One Bad Apple Spoils the Bunch: Employment Contracts

Employment contracts by nature address a number of different factors relating to employment, from sick days to vacation and overtime pay to performance management, compensation and an employee’s rights upon termination. When one clause is found to be invalid, courts have often held that the offending term can be lifted out, leaving the rest of the contract intact. However, a recent decision of the Ontario Court of Appeal found that a single invalid clause had the effect of invalidating the related clauses as well, even though the related clause did not violate the employee’s rights.

Contracting Out of Statutory vs. Common Law Entitlements

The provincial Employment Standards Act (ESA) provides certain minimum entitlements to notice or pay in lieu of notice, for employees who are terminated without cause. This entitlement is generally one week notice per year of employment, up to 8 weeks total. These entitlements are mandatory and an employer cannot contract out of them by way of the employment contract.

However, in addition to the ESA minimums, the common law has also developed additional notice requirements for termination without cause, which is more generous. In many cases, employees will be entitled to approximately one month’ notice per year of employment – nearly four times the amount specified in the ESA. This entitlement can be removed by included clear language to that effect in the termination clause of an employment contract.

Termination Clauses in an Employment Contract Should be Read as a Whole

In the case at hand, the employee had been working with the employer as a sales director for 10 months when he was terminated without cause. At the time of his termination, he was given two weeks’ notice in light of the minimum ESA standards. In this case, the amount of notice was double the minimum requirements under the ESA for employment lasting less than one year.

The employee’s contract contained two termination clauses; one for termination without cause, and one for termination for cause. The employee acknowledged that the ‘without cause’ provision was not in violation of the ESA. However, the employer conceded that the ‘for cause’ provision did violate the employee’s rights. The contract also contained a provision which said that if any clause was found to be invalid, the other clauses remained in force.

The employee brought a claim against his employer, stating that because the ‘for cause’ provision was invalid, so should the ‘without cause’ provision, therefore entitling the employee to a more significant notice period under the common law.

While the lower court sided with the employer, upholding the ‘without cause’ provision, the Court of Appeal found in favour of the employee, stating:

An employment agreement must be interpreted as a whole and not on a piecemeal basis. The correct analytical approach is to determine whether the termination provisions in an employment agreement read as a whole violate the ESA. Recognizing the power imbalance between employees and employers, as well as the remedial protections offered by the ESA, courts should focus on whether the employer has, in restricting an employee’s common law rights on termination, violated the employee’s ESA rights. While courts will permit an employer to enforce a rights-restricting contract, they will not enforce termination provisions that are in whole or in part illegal.  In conducting this analysis, it is irrelevant whether the termination provisions are found in one place in the agreement or separated, or whether the provisions are by their terms otherwise linked. Here the motion judge erred because he failed to read the termination provisions as a whole and instead applied a piecemeal approach without regard to their combined effect.

The Court said that employers should be cautious to ensure all employment contracts are in compliance with the law from the start, and reading related terms together in this way will encourage them to do so.

Get Informed, Stay Current

This case will likely impact how termination clauses are drafted and interpreted going forward throughout Ontario, and could affect an employee’s ability to claim damages for wrongful dismissal. Employees who are wondering about the interpretation of the termination clauses in their contract should seek the advice of a skilled employment lawyer. Contact the offices of Guelph employment lawyer Peter McSherry. We can guide you through the issues, help you understand your rights, and defend your position with respect to employment contract terms including termination clauses. Contact us online or by phone at 519-821-5465 to schedule a consultation.