Ontario Court of Appeal Finds Clarity in Termination Clause

The Ontario Court of Appeal recently overruled a decision regarding a termination clause, finding that the provision clearly and unambiguously ousted the presumption of common law reasonable notice.

The Case

The employee in Amberber v. IBM Canada Limited was 57 years old and had almost 16 years of service when IBM dismissed him without cause. IBM sought to rely on the termination clause in his employment agreement. The clause in the contract was contained in a single paragraph, which the Court separated into three sections for ease of reference.

The Court referred to the following portion of the paragraph as the “Options Provision”:

If you are terminated by IBM other than for cause, IBM will provide you with notice or a separation payment in lieu of notice of termination equal to the greater of (a) one (1) month of your current annual base salary or (b) one week of your current annual base salary, for each completed six months worked from your IBM service reference date to a maximum of twelve (12) months of your annual base salary.

The Court referred to the following portion of the paragraph as the “Inclusive Payment Provision”:

This payment includes any and all termination notice pay, and severance payments you may be entitled to under provincial employment standards legislation and Common Law. Any separation payment will be subject to applicable statutory deductions. In addition, you will be entitled to benefit continuation for the minimum notice period under applicable provincial employment standard legislation.

The paragraph also contained further language, which the Court referred to as the “failsafe provision”:

In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (“statutory entitlements”) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment.

In addition to eleven weeks and three days of working notice, the employer provided a separation payment equivalent to 31 weeks’ in lieu of notice.

As we noted in our earlier blog post regarding the lower court decision, the motion judge found that the “inclusive payment provision” effectively ensured that a terminated employee would never receive less than what he or she was entitled to under the Employment Standards Act, 2000 (the “ESA”). As such, the termination clause as a whole did not violate the ESA.

The “inclusive payment provision” specified that payment pursuant to the termination clause was inclusive of any other statutory or common law entitlements upon termination. In other words, the “inclusive payment provision” clearly and unambiguously rebutted the presumption of common law notice, by stating that no further common law amounts would be paid on top of the contractual entitlement.

However, because the “inclusive payment provision” was not repeated at the end of the paragraph, the motion judge found that it was unclear whether it applied to the “failsafe provision” which followed it. It was ambiguous, according to the motion judge, whether common law reasonable notice was to be paid on top of amounts paid under the “failsafe provision” as opposed to the “options provision”. Because it was unclear, the motion judge found that the language should be interpreted contra proferentum, against the employer who had drafted the contract.

The Decision

The Court of Appeal noted that because employees generally have less bargaining power than employers, employment contracts are interpreted differently than commercial contracts. Where a termination clause can reasonably be interpreted in more than one way, the interpretation that favours the employee should be preferred. However, the Court noted that the contra proferentum principle only applies where there is genuine ambiguity in the contract language.

The Court of Appeal found that the motion judge had made an error by subdividing the termination clause into parts and interpreting those parts individually. The clause was drafted as a single paragraph, and it should have been interpreted as a whole. The “inclusive payment provision” clearly modifies the “options provision”, and the Court noted that the “failsafe provision” also modifies the “options provision” by ensuring that it is read up to comply with the ESA when necessary. As such, the Court held that the “inclusive payment provision” applies to only one part of the clause, but not the other, gives the clause as a whole a strained and unreasonable interpretation.

The Takeaway

The Court’s reversal in this case, while favourable to employers, emphasizes the occasional unpredictability of the law in this area. It is prudent to periodically review your contractual termination provisions for new hires, as well as for existing contracts which may have been rendered problematic by the changing law. Seeking advice from an employment lawyer who is up-to-date with the latest case law is your best defence to help ensure that your termination clauses survive legal scrutiny, and avoid known pitfalls.

This blog was first published on First Reference Talks.

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