Ruling on Enforceability of Termination Clauses, The Law Times (March 13, 2017, p. 7)

The importance of employment in a person’s life enables courts to interpret employment agreements differently from commercial agreements. However, the question of enforceability of a termination clause within an employment agreement has been plaguing our courts with uncertainty for years.

In its recent judgment, Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the Ontario Court of Appeal reaffirmed that the enforceability of the termination clause stands and falls on its own wording and not on what an employer may have done on termination, or during the notice period. It reinforced that termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the Employment Standards Act, 2000.

In Wood, Fred Deeley Imports was the exclusive Canadian distributor for Harley-Davidson. In April 2007, it hired Julia Wood as a sales and event planner. In 2015, Harley-Davidson Canada entered into an agreement to buy all of the company’s assets. As a result, the company notified Wood that her employment would terminate on August 4, 2015.

At the time of dismissal, a 48-year old Wood worked for the company for 8.3 years and received approximately $100,000 in annual compensation. Relying on the termination clause in Wood’s employment agreement, which she signed one day after she commenced her employment, the company provided her with 13 weeks of working notice. During working notice, the company paid her base salary and made all required contributions to her health and dental plans. At the end of working notice, the company paid Wood additional compensation, including a lump sum equivalent to eight weeks’ pay.

Nevertheless, Wood sued for a wrongful dismissal, contending that her termination clause was unenforceable for two reasons: it expressly excluded the company’s statutory obligation to contribute to Wood’s benefit plans during the notice period; and it did not clearly satisfy the company’s statutory obligation to pay her severance pay.

The action proceeded by way of a summary judgment motion. The motion judge dismissed Wood’s motion and held that both the employment agreement and the termination clause were enforceable. Wood appealed. On appeal, the main issue was whether the termination clause was enforceable.

Writing for the Ontario Court of Appeal, Justice John Laskin found the clause to be void and unenforceable. Having acknowledged that a motion judge’s interpretation of a contractual provision is now entitled to deference from an appeal court, he concluded the motion judge made an extricable error of law in holding that the company’s actual contributions to Wood’s benefits plans were material to the interpretation of the termination clause.

Laskin resolved that the company’s contributions on termination should have no bearing on whether the termination clause is enforceable. The wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA. He opined that if employers can be allowed to cure illegal termination clauses by complying with the ESA on termination, then they would have little incentive to draft enforceable termination clauses at the beginning of the employment relationship. In addition, Laskin clarified that the word “pay” in the phrase “two week’s notice of termination or pay in lieu thereof” was ambiguous and contemplated only salary or wages, not to benefits.

In considering the “more difficult” question of whether the termination clause also contravened the ESA because it does not satisfy the company’s statutory obligation to pay severance pay, Laskin concluded the clause conflated the company’s separate statutory obligations. The clause required the company to give Wood “two weeks’ notice of termination or pay in lieu therefore for each year of employment.” These payments and notice were “inclusive of [Wood’s] entitlement to notice, pay in lieu of notice and severance pay.”

The termination clause allowed the company to fulfil its statutory obligations in one of three ways, with only one of those ways would satisfy the company’s statutory obligation to pay severance pay. First, the company could have given Wood a lump sum payment equal to 18 weeks’ salary (pay equal to 2 weeks’ notice for every completed or partial year of employment – 9 x 2 weeks). Second, the company could have given Wood 18 weeks’ working notice, which would have provided her with more notice than she was entitled to under the ESA, but she would not receive any severance pay.

Third, the company could do what it actually did: provide a combination of working notice and a lump sum payment. Depending on how much working notice it gave, Wood may or may not receive the severance pay she was entitled to under the ESA. From Wood’s perspective, when she signed her employment agreement she could not know whether she would receive the severance pay if her employment ended. Because the clause was ambiguous and allowed the company to not pay Wood her statutory severance pay, or to pay her less severance pay, the court of appeal found it to be unenforceable.

The court also observed that just because Wood signed her employment agreement one day after she started working, it would not necessarily render it unenforceable for the lack of fresh consideration. It explained, a written employment contract might well be unenforceable if an employer included in it a material term that was not part of the original employment agreement. Because Wood did not argue that the company unilaterally imposed a new term of her employment, the signing of the employment agreement, in her specific case, was a matter of administrative convenience and did not render the agreement unenforceable.

Wood is a welcome decision for employees and the employment bar. It serves to incentivize prudent employers to pay close attention and draft enforceable termination clauses. Should the clause not be on onside with the ESA’s notice, benefits and severance pay provisions from the outset of the employment relationship, courts will invariably invalidate them.