Vexing Termination Clauses, The Law Times (February 5, 2018 at p 7)

A question of enforceability of termination clauses turns on the wording of the clause, the purpose and language of the Employment Standards Act, 2000, and the jurisprudence on interpreting employment agreements. With the release of Nemeth v. Hatch Ltd., 2018 ONCA 7, the Court of Appeal for Ontario threw that jurisprudence into confusion. Having found the termination clause to be unambiguous, the court concluded the silence of the termination clause concerning the employee’s entitlement to severance pay and benefits did not denote the employer’s intention to contract out of the ESA.

In Nemeth, Joseph Nemeth’s 19-year employment was governed by a written employment contract, which included the termination clause that stated “the Company’s policy with respect to termination is that employment may be terminated by either party with appropriate notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.”

Following his without cause dismissal, Nemeth asserted the termination clause was ambiguous, contrary to section 5(1) of the ESA and, thus unenforceable, because, in part, it was silent with respect to his entitlement to severance pay and benefits. Nemeth’s lawsuit was adjudicated by way of a motion for summary judgment. The motion judge determined the termination clause was not ambiguous, and dismissed Nemeth’s motion and his action.

Nemeth appealed, arguing the motion judge erred in failing to find that he retained his rights to common law notice, because the termination clause did not: contain express language excluding entitlements under the common law, include any reference to severance pay, and limit his entitlement to the ESA minimum. The latter was Nemeth’s alternative argument, which the motion judge did not consider, but which ultimately prevailed on appeal.

The court concluded that it was clear from “the plain language of the termination clause that the parties intended and agreed to limit” Nemeth’s common law notice entitlements. It explained that the need for clarity does not mean the parties must use a specific phrase or particular formula, rather it suffices that the parties’ intention to displace an employee’s common law notice rights can be “readily gleaned” from the contractual language.

The termination clause contemplated Nemeth to receive “one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.” This sentence contains two disjunctive conditions, with the latter being superfluous. The latter condition will always remain dormant, because the former will always either match or exceed Nemeth’s ESA entitlement.

This ambiguity makes it neither reasonable nor practical to leave the employee in the position of having to keep an eye on the relationship between the statutory minimum and the contractual term. This is especially so, since in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158, the same court recognized that “many employees are likely unfamiliar with the employment standards in the ESA and the obligations the statute imposes on employers.”

In Nemeth, the court agreed that the termination clause gave rise to two possible interpretations. One interpretation was that would limit Nemeth’s notice entitlement to the minimum prescribed by the ESA, and the other interpretation was that it would not. By preferring the interpretation that gave Nemeth the greater benefit, the court concluded that the termination clause’s language rebutted the presumption of reasonable notice, and, as such, Nemeth was entitled to receive 19 weeks’ contractual notice.

The termination clause’s ambiguity is further compounded by its reference to the applicable “labour” legislation. In Wood, the court said “employees should know at the beginning of their employment what their entitlement will be at the end of their employment.” From the plain language perspective, how would one know, which legislation the termination clause inferentially incorporated? Is it the Labour Relations Act, the Employers and Employees Act or, among many others, the ESA?

Not only was the termination clause silent about the applicable legislation, it also contained no reference to Nemeth’s entitlement to severance pay and benefits. Under the ESA, an employer’s obligation to give an employee notice and its obligation to pay severance pay are separate obligations.

At the time Nemeth signed his employment contract, he did not know whether he would receive his statutory severance pay if his employment ended. Nor did Nemeth know whether or not he waived his statutory entitlements.

Surprisingly, the court interpreted the silence of the termination clause as inferentially incorporating Nemeth’s statutory entitlements.

It is a strained interpretation to attribute such meaning to the employment contract language that does not specifically say so. This proposition finds direct support in Wood, where the same court made it clear by stating that “the wording of the clause alone must be looked at to decide whether it contravenes or complies with the ESA.”

Nemeth reaffirms the importance of carefully drafting termination clauses. It signals that the jurisprudence on the enforceability of termination clauses is undergoing yet another interpretative turn. Given the recognized power imbalance between employers and employees, courts should be reluctant to regard the silence of the contractual language concerning the employee’s statutory entitlements as evidence of an employer’s intention not to contract out of the ESA. The employee’s statutory entitlements at dismissal should be explicitly stated in the contract.