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Employers and employees take note, void ab initio really does mean something, and not just for those who speak Latin.

By Rhea Kamin

A recent decision from the Court of Appeal for Ontario affirms important principles relevant to the interpretation of termination clauses and which have not been consistently applied in recent jurisprudence. Most importantly, the Court confirmed that if a termination clause, on its face, can fall below minimum employment standards, it is void ab initio (from the beginning) regardless of whether or not the employer actually complies with its obligations under the Employment Standards Act (ESA).

The termination clause at issue was the following:

“[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.” [Emphasis added.]

The employee successfully attacked the clause using two arguments:

  • That the clause excluded the employer’s statutory obligation to make benefit plan contributions during the reasonable notice period; and,
  • That the clause failed to satisfy the employer’s obligation to pay severance pay.

 The Court agreed with the employee and refused to enforce the termination clause.

 In its analysis, the Court revisited some of the jurisprudence on enforceability of termination clauses and distilled the following principles:

 

  • Employment agreements are generally interpreted differently than commercial agreements because of the fact that employees are the more vulnerable party and because of the importance of work in a person’s life.in
  • When employment agreements are made, usually employees have less bargaining power than employers. Employees rarely have enough information or leverage to bargain with employers on an equal footing: Machtinger, p. 1003
  • Many employees are likely unfamiliar with the employment standards in the ESA and the obligations the statute imposes on employers. These employees may not seek to challenge unlawful termination clauses: Machtinger, p. 1003
  • The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible”, over an interpretation that does not do so:Machtinger, p. 1003.
  • Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship:Machtinger, p. 1004.
  • A termination clause will rebut the presumption of reasonable notice only if its wording is clear. Employees should know at the beginning of their employment what their entitlement will be at the end of their employment:Machtinger, p. 998.
  • Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee:Ceccol v. Ontario Gymnastics Federation(2001), 149 O.A.C. 315, Family Counselling Centre of Sault Ste. Marie and District (2001), 151 O.A.C. 35.

The Court found that the termination clause did not clearly indicate that benefits would continue during the notice period. In fact, the clause excluded benefits because the notice or pay in lieu thereof was inclusive of all of the employee’s entitlements under the ESA. The fact that the employer continued benefits throughout the notice period was irrelevant. The enforceability of the clause “stands or falls on its own wording and not on what [the employer] may have done during the notice period or after Wood’s employment was terminated.”

With respect to the severance issue, the Court found that because the clause was drafted in a manner which allowed the employer to fulfill its obligations in three different ways, one of which clearly fell below minimum employment standards, it was void. The fact that the employer complied with its severance obligations was irrelevant. The clause permitted the employer to pay the employee less than she as entitled to under the ESA. The employee had no way of knowing when she entered into the agreement that the employer would comply with minimum employment standards.

 This is an important case and a good one for employees. Employers are held to a high standard when drafting termination clauses. If an employer does not draft a clear termination clause that meets the minimum employment standards, it is void. If an employer drafts a clause that could be interpreted in several ways, one of which falls below minimum standards, it is void regardless of whether the employer actually complied with the ESA.

 If you have been terminated without cause and you signed an employment agreement with a termination clause, you should speak to a lawyer to determine whether or not the clause is enforceable.


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