(416) 365-9320 | Suite 200, 70 Bond Street, Toronto, Ontario, Canada M5B 1X3

A Tale of Two Cases: the ONCA injects serious uncertainty into the law regarding the enforcability of employment contracts

By Jennifer Mathers McHenry

A pair of recent recent decisions in Ontario, each involving the same employer: Hatch Ltd. have thrown the law around enforceability of termination clauses into question and underscore the difficulty employers and employees have in assessing whether a particular contract will effectively limit a terminated employee’s common law rights.

 First, in February, 2017 Hatch Ltd (“Hatch”). faced Paul Holmes, who was terminated after 16 years with the company. His contract stated:

“In the event that we must terminate your employment for reasons other than cause, you will receive a termination package which takes into account your years of service, position and age. As a minimum the amount of combined notice and severance you will receive will equal 4 weeks plus one week for each completed year of service, or such greater amount as may be required by statute at the time of termination.” [Emphasis added.] 

On termination, Hatch provided Holmes with 4 weeks of combined notice and severance plus one week for each completed year of service (a total of 21 weeks).

Among other things, Holmes argued that his employer breached its Employment Agreement by failing to, as the contract required, take into account his years of service, position and age.

The court agreed and determined that because Hatch fundamentally breached the terms of its own contract it could not then rely upon it to limit Holmes’ entitlement.  The contract was set aside and Holmes was awarded 18 months based on common law – approximately three times the contractual formula.

Just less than a year later Hatch Ltd. found itself back in court, this time with a claim from Joseph Nemeth who worked for Hatch Ltd. for 19 years before he was terminated. The common law would provide such an employee with a lengthy period of notice during which his entitlement would be to be kept whole (in receipt of all compensation and benefits to which he would be entitled as an employee).

He had an employment contract with a termination clause which read:

“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.”

On termination his employer provided him with the minimum requirements of the applicable labour legislation, which was the ESA: 8 weeks of notice (with benefits continuation) and 19 weeks of severance.

The plaintiff argued, relying on recent jurisprudence, that the termination clause in his contract was insufficient to oust his entitlement to common law notice because it did not clearly or expressly state that it did so, and that it was unenforceable in any event insofar as it referred only to the notice required by the ESA (and not severance or benefits) and therefore did not meet the minimum requirements of the statute, which requires all three.   In the alternative, he argued that the clause did not limit his entitlement to notice to the ESA minimums but rather set the floor beneath which his notice could not fall.

He was successful on the latter argument on the plain language in the contract which says he was entitled to one week of notice per year of service with a minimum of what is required by statute.  It does not set a maximum number of weeks, so no maximum would be read in. The employer breached his contract when it provided only 8 weeks of notice.

The plaintiff failed, however, to convince the Court of Appeal for Ontario that the clause failed to oust the common law entitlement to notice and the court made clear that a clause need not expressly state that a contractual notice provision is in place of common law provided that it is clear what contractual notice is owing and provided that it meets of exceeds the minimum statutory requirements in all cases.

The Court of Appeal also found – to the surprise of many employment lawyers - that a clause which states that the employer will provide ESA notice and is silent on its obligations to provide severance or benefits pursuant to the statute does not, by virtue of it’s silence, fall below the minimum requirements of the ESA. Instead, the court determined that the clause limited only the notice requirements which might otherwise have been determined by common law and left unscathed ESA entitlements to benefits and severance.

Nemeth was ultimately awarded only 19 weeks of notice in addition to amounts initially provided to him by his employer.  It is unclear from the damages calculation whether the additional amounts provided accounted for the fact that the company terminated his benefits well before the end of the contractual notice period.

Once again Hatch breached its own employment agreement, and notwithstanding the decision the year prior in it’s own case, it again argued the employment agreement would nevertheless limit recovery to contractual rather than common law amounts.  It worked. Where Nemeth's colleague received approximately 78 weeks under common law, Nemeth was awarded only 40 under his contract. 

In my view this latter decision is inconsistent with binding Supreme Court of Canada jurisprudence dating back to it’s decision in Machtinger v. Hoj Industries Ltd. wherein the Supreme Court of Canada noted that policy considerations necessitate that where an employment contract does not comply with the minimum notice periods set out in employment standards legislation, the employee should obtain access to common law remedies.  In this way employers are incentivized to ensure that they draft contracts which clearly comply. The Supreme Court pointed, in coming to its decision,  to the fact that many employees are unaware of their rights and will not challenge contracts which do not comply with mandatory minimums.  

Supreme Court 1992: Employers, be careful. You should draft clear contracts which comply (my comment: I suggest on their face) with minimum statutory requirements because if you muck that up the employee will have their full common law rights.

Ontario Superior Court 2017: Employers, be careful. If you breach your own contract, you will not get the benefit of it, and the employee will have their full common law rights.

Ontario Court of Appeal: Employers, don’t worry!  As long as a contract suggests you want to oust common law, no need to be clear that you will comply with all mandatory minimums (we’ll just read intended compliance into your silence). No need to even adhere to your own contract. Worst case if the employee has to take you to court, you’ll be held to the bare minimum of what you agreed to.

The inconsistency in these outcomes, in the policy which informs them, and in the various courts’ approaches to balancing the rights of employees with the need to allow employers to effectively limit those rights by valid contract  aptly demonstrates the difficulty counsel – and more importantly their clients – have when assessing their risks vis a vis whether a contract will be effective.

The decision of the Court of Appeal for Ontario in Nemeth v. Hatch also shifts (for now) the burden away from employers to ensure their contracts clearly state that they will include all necessary entitlements under employment standards legislation in order to have their contracts enforced.   The problem, from my perspective with that shift is that it puts the onus on the employee to strictly enforce those “silent” entitlements (assuming they know they exist) and, based on the court’s willingness to enforce the contract notwithstanding the silence and notwithstanding the employer’s breach of its own provisions, the cost of doing so may outweigh the benefits insofar as the successful employee may not have access to common law damages even where a contract is both silent as to minimum requirements and breached.

What is being touted by many as a victory for contract law and certainty is a serious loss for employees in Ontario, and does little to provide true certainty to employers in the face of other inconsistent jurisprudence. 

If the only sanction which employers potentially face for failure to respect the minimum notice periods is an order that they comply with the Act, they will have little incentive to make contracts with their employees that meet the statutory standards.  Similarly If the only sanction which employers potentially face for failure to adhere to their contracts is an order that they do only that, they will have little incentive to make contracts with their employees that meet the statutory standards.

It remains to be seen how this pendulum swing will be interpreted by the lower courts or whether it will last.  In the meantime, employers still face significant uncertainty with poorly drafted contracts and employees face significant uncertainty if they seek to challenge them.

We may need the Supreme Court to remind us all of some of the principles of contractual interpretation which apply in this context in order to protect employees.  Or perhaps, as was the case following it's decision in Love v. Acuity, The Court of Appeal for Ontario will effectively reverse itself when a new case on different facts lands before it (I expect that in Nemeth had the employer not continued benefits for the statutory notice period, for example, the court would not have been as inclined to read silence as intended compliance).

Until then, uncertainty reigns.


Read more in What's New

Tags: Executive Employment Law and Litigation Employment Law and Litigation