For years, lawyers have debated whether a termination clause must specifically state that the employee will not be entitled to common law reasonable notice in order to limit his or her entitlements upon termination. According to the Ontario Court of Appeal's decision in Nemeth v Hatch Ltd (2018 ONCA 7), the answer is no. The court also confirmed that the termination clause need not address all of the employee's statutory entitlements in order for it to be valid.
The obligation to provide reasonable notice of termination when an employer wishes to end the employment relationship without cause is implied in every employment contract. Factors used to determine reasonable notice include:
- the character of employment;
- the employee's length of service;
- the age of the employee; and
- the availability of alternative employment.
The obligation to provide reasonable notice of termination can be modified in (or entirely removed from) an employment contract, provided that the language is clear and complies with the minimum requirements under applicable employment standards legislation. Failing this, the provision will be declared invalid and therefore unenforceable.
Mr Nemeth had worked for his employer for 19 years when his employment was terminated. Upon termination, his employer provided him with his entitlements under the Ontario Employment Standards Act 2000, which comprised eight weeks' termination notice and 19.42 weeks' severance pay.
Nemeth's entitlements upon termination were specifically addressed in the following clause of his employment contract:
"The Company's policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation."
Nemeth argued that he retained his common law right to reasonable notice because the termination clause did not expressly exclude his entitlements under common law. He further argued that the termination provision was invalid because it made no mention to severance pay and therefore attempted to contract out of his minimum statutory entitlements under the Employment Standards Act.
The court of appeal rejected both arguments.
It held that an employee's right to reasonable notice can be modified or eliminated if the contract clearly specifies another period of notice, whether expressly or impliedly, and provided that it complies with the minimum requirements of the Employment Standards Act. It is not necessary for the clause to state that the parties intend for the contractual notice period to replace the employee's common law right to reasonable notice – that is implied by virtue of the fact that the parties specified what the notice requirements would be if the employer ended the relationship on a without cause basis.
The court also rejected the argument that the clause was invalid because it failed to address Nemeth's entitlement to statutory severance pay. In this regard, the court concluded that the termination clause in the contract limited the entitlement to termination notice only. It did not purport to address (let alone deny) any other entitlements under the Employment Standards Act (eg, severance pay). It was implied that these additional entitlements would flow from the requirements of the act. Ultimately, the court found that the termination provision did not violate the Employment Standards Act and was therefore valid.
However, the court also found that the termination clause could be interpreted in a way that would entitle Nemeth to 19 weeks' notice, rather than the eight weeks' notice that he would be entitled to under the Employment Standards Act. The provision offered him one week's notice per year of service (19 weeks in his case) or the minimum amount of notice required by the act. The clause did not state that Nemeth would be entitled to the greater of the two, nor did it restrict his entitlements to only the minimum notice stipulated under the Employment Standards Act. There were two possible interpretations of the provision and the court concluded that the more generous reading should be preferred. Therefore, Nemeth was awarded 19 weeks' pay in lieu of notice. As the employer had already provided him with eight weeks' notice at the time of termination, Nemeth was awarded an additional 11 weeks' pay, bringing the total notice period to 19 weeks.
Employers should ensure that their employment agreements contain properly drafted termination clauses. Clear and unambiguous language that complies with the minimum statutory requirements can go a long way in reducing an organisation's severance exposure and preventing costly litigation.
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