A termination provision in an employment agreement can be a valuable tool to limit the cost of terminating an employee on a without cause basis. An enforceable contractual termination clause rebuts the presumption that an employee is entitled to common law reasonable notice and, as such, can significantly reduce the quantum of notice or pay in lieu of notice owing. However, the Courts have made the enforcement of termination provisions challenging, often finding the clauses void for various technical reasons. The Ontario Court of Appeal recently released its decision in Wood v. Fred Deeley Imports Ltd. which provides further insight into the proper drafting and enforceability of termination clauses.

The plaintiff in Wood had been employed for approximately eight years at the time her employment was terminated. She was offered a severance package consisting of 13 weeks’ working notice, pro-rata incentive bonus payment, benefits coverage, outplacement services and an additional lump sum payment in exchange for her executing a full and final release. Despite the offer, the plaintiff commenced an action seeking damages equivalent to 12 months’ pay in lieu of notice.

At issue on appeal was the enforceability of a termination provision contained within the plaintiff’s employment agreement. The contractual provision at issue was as follows:

[The Company] is entitled to terminate your employment at any time without cause by providing you with 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph, except for any amounts which may be due and remaining unpaid at the time of termination of your employment. The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

The plaintiff argued, in part, that the termination clause was unenforceable as it failed to provide for the continuation of benefit contributions during the statutory notice period as required by the Employment Standards Act, 2000 (the “ESA”). The employer defended the clause on the basis that the reference to “two weeks’ notice of termination or pay in lieu thereof” was broad enough to encompass base salary and benefit contributions. The employer also argued that its payment of the benefit contributions for the statutory notice period following the termination should be considered when assessing whether the clause was valid.

The Court of Appeal rejected the employer’s arguments and ultimately found the clause void. The Court confirmed that a contractual provision which purports to rebut an employee’s entitlement to common law reasonable notice must be clear and unambiguous. In this regard, the words “pay in lieu” do not clearly include both base salary and benefits. The Court also found an employer’s conduct or payment post-termination cannot remedy an otherwise unenforceable termination clause. As such, the enforceability of the termination provision depends solely on the wording of the clause itself.

In reaching its decision, the Court differentiated the clause contained in the plaintiff’s employment agreement, referenced above, from that at issue in its decision of Roden v. Toronto Humane Society. In Roden, the Court of Appeal upheld a termination provision which was silent on benefits continuation. The Court in Wood noted that the contractual provision at issue was not only silent with respect to benefits continuation but also expressly restricted termination entitlements to those set out in the employment agreement. The express limitation of the employee’s termination entitlements to those which did not include benefits defeated any interpretation that the provision was compliant with the ESA.

The Court’s distinction between the clauses contained in Roden and Wood provides employers a small window to argue for the enforceability of clauses which do not expressly reference the continuation of benefits. Such an argument was successful in the recent decision of the Ontario Superior Court of Justice in Cook v. Hatch Ltd. The termination clause in Cook did not expressly reference benefits continuation. The clause also did not contain language which expressly limited the employee’s entitlements to those contained within the agreement. The Court in Cook upheld the termination provision, concluding the clause was similar to that in Roden. We will have to wait to see whether this argument will be embraced in future decisions and whether the Cook decision will be appealed to the Court of Appeal.

Lessons for Employers

Termination provisions provide an excellent opportunity for significant cost savings for employers at the time of termination. Employers should ensure employment agreements contain carefully crafted termination provisions to reduce the likelihood they will be found void upon judicial scrutiny. The Wood decision also signals the importance of regularly reviewing and updating employment contracts to ensure they remain consistent with jurisprudence and statutory requirements.