The landscape of employment law is ever‑shifting; there have been significant recent developments in the case‑law around the enforceability of termination clauses.

By law, employers are required to give employees reasonable notice of termination where they are terminated without cause and have entered into a contract for an “indefinite” term, or a series of consecutive fixed terms.

The question of what constitutes “reasonable notice” is less clear.

Judge‑made law, or “common law” considers an employee’s age, the length of service, the character of their position, and the likelihood of re‑employment elsewhere in determining how much notice is reasonable. While many previously understood that common law notice could not exceed two years, a recent Court of Appeal decision confirmed an award of 30 months’ notice for a long serving employee.

The only way to challenge the presumption of common law notice is to agree, in writing, on a different notice period. This is where things get murky: by law, an employee cannot contract out of their minimum entitlements under the Employment Standards Act (the ESA). A termination clause that could offend the ESA, or which does not comply with its minimum standards provided under the ESA, will be struck down.

Courts have taken an increasingly stringent approach to termination clauses, highlighting the need for employers to ensure that they have well‑drafted, up to date, employment agreements. Below we set out a few lessons learned.

1. Benefits Must Go On

In 2017, the Court of Appeal struck down a termination provision that purported to offer two weeks’ notice of termination, or pay in lieu, per completed year or partial year worked. They did so because the termination clause failed to reference the continuation of benefits over the notice period. The fact that the employer actually made contributions to the employee’s benefits plan for the relevant period was deemed to be of no relevance in the face of an “illegal termination clause”; the entire clause was struck down.

Lesson #1: if your employment agreement does not provide for a continuation of benefits during the notice period, it may be invalid.

 

2. Consider Severance!

Under the ESA, employees with five or more years of service, who serve at a company with a payroll of over $2.5 million, are entitled to severance, in addition to reasonable notice. A 2020 case from the Superior Court found that failing to provide for severance in an employment contract could invalidate the entire termination clause, even where the employer’s payroll is not of the requisite size, and the employee has not served for five years.

In 2022, the Superior Court went a step further, finding that a termination clause that provided for “notice of termination, termination pay, and/or severance pay” was invalid, because the reference to “and/or” created an ambiguity, the overall effect of which was to suggest that the employer could pay either termination pay or severance pay, but not necessarily both.

Lesson #2: Even if an employee has not worked for 5(/+) years, ensure that your employment contract contains a valid severance provision.

 

3. The “For Cause” Conundrum

It is well‑established that an employer can terminate an employee “for cause”. However, the standard for cause differs under the ESA and at common law: under the ESA, cause is limited to willful misconduct, disobedience, or willful neglect of duty that is not trivial, and has not been condoned by the employer. “Cause” at common law is a broader concept, and may include dishonesty, insubordination, or breaches of company policy.

Employees whose activities do not meet the threshold of “cause” under the ESA may still be entitled to minimum, statutory notice, even if they engage in activities that could constitute “cause” at common law; a termination clause that purports to deny them this right may be struck down. This was confirmed by the Court of Appeal in a 2020 decision despite the fact that the employee in question was being terminated “without cause”.

Significantly, the court in that case found that a “severability” provision, which stated that any invalid clause would be severed from the agreement, could not save the deficient clause.

Lesson #3:  if your employment agreement purports to offer no notice in cases of termination “for cause”, you may be at risk of having the entire clause struck down.

 

4. Termination at any time? Think again.

The most recent case of note is a 2024 decision of the Superior Court which found that a contract permitting an employer to terminate an employee “at any time” offended the ESA in two ways; first, with respect to Section 53, which requires an employer to reinstate an employee after a protected leave, and second, with respect to Section 74, which protects employees from reprisal for exercising rights under the ESA. In that case, the employee was on a fixed term contract; she was awarded compensation for the balance of her contract term, being over $150,000.00.

Lesson #4: if your termination clause permits the employer to terminate an employee “at any time, in the sole discretion of the employer”, it may be invalid.

Filed in: Employment Law