With the provincial government looking at instituting a minimum wage of $15.00/hour, the Employment Standards Act, 2000 (the ESA) is generating headlines this week.

But one of the biggest pitfalls for employers in the ESA made judicial news at few weeks ago: the Ontario Court of Appeal further clarified employers’ obligations when terminating employees in its decision Wood v Fred Deeley Imports Ltd. (Wood) released earlier this year.

The important take-away from this case is: if the termination clause in an employment contract excludes even one obligation under the ESA the entire termination clause is unenforceable. As a result, the employee becomes entitled to common law reasonable notice discussed in more detail below. The employment clause will also be void even if the employer meets the ESA obligations that were excluded from the termination clause.

The ESA covers employment standards for most employees in Ontario. This legislation sets out the minimum notice period (or payment in lieu of notice) that an employee is entitled to when terminated without cause.

The ESA also requires employers to provide all benefits throughout the notice period. Severance pay is required if the employee worked for five years or more and if the employer meets certain criteria.[1]

If an employment contract does not specify that notice of termination is subject to the ESA and the contract is not for a fixed term, that employee is entitled to “reasonable notice” under the common law (judge‑made law). Reasonable notice is in most cases a much longer notice period, because it is intended to compensate the employee for the length of time it would take for a person with similar characteristics to find similar work in the current job market.

In Wood, the employment contract’s termination clause stated that Julia Wood (Wood) was entitled to notice above the ESA minimum. However, the contract did not say that she was also entitled to benefits during the notice period. The termination clause also said: “…the Company shall not be obliged to make any payments to you other than those provided in this paragraph.” The contract went on to say that “…the payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.”

Wood was terminated when her employer (Deeley) was bought by another company. The employer gave Wood 13 weeks’ working notice, as required under her employment contract. Deeley also paid her salary and benefits during the 13 week notice period and paid Wood an additional lump sum of severance pay, as it was required under the ESA.

However, Wood argued that the termination clause of her employment contract violated the ESA because its language excluded Deeley’s obligation to contribute to her benefits plan during the notice period and excluded Wood’s entitlement to severance pay.

The Ontario Court of Appeal agreed with her.

In explaining its decision, the court pointed out that an employment contract will be enforceable only if it complies with the minimum standards in the ESA. If the termination clause doesn’t comply then the entire clause is void and the employee is entitled to common law reasonable notice .

The court found that the plain language of the termination clause excluded Deeley’s obligation to contribute to Wood’s benefit plan during the notice period and to pay severance pay. Since the clause contravened the ESA, it was void and unenforceable.

Even though Deeley actually complied with its statutory obligations by paying what it was obligated to under the ESA, this did not change the fact that the contract did not comply with the ESA.

Since the termination clause gave Deeley the option to not pay Wood the severance pay she was entitled to, or pay her less, the clause didn’t clearly satisfy Deeley’s obligations. Therefore, it was void and unenforceable.

As a result, Wood was entitled to common law notice, which the court fixed at 39 weeks – much larger than the 13 weeks Wood was entitled to under her contract.

As a final note, when we are preparing employment contracts we will consider Justice Laskin’s overview of how courts have treated termination provisions, summarized here:

1. Courts generally interpret employment agreements differently from commercial contracts because of the importance that employment plays in a person’s life and because people are vulnerable when they are terminated;
2. Employees usually have less bargaining power than employers at the time the employment contract is drawn up;
3. Many employees are not aware of the minimum standards employers are required to meet under the ESA so they might not know to challenge a termination clause that doesn’t comply with the ESA;
4. Since the ESA is designed to protect the interests of employees, courts should interpret the ESA in a way that encourages employers to comply;
5. Employers should be encouraged to draft agreements that comply with the ESA;
6. Employees should know their entitlements as employees when they begin their employment; and;
7. If a termination clause can be interpreted in more than one way, a court should interpret it in favour of the employee.

 

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[1] Specifically, if the employer is either discontinuing a business employing 50 or more employees who are being severed within a six‑month period, of if the employer has a payroll of $2.5 million or more. (ESA sections 60-61)

Filed in: Employment Law

Tags: Employment contracts, Employment standards, Employment Standards Act, Termination