04 Dec Are your employment contracts enforceable? Canadian HR Reporter at 5-6, (December 14, 2009)
Most written employment contracts include a provision that limits the compensation to which an employee is entitled in the event of termination. If an employment contract provides for a period of notice that, at the time of dismissal, would be less than the employment standards minimum, is the termination provision void from the outset or does it become void when the statutory requirement first exceeds the contractual term?
Courts have ruled a contractual term with a specified notice period that may be consistent with minimum employment standards at the time of the employee’s dismissal, but could “potentially” violate those standards, is void from the beginning and a reasonable notice period is to be calculated using common law principles. Notice provisions failing to account for the future are unenforceable. The vulnerability of a clause designed to limit an employee’s right to notice was exposed by the British Columbia Court of Appeal in the 1998 decision Shore v. Ladner Downs.
In this case, the employment contract stipulated the employee could be terminated with 30 days’ notice. The employee was terminated after eight months of service at a time when B.C.’s Employment Standards Act (ESA) provided for two weeks’ notice of dismissal for one year of service and one additional week for each year of service up to a maximum of eight weeks. Although at the time of termination the employee’s contractual entitlement was more generous than that mandated by the ESA, it was void from the beginning, found the court. The rationale was simple: Had the employee worked long enough, the termination provision would have resulted in him receiving less than the employment standards minimum on dismissal. Curiously, the employee would have had to work five years before the statutory requirement actually exceeded the contractual term.
Relying on a policy consideration outlined in Machtinger v. HOJ Industries Ltd. by the Supreme Court of Canada, the court said: “It is neither reasonable nor practical to leave the individual employee in the position of having to keep an eye on the relationship between the statutory minimum and the contractual term.”
Shore illustrates that a termination provision with a specified notice period is generally void from the beginning unless the notice period is long enough to meet any potential statutory notice period requirements. Importantly, the termination provision will be void even if at the time of termination the statutory minimum has yet to exceed an employee’s contractual entitlement.
Notice provisions are void for ‘potentially’ violating ESA: Court
An example of a more recent case in which an employer’s attempt at limiting a notice period was thwarted is the Ontario case of Slepenkova v. Ivanov. In this case, the employee worked for 33 months under a series of ostensibly separate, fixed-term contracts, stipulating two weeks’ written notice for termination.
In dismissing the employer’s argument the employee was a fixed-term employee and not entitled to the protection of Ontario’s ESA, 2000, the Ontario Superior Court of Justice said had the employee not been dismissed, her contract would have expired after about 38 months of employment. As such, the contractual notice provision would have violated section 57 of the ESA, which provides for two weeks’ notice for an employee with less than three years’ employment.
The employer argued the termination provision conformed to the ESA because, at the time of termination, the employee had yet to pass the three-year mark in her employment. However, the termination provision was void and unenforceable because it “potentially” violated employment standards, found the court.
In addition, the court regarded the termination provision as an attempt to contract out of the employment standards minimum contrary to the ESA. Slepenkova demonstrates if a termination provision could ever result in notice that is less than the statutory minimum, it will be void and unenforceable.
The Shore and Slepenkova decisions show courts will void a termination provision whenever there is a possibility, however remote, an employment contract provides an employee with less notice than she would be entitled to under an applicable employment standards legislation. Employers should ensure notice provisions in employment contracts satisfy, at least, the minimum statutory standards for notice and severance pay at any point in an employment relationship. If such provisions do not meet these criteria, courts will strike the contracts down.
TIPS FOR EMPLOYERS
Employers that want to limit employees’ notice entitlement to the minimum prescribed by applicable employment standards legislation must draft termination provisions in clear and exact terms.
An example of a relatively clear notice provision that is unlikely to be struck down is: “The employer may terminate the employee’s employment for any reason whatsoever, by satisfying the notice and severance pay requirements contained in the applicable employment standards legislation. No other notice or severance whatsoever, either at common law or other statutes, shall be payable.”
Language that encompasses severance pay as well as notice is advisable because if an employer qualifies or in the future might qualify as a severance employer, a termination provision that only addresses notice entitlement will be voided for stripping an employee of her statutory right to severance pay.
Furthermore, this example demonstrates termination provisions must refer to applicable employment standards “legislation” as opposed to applicable “law”. The latter concept creates uncertainty as to whether reference is being made only to statutory law or also to common law. It also facilitates an argument the employee signed the contract without understanding it could have the effect of limiting her right to notice.
There is a tendency in Canada, which should be resisted, to hire employees on the basis of an informal hiring letter. Where the offer letter method is used, employers might want to consider drafting an employee manual that spells out notice and severance pay entitlements upon termination.
It is advisable to make employment conditional upon employees accepting the terms contained in the manual. Employees should be required to sign a memorandum confirming they have read the manual and understood the effect the termination provision will have on their entitlements upon termination.