The Costly Risks of Termination Clauses

The Costly Risks of Termination Clauses

One of the most critical yet often misunderstood aspects of employment law in Ontario is the enforceability of termination clauses in employment contracts. Both employers and employees frequently underestimate the significance of these clauses, potentially leading to unintended financial consequences upon termination.

Statutory Notice vs. Common Law Notice

Per the Ontario Employment Standards Act (the “ESA”), employees terminated without cause are entitled to a minimum notice period based on their length of service, ranging from one week to a maximum of eight weeks. This notice can either be provided as ‘working notice,’ where the employee continues to work during the notice period, or as ‘pay in lieu of notice,’ where the employer compensates the employee for the value of the notice period.

In addition to this statutory notice, employers with a payroll exceeding $2.5 million annually must also provide severance pay to employees with five or more years of service. The severance pay is calculated at one week per year of service, up to a maximum of 26 weeks – it also includes part weeks, such that an employee with 5.5 years of service is entitled to 5.5 weeks of severance pay, or an employee with 6.3 years of service is entitled to 6.3 weeks of severance pay.

However, what many fail to realize is that without enforceable termination clauses, employees can also be entitled to common law notice, often resulting in a significantly longer notice period, beyond that prescribed in the ESA.

The Challenge with Termination Clauses

Recent court rulings in Ontario have increasingly scrutinized the wording of termination clauses, often determining that they should not be enforced. Many standard employment contracts contain both ‘for cause’ and ‘without cause’ termination clauses. If either clause is found to be unenforceable, the entire termination provision becomes void.

For example, phrases like “Your employment may be terminated for cause without notice” or “Your employment can be terminated by the employer without cause upon providing you with your minimum notice” have been deemed void by courts. This means that even a valid ‘without cause’ termination provision can be undermined by an unenforceable ‘for cause’ provision.

The Substance of Common Law Notice

In the absence of a valid termination clause, employees are entitled to common law notice, or ‘reasonable notice.’ This notice period is determined on a case-by-case basis, considering factors such as the employee’s age, length of service, and availability of comparable employment. While common law notice can extend up to 24 months, it varies widely based on individual circumstances, leading to potential legal disputes over the appropriate duration.

Next Steps for Employees and Employers

For employees facing termination, consulting an employment lawyer to assess the enforceability of their employment contract is crucial. For instance, while statutory notice for a 30-year employee might be limited to 8 weeks, common law notice could extend up to 24 months, highlighting the importance of legal advice in such situations.

Employers, on the other hand, can save significant costs by ensuring their employment contracts have enforceable termination clauses. Updating existing contracts or incorporating new ones requires careful drafting to comply with recent court rulings. Employers should seek legal guidance to navigate this complex landscape and mitigate potential financial liabilities.

Author – Carson Healey