recent judicial rulings.
Employers can best protect themselves by taking the following steps:
- if they are not using written contracts already, start doing so with all new hires, and possibly introduce contracts to existing employees for valid consideration;
- if they presently have employment contracts in place that are silent on the issue of termination, introduce valid termination provisions for all new hires, and possibly for existing employees where there is adequate consideration; and
- if they have contracts with termination clauses, have those clauses reviewed annually to keep up with changes in the law and recent court decisions.
In all of the above cases, the termination language should be drafted and/or reviewed by legal counsel well versed in this specialized area of the law.