Termination Clauses in Employment Agreements

Termination Clauses

What is a Termination Clause?

A termination clause is a statutory compliant clause in a written employment agreement that clearly specifies the amount of notice, or compensation in lieu of notice, an employer will provide an employee upon termination of the employment.

Why is it advisable to have a termination clause?

Every contract of employment has an implied term that, absent just cause, an employer will provide an employee with reasonable notice of termination or compensation in lieu of notice. The Employment Standards Act provides for the minimum notice periods (and severance, if applicable), based on an employee’s length of service, that every employer must provide its employees. Notwithstanding this, an employee may be entitled to a notice period under the common law that is considerably longer than what is provided for in the Employment Standards Act.

The amount of reasonable notice an employee is entitled to under the common law is based on a number of factors which include: the employee’s age, length of service, character of employment, and availability of similar employment. As such, an employer has the potential to be exposed to giving much longer notice periods than the minimum mandated under the Employment Standards Act. For small to mid-size employers, this exposure could be crippling. In order to avoid this exposure, it is often in the employers best interest to have a valid and enforceable termination clause as part of their employment agreement with the new employee. A valid and enforceable termination clause will rebut the common law presumption of reasonable notice and therefore reduce the employer’s liability.

Some Important Things to Consider

In order for an employment agreement (and termination clause) to be enforceable, it is paramount that it be properly drafted and executed. A termination clause must be clear and unambiguous. A clause where two possible interpretations are possible, will likely be interpreted by a court in a manner that is least favourable to an employer.

It is also imperative that the clause comply with the minimum employment standards in the jurisdiction of the employment. In other words, a termination clause cannot provide for, nor have the potential to provide for a notice period that is less than what the employee would be entitled to under the applicable statute. If the termination clause fails to comply with the minimum standards of employment it will be unenforceable. This principle was articulated in the Supreme Court of Canada decision in Machtinger v. HOJ Industries Ltd. [1992] 1 S.C.R. 986 and is consistent with section 5(1) Ontario Employment Standards Act, which provides that “no employer or agent of an employer and no employee or agent of an employee shall contract out of or waive an employment standard and any such contracting out or waiver is void.”

What happens if a termination clause fails to comply with the minimum standards of employment?

If a termination clause fails to comply with the minimum standards of employment in the jurisdiction of employment the clause will be unenforceable and the common law presumption of reasonable notice will not have been rebutted. In other words, the court will not order that the employer simply comply with the minimum standards, but will find that the common law presumption of reasonable notice has not been rebutted and, as a result, the employee may be entitled to a greater notice period. There are sound policy reasons behind this. More precisely, Iacobucci, J. speaking for the Supreme Court of Canada in the Machtinger decision addressed the policy rational behind this approach:

[I]f the only sanction which employers potentially face for failure to comply with the minimum notice periods prescribed by the Act is an order that they minimally comply with the Act, employers will have little incentive to make contracts with their employees that comply with the Act…… Employers can rely on the fact that many employees will not challenge contractual notice provisions which are in fact contrary to employment standards legislation. Employers such as the present respondent can contract with their employees for notice periods below the statutory minimum, knowing that only those individual employees who take legal action after they are dismissed will in fact receive the protection of the minimum statutory notice provisions.In my view, an approach more consistent with the objects of the Act is that, if an employment contract fails to comply with the minimum statutory notice provisions of the Act, then the presumption of reasonable notice will not have been rebutted. Employers will have an incentive to comply with the Act to avoid the potentially longer notice periods required by the common law, and in consequence more employees are likely to receive the benefit of the minimum notice requirements.

Conclusion

A properly drafted and executed termination clause can limit an employer’s exposure to the common law presumption of reasonable notice. Employers, who are prudent in ensuring that their legal liability is minimized at the outset of their employment relationship with their employees, will undoubtedly, reap the benefits of such.