Enforceability of Termination Clauses, The Law Times (May 16, 2016, p. 7)

Enforceability of Termination Clauses, The Law Times (May 16, 2016, p. 7)

By Nikolay Y. Chsherbinin

Written employment contracts are relationship management tools. Their goal is to provide certainty of the terms of employment. If an employment contract fails to conform to the provisions of the Employment Standards Act, 2000, it will be invalidated. A recent case in point is Garreton v. Complete Innovations Inc., 2016 ONSC 1178, where the Divisional Court confirmed that a termination provision’s “potential” violation of the ESA in the future is sufficient to void it. Notably, it clarified that the termination provision’s conformity to the ESA is to be assessed as of the time the employment contract was executed and not at the time of the employee’s dismissal.

In Garreton, a 43-year-old Marcela Garreton worked as a trainer for Complete Innovations Inc. On June 7, 2012, she purchased bagels for an internal training session she was to conduct. Another employee, who was not part of the training session, after obtaining permission from her supervisor, sought to take a bagel. Garreton asked her to wait until the attendees had got their food. The employee grabbed a bagel and Garreton grabbed her wrist. The employee then told her to “get the f… off”, took the bagel, and left. The employee immediately reported the incident to CI’s CEO, who, after interviewing Garreton, suspended her employment with pay for two days, describing the incident, in a suspension letter, as “retaliating with physical violence”. Upon her return, CI terminated Garreton’s two-year employment for cause, in part, due to the bagel incident.

At trial, CI did not rely on the provisions of Garreton’s written employment contract, which permitted it to dismiss her for cause. Instead, it argued she breached s. 2(1)(3) of the Regulations 228/01, which relieves employers from the obligation to provide notice of termination or termination pay to employees guilty of “wilful misconduct, disobedience or wilful neglect of duty that is not trivial and has not been condoned by the employer”.

The trial judge found CI’s suspension of Garreton’s employment was a form of discipline in response to the bagel incident. Because an employee can be disciplined only once for the same offence, CI’s decision to dismiss Garreton after she served her suspension constituted double jeopardy and amounted to wrongful dismissal. Ultimately, the judge found CI had no cause to dismiss Garreton and awarded her five months’ salary.

On appeal, CI successfully argued the trial judge erred in assessing Garreton’s damages on the basis of the common law principles but without concluding whether the termination provision in her employment contract was enforceable. It further asserted that, even if Garreton’s dismissal was without cause, CI is entitled to rely on the termination provision in the employment contract, which limited Garreton’s damages to two weeks’ notice.

In response, Garreton submitted that the termination provision offends the ESA and is, therefore, unenforceable, because it potentially violates sections 64 and 65 of the ESA. These sections set out the requirements that must be met for an employee to qualify for severance pay, which has an effect of supplementing the termination pay, if: (a) an employee has five or more years employment; and (b) the company has a payroll of $2.5 million. If these conditions are met, an employee, aside from the termination pay, is entitled to be receive an additional week of wages for each year of employment, for up to a maximum of 26 weeks.

The termination provision limited Garreton’s pay in lieu of notice to eight weeks maximum and was inclusive of “all severance pay entitlement, notice of termination or termination pay in lieu thereof….” Garreton argued that despite the fact she has yet to be entitled to severance pay, the termination provision did not conform to the ESA in that it potentially entitles her to less than the employment standards minimum.

The crux of Garetton’s argument was a “potential” breach of the severance provisions of the ESA. The argument is not novel, but is vexing. It required Justice Laurence A. Pattillo to reconcile the inconsistent wrongful dismissal jurisprudence on whether the termination provision must conform to the ESA at the time the employment contract was executed or at the time of the employee’s dismissal.

Having examined the conflicting jurisprudence, Justice Pattillo dismissed CI’s appeal, stating that: “if the termination provision is not onside with notice provisions and severance provisions (if applicable) of the [ESA] at the outset, then it is void and unenforceable. Potential violation in the future is sufficient.”

Garreton, hopefully, settled the state of the law in Ontario on the important point at issue. Justice Pattillo’s apt conclusion finds support in the British Columbia Court of Appeal’s judgment Shore v. Ladner Downs, 1998 CarswellBC 973 (BCCA), which has been cited with approval in obiter in Slepenkova v. Ivanov, 2007 CarswellOnt 5643 aff’d 2009 ONCA 526 (ONCA) and applied in Wright v. The Young and Rubicam Group of Companies, 2011 CarswellONt 10754 (Ont. S.C.J.)

Garreton, Wright, Slepenkova and Shore demonstrate that courts will void a termination provision whenever there is a possibility – however remote or academic – that an employment contract provides an employee with fewer entitlements that he or she would receive under the applicable employment standards legislation on dismissal.

Employers should ensure termination pay, notice, severance pay and, inter alia, benefits provisions in employment contracts satisfy, at least, the minimum statutory standards at every point in an employment relationship. If such provisions do not conform to the legislative requirements, courts will invariably invalidate them.

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