Carpenter: a reminder about the perlis of termination provisions, The Law Times (October 26, 2015, p. 7)

While we often see employment contracts that contain termination provisions that purport to limit employees’ entitlements upon dismissal to the statutory minimums mandated by the Employment Standards Act, the language used to achieve that objective is often susceptible to legal interpretation.

A case in point is Carpenter v. Brains II Canada Inc., in which Justice David Stinson considered whether a termination clause that exempted the employer from paying anything other than salary was an attempt to contract out of the Employment Standards Act. He found the clause amounted to a waiver of the employee’s rights under the act and voided it.

Patricia Carpenter, the plaintiff in Carpenter, had worked for NexInnovations Inc. from September 1996 to October 2007. In 2007, NexInnovations was the subject of creditor protection proceedings under the Companies’ Creditors Arrangement Act . As a result, various parts of its business went to separate purchasers. The defendant, Brains II Canada, purchased some of NexInnovations’ assets. Following the acquisition, Carpenter continued to work for the company until July 2014. She served in a similar capacity at the same location and earned the same salary. In May 2014, Carpenter learned the company was terminating her employment without cause as of July 23, 2014, and received eight weeks’ working notice. At the end of her working notice, she also received 17.9 weeks of severance pay.

Displeased, the 54-year-old Carpenter brought a summary judgment motion seeking common law wrongful dismissal damages. Brains II Canada defended, arguing that her signed employment contract had eliminated her right to do so. Predictably, Carpenter retorted that the termination provision was unenforceable because it offended the statutory prohibition found in s. 5(1) of the act against contracting out of that statute.

The termination clause limited Carpenter’s entitlements at dismissal to “salary in lieu of notice. . . . This includes all your entitlements to both termination pay and severance pay . . . as well any outstanding vacation or statutory holiday pay. . . . You will not be entitled to any other compensation.”

Carpenter argued the termination clause was unenforceable because it expressly exempted Brains from paying anything other than salary without mentioning or obliging it to pay either the non-salary components of her remuneration package or continue her benefits during the statutory notice period.

Stinson agreed that the termination clause provided Carpenter with less than her minimum entitlements under the act. Relying on the Divisional Court’s judgment inMiller v. A.B.M. Canada Inc., he explained that Carpenter’s employment contract discussed remuneration and benefits separately from her salary. However, the termination provision referenced only her entitlement to salary in lieu of notice without any mention of paying benefits should the employer not provide notice of dismissal, a scenario contemplated by s. 61(1) of the act. As such, it amounted to a waiver of Carpenter’s rights under paragraph 61(1)(b) of the act that requires employers to continue all benefits during the statutory notice period.

Curiously, the court observed that Carpenter was “given eight weeks notice, during which time (presumably) her benefits continued.” Therefore, Brains II Canada technically did comply with all of its statutory obligations during the notice period. However, that’s not a legal test. In Wright v. The Young and Rubicam Group of Companies (Underman) and subsequently in Stevens and Sifton Properties Ltd., the court made it clear that the key issue isn’t whether the employer acted in compliance with the act but whether the language of the termination provision complies with it. I pause to caution that there’s currently conflicting jurisprudence regarding whether a termination provision must meet statutory minimums at all times or at the time of termination only (see, for example, Ford v. Keegan).

In considering Carpenter’s common law entitlements, Stinson had to decide what was the correct measure of her length of service given Brains II Canada’s acquisition of NexInnovations’ assets and continuation of her employment. Carpenter argued it should start from September 1996 because Brains II Canada purportedly acquired NexInnovations as a going concern and, therefore, became a successor employer under the act. In response, Brains II Canada argued that her common law entitlement should follow the premise that she became its employee in October 2007.

In this debate, Stinson sided with the employer.

He explained that, despite the fact that Carpenter had continued to perform much of the same functions in the same surroundings as she previously had, the company had acquired only “some of the assets” of NexInnovations and had hired “only some of the former employees.” Consequently, the company couldn’t have continued to operate as NexInnovations had. Moreover, the evidence revealed that Carpenter’s employment with Brains II Canada consisted of the following steps: the insolvency of NexInnovations; the subsequent termination of her employment by that company; her hiring on a temporary basis by a chief restructuring officer appointed under the restructuring proceeding; the termination of that temporary employment; and, significantly, that Brains II Canada had informed her that it wouldn’t be honouring any prior severance entitlements save for the purposes of calculating her entitlements under the act. In other words, it was neither a business-as-usual or simple asset sale or a seamless change of ownership.

Consequently, Stinson awarded Carpenter damages for wrongful dismissal based on eight months’ reasonable notice. In light of her previous salary of $45,000, the quantum of damages fell within the monetary jurisdiction of the Small Claims Court, which could have eliminated her right to recover costs. Stinson, however, refused to exercise his discretion not to award costs. Having noted that the matter raised complex questions of law, he awarded Carpenter $9,000 in costs.

Carpenter serves as a timely reminder to employers that while termination provisions act as a valuable tool permitting them to exercise control over employees’ entitlements upon dismissal, the jurisprudence makes it clear that they often involve uncertainty and, as such, should be crafted with legal precision and foresight. The court would interpret a reference to the word “salary” within a termination provision as denoting an employee’s base salary only. Failure to specify the employee’s entitlements to benefits and other non-salary components could render the termination provision void and unenforceable, thereby exposing employers to the golden smelter of common law.

Perhaps, the time is ripe for employers to take a closer look at their existing employment contracts to make sure that the termination provisions comply with the technical legal requirements and continue to meet their corporate objectives.