August 8, 2013

Most employers want to attempt to limit their liability to an employee upon the termination of employment.  To do that, many will provide an employment contract to the employee, believing that this contract will protect them, thereby limiting liability for employers.  However, if it is not provided prior to the commencement of employment and signed before the employee commences employment with the company, it may not be enforceable.  Likewise, if the contract is vague and ambiguous, not clearly defined, or well-articulated, it will likely be construed against the employer, and also found not to be enforceable.

Upon termination of employment, the employee is entitled to both his or her entitlements pursuant to the Employment Standards Act, 2000 (“The Act”), as well as his or her entitlements pursuant to the common law, with what is known as reasonable notice, and in today’s vernacular, a “severance package”.  The Act provides for the bare minimums to which an employee is entitled by statute, and does not require the employee to sign any type of release in order to obtain these from the employer.  Under the Act, an employee is entitled to notice of termination of up to 8 weeks, depending on length of service, as well as severance if the employee’s length of service is 5 years or more and the company has a payroll of $2.5 million or more.  Severance is one week for every year of service, up to a maximum of 26 weeks under the Act.  The employee is also entitled to pay up to the last date of employment, his/her record of employment and vacation pay.  More importantly, the employer is required to maintain all existing benefits for the employee over the statutory notice period of up to 8 weeks.

In terms of limiting liability for employers, under the common law, the employee may be entitled to significantly more, particularly if the employee is a long-serving, older employee.

Therefore, in the body of an employment contract, employers will often seek to limit their exposure to damages upon the termination of the employee’s employment by restricting the employee’s entitlement to Employment Standards Act minimums in an effort to avoid providing the employee with common law reasonable notice of the termination of their employment.  A recent case illustrates that if this restrictive clause is not clearly drafted, and fails to outline all elements of what an employee is entitled to pursuant to the Act, it, too, will be found to be unenforceable.

In Wright v. Young & Rubicam Group of Cos., 2012 CarswellOnt 16792, Mr. Wright joined the Company as its Executive Vice President and Director in January of 2005, pursuant to a written contract of employment, which attempted to restrict Mr. Wright’s entitlements upon termination to the basic minimums provided by the Act.

He was terminated in 2010 after 5 years of service, and only provided with all of his entitlements pursuant to the Act.  The employer argued that he was not entitled to anything else, given that he had signed an employment contract restricting his entitlement upon termination to only employment standards entitlements.

However, Mr. Wright successfully argued that the termination clause was unenforceable due to the fact that it failed to provide him with continued benefit coverage, which had been excluded from the termination clause.  When the court examined the termination clause, it found that Mr. Wright was correct and that the clause only allowed for Mr. Wright to receive payment of base salary. Due to the fact that benefits were part of his compensation, and not included in this clause, the contract was found to be unenforceable and Mr. Wright was entitled to 12 months reasonable notice rather than the 13 weeks that the Company had earlier paid.

By Natalie C. MacDonald