Employment contracts are often an attempt by an employer to minimize an employee’s payment upon the termination of employment. There is no doubt that a company can create a contract under which an employee gives up their common law rights to wrongful dismissal payments. That being said, a few recent cases reflect how difficult it often is for an employer to enforce these limiting terms.
In order to effectively set limits on an employee’s entitlement to notice pay for dismissal, employers must be careful to satisfy a number of elements. Without these precautions in place, it is unlikely that such terms will withstand scrutiny by a court.
Step 1: Consideration
There must be something of value given in exchange for the contract signed by the employee. That is easy to satisfy when the contract is presented at the time of an offer of a new job, provided that the employee has reviewed and agreed to the terms before starting employment.
If new terms are given after employment has started, there must be fresh “consideration” or value given such as a raise, a promotion or some new and improved benefit. If there is no new value given, there is no contract in place.
Step 2: Minimum Standards
Ontario has set out minimum notice terms in the Employment Standards Act which cap at 8 weeks. This requires not only the payment of a employee’s salary for the notice period but also benefits, which have been a nightmare for many employers, as discussed below. In addition, Ontario law requires severance pay for certain larger employers with a payroll of over $2.5 million where the employment relationship exceeds 5 years. Where this is so, severance pay is capped at one week per year of employment for up to 26 weeks. The contract cannot override these payments and benefits and should it do so, the termination clause will likely fail.
Step 3: No Confusion
It is a fundamental rule of interpretation that a confusing or ambiguous term will be read against the interests of the party that drafted the contract. For this reason, the termination clause must be precise and clear and not capable of multiple interpretations.
In one case decided recently by the Court of Appeal, the contract stated that the benefits would be extended for the required statutory period, subject, however, to the consent of the benefits insurer. The reason this clause often appears is that the insurer may have qualms about continuing disability insurance should the employee have a history of serious medical issues. This clause was found to have violated the mandated need to continue the benefits without such a qualifier and hence the termination clause failed. This was based on the wording of the clause itself and not an actual refusal of the insurer.
In a second case, the agreement stated that benefits were required for a maximum of only 4, as opposed to the correct 8 weeks, on termination. However, the contract had a saving clause which stated that if the agreement, for whatever reason, was in violation of the Employment Standards Act, then it should be read to ensure compliance with this statute. This, the Court of Appeal stated, was confusing and hence any such ambiguity must be read against the employer. The Court found that an employer cannot provide for notice in direct violation of statutory minimums on the hope the contract won’t be challenged, and then save itself with such a provision. Again, the agreement failed.
In a third case, the employer added a term to the employment manual which granted the employer the right to change the terms as it chose, unilaterally. The policy, in this case, was also created after the employment had begun and there was no consideration or explicit agreement on the employee’s part. For these reasons, the court found that there was no contract in place and the agreement once again failed.
Let Legal Advice Guide Your Actions
Before signing any contract that attempts to place limits on notice, benefits or severance, consult with an experienced and skilled employment lawyer who will review the terms and advise you of your rights.