Time to Take Another Look at your Employment Agreements?

Think that ESA termination clause in your contract is valid because a lawyer prepared it a few years ago? You may want to have another look!

If you spent the time and the money a few years ago to have a lawyer review and prepare a template employment agreement, particularly an enforceable termination clause, good call. Limiting an employee’s entitlements upon termination to statutory minimum termination and severance pay, for example, as compared with common law reasonable notice can save employers significant costs. It can mean the difference between whether you owe an employee eight weeks or eight months or more, as one example.

But if you haven’t had that termination clause reviewed in the last two years or so, it may no longer be enforceable, and an employee may be able to recover common law reasonable notice.

What’s happened? Termination clauses have commonly looked something like this:

“The Employer may terminate your employment without cause at any time by providing you with notice or payment in lieu of notice (and severance pay if applicable) as required under the Employment Standards Act, 2000. You agree that such notice or payment in lieu satisfies all claims you may have against the Employer, arising from your employment or termination of your employment, whether under statute or common law.”

In a recent Ontario decision, Stevens v. Sifton Properties Ltd., this clause was ruled unenforceable by the Court.

The reason the Court did so flows from the language and the requirements of the Employment Standards Act, 2000 (“the Act”). First, remember that this statute sets out minimums, meaning an employer cannot contract for less than what the Act requires with an employee. Second, under the Act, Section 61(1) requires an employer to maintain an employee’s benefits during the statutory termination period.

What does the clause above say about benefits? Nothing.

In this particular case, the fact that the Employer did actually maintain benefit coverage did not save the Employer. The Employer tried to argue that the clause did not explicitly deny benefit coverage, it only dealt with notice and severance explicitly and that anything else would be unaffected and governed by the Act. This is, in fact, how the employer conducted itself. The Court did not agree, saying that the clause implicitly eliminated benefits by stating that payment of notice and severance under the Act satisfied all claims under statute and common law. This resulted in benefits being excluded from the contract.

The Court stated that employers should be given an incentive to ensure that the contracts drafted by employers comply with all aspects of employment standards legislation. This means not just providing notice (and severance if applicable), but mandating benefit continuation.

Now, if the termination clause simply says the employer will comply with the Act and does not specify what will be provided and what won’t, that might still pass. But why take the chance? The prudent thing is to explicitly include the continuation of benefit coverage moving forward.

Of course, amending a contract is not as simple as human resources issuing employees an update to sign. A valid contract requires offer, acceptance and consideration. Varying the contract and not providing consideration to the employee still leaves the employer with an unenforceable contract.

As the law develops, doing what you always did will likely no longer be good enough. Standard employment agreements that have been in use for some time should be reviewed and considered in light of legal developments.