Highlighting the importance of using precise language in termination provisions of employment contracts, the Ontario Court of Appeal in Wood v Fred Deeley Imports Ltd., 2017 ONCA 158 [Wood] recently held that a termination provision that failed to expressly provide for benefit continuation during the notice period and statutory severance pay was unenforceable. The Court of Appeal’s decision in Wood affirms that termination provisions must be interpreted by their strict language alone, and implementing a termination in accordance with the Employment Standards Act, 2000 (ESA) cannot save an otherwise unenforceable provision.

Background

The plaintiff, Ms. Wood, worked for the employer from April 2007 until April 2015, at which time the employer notified all of its employees, including Ms. Wood, that due to a sale of its business, their employment would end effective August 2015. Ms. Wood was provided with 13 weeks’ working notice, a lump sum payment equal to 8 weeks’ pay, and benefit continuation for the duration of the notice period.

The working notice and lump sum payment provided to Ms. Wood totalled 21 weeks and exceeded her entitlements to approximately 16 weeks as specified in her employment agreement, which stated:

[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 Summary Judgment Decision

Ms. Wood moved for summary judgment, challenging the enforceability of the employment agreement on the basis of two grounds. First, she argued that the entire agreement was invalid for lack of consideration because she had not signed the employment agreement until a day or so into her employment. Second, Ms. Wood argued that the termination provision failed to expressly reference her entitlement to continued benefit contributions during the notice period specified therein. The motion judge dismissed both lines of argument, noting that the employer had continued Ms. Wood's benefit contributions throughout the notice period, but fixed Ms. Wood’s reasonable notice entitlement at nine months in the event that his findings on either ground were wrong.

The Court of Appeal Decision

The Court of Appeal upheld the motion judge’s finding that there was insufficient consideration for the employment agreement and also declined to interfere with the motions judge’s finding regarding the appropriate length of the notice period. However, the Court of Appeal overturned the motion judge’s finding that the termination provision’s failure to expressly reference Ms. Wood’s benefit entitlements was not fatal to the provision as a whole, distinguishing the Ontario Superior Court of Justice’s earlier decision in Roden v. Toronto Humane Society, 2005 ONCA 33578 [Roden].

The termination provision in Wood expressly excluded any obligations on the part of the employer “other than those provided for” in the express language of the provision. In light of the exclusionary language, the Court of Appeal found that, unlike in Roden, it was not possible to infer that the termination provision had intended to include benefit continuation during the notice period. As such, the Court of Appeal concluded that the termination provision contravened the ESA and it was unenforceable.

The fact that the employer had actually continued the employee’s benefits during the working notice period in Wood was not sufficient to correct an otherwise unenforceable contractual provision. The Court of Appeal held that the enforceability of a termination provision “depends only on the wording of the clause itself, and not what the employer may have done on termination”.

Finally, the Court of Appeal concluded that the termination provision was unenforceable on a second basis, having failed to clearly satisfy the employer’s obligation to pay severance pay. Specifically, the employer could meet its obligations under the clause in three ways, only one of which would have complied with the employer’s severance obligations under the ESA.

Key Takeaways for Employers

  1. Employment contracts must be drafted in clear terms: As noted in previous blog posts, contractual clarity is paramount. Precise drafting reduces the risk of future litigation. In Wood, the Court of Appeal affirmed that termination provisions will be considered in light of both their actual and potential application and that the mere possibility of a contravention of the ESA is sufficient to render the provision unenforceable. The defects that arose in Wood could have been avoided by clearly particularizing the employee’s entitlements to notice or pay in lieu, severance pay, vacation pay and benefit continuance within the termination provision.
  2. “Checked for silence… taxed for speech”: Exclusionary language in a termination provision can make it unenforceable: The decision in Wood clarifies the effect of exclusionary language. In both Wright v Young and Rubicam Group of Cos. (Wunderman), 2011 ONSC 4720 and Stevens v Sifton Properties Ltd., 2012 ONSC 5508, the termination provisions were held to be unenforceable despite the fact that the employers had complied with their ESA obligations post-termination on the basis that the provisions contained clear exclusionary language, rather than simply “remaining silent” with respect to benefit entitlements. The Court of Appeal's decision in Wood differentiates its earlier decision in Roden, where a termination provision that was silent with respect to benefit entitlements but did not contain exclusionary language was upheld. The takeaway for employers is that if exclusionary language is used, it is important to include a saving provision confirming the employee will not receive less than his or her minimum statutory entitlements.
  3. Not too little, still too late: Complying with ESA obligations will not cure a defective contract provision: If a termination provision expressly excludes benefit or other entitlements during the notice period, providing the benefit in question post-termination will not serve to otherwise cure or uphold the remainder of the termination provision. Enforceability is entirely dependent on the express language of the provision.

A special thank you to Tyler Henderson for his assistance with this update.