By: Amanda D. Boyce and Erika M. Montisano
A recent and troubling decision from the Ontario Superior Court of Justice illustrates that the courts are applying increasing scrutiny to employment contracts which purport to limit employee entitlement upon termination. The courts are finding increasingly creative ways to invalidate such clauses, finding that any interpretation that could potentially violate the Employment Standards Act, 2000, no matter how remote, will be sufficient to void a termination clause. For employers, the daunting task of drafting a termination clause to limit an employee’s termination entitlements just became even more challenging.
In Rutledge v. Canaan Construction Inc., the employee was working in the construction industry. Unlike the majority of employees in Ontario, construction employees are exempt from entitlement to notice of termination or pay in lieu thereof pursuant to O. Reg 288/01 under the Employment Standards Act, 2000 (the “ESA”).
The employment contract in this case reflected this exemption, and contained the following termination clause:
The Employee may be terminated at any time without cause upon being given the minimum periods of notice as set out in the Employment Standards Act, or by being paid salary in lieu of such notice or as may otherwise be required by applicable legislation. The Employee acknowledges that pursuant to the Employment Standards Act they are not entitled to any notice or time in lieu thereof due to the nature of their job and as such they are entitle to absolutely no notice or pay and benefits in lieu thereof upon termination.
The termination provisions set force above, represent all severance pay entitlement, notice of termination or termination in lieu thereof, salary, bonuses, vacation pay and other remuneration and benefits payable or otherwise provided to the Employee in relation to the termination of the Employee regardless of cause or circumstances.
After being placed on a temporary layoff that eventually became permanent, which constitutes a termination under the ESA, the employee sued for damages for wrongful dismissal.
The Small Claims Court found that the termination clause was void because it purported to contract out of the obligation to continue benefits during the statutory notice period. There was no question that the employee was a construction employee, and that he was exempt from notice of termination and termination pay under the ESA. The employer appealed the decision on the basis that it could not be illegal to discontinue benefits during the statutory notice period for a terminated employee that is not entitled to such notice period.
The Superior Court acknowledged that the lower court’s judgment may have been incorrect on that point. However, the Court ultimately dismissed the employer’s appeal, finding that the termination clause was void and that the employee was entitled to reasonable notice at common law.
The Court found that although the employee was and always had been a “construction employee” as defined in the legislation, it was possible that at some point during his employment he could have changed roles and ceased to be a construction employee. If this had happened, the exemption would no longer have applied to him, and he would have been entitled to statutory notice of termination or pay in lieu thereof. In this hypothetical scenario, the termination clause would have become illegal.
Further, the Court found that although the company was not currently a severance pay employer because of its small size, it could potentially have grown to over 50 employees in the future and increased its payroll to over $2.5 million. In that case, the Court reasoned, the employee would have become entitled to severance pay. The Court seems to have been reasoning on the understanding that construction employees are entitled to severance pay under the ESA. If so, that would appear to be an error of law, as construction employees are specifically excluded from entitlement to severance pay under the ESA, pursuant to a regulatory provision located just below the one which exempts them expressly from notice of termination or pay in lieu thereof.
Previous decisions held that if a termination clause may potentially violate the ESA in the future, the clause is invalid now. This reasoning has typically been used with respect to severance pay entitlement, as the Court discussed in this case, with courts reasoning that smaller employers with payrolls under $2.5 million could grow, such that they could become severance pay employers in the future.
By contrast, this decision has applied the principle in a novel and troubling way. The employee in this case had always worked as a construction employee, and there was no basis to conclude that the nature of his employment could have changed at any time. The employment contract further specified that he was to be employed as an apprentice in the construction industry. This suggests that if and when he ceased being an apprentice, he would likely have become a journeyman in his trade, and would have remained a construction employee. However, the Court found that because the termination clause did not specifically state that he would become entitled to notice of termination or pay in lieu thereof if he ceased to be a construction employee, it was invalid.
In our view, this is a misapplication of the rationale in earlier case law, as it relied on events too remote and unlikely to interpret a contractual clause. Hopefully, if the Supreme Court of Canada grants leave to hear the appeal in the unrelated case of Waksdale v. Swegon North America Inc., it will take the opportunity to provide guidance on this and other troubling trends in contractual interpretation.
In the meantime, employers should strongly consider having their employment contracts reviewed by a qualified employment lawyer to ensure, insofar as it is possible to do so, that they conform to the latest case law. Recent decisions have illustrated that the courts sometimes come to unpredictable conclusions when interpreting termination clauses. Keeping employment contracts as current as possible will give employers the best chance of reducing their liability upon termination.
For more information, please contact:
Amanda D. Boyce at [email protected] or 416-862-1687
Erika M. Montisano at [email protected] or 416-849-2552