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2018-05-22T17:57:08+00:00 May 25, 2018|Employment Contracts, Employment Law|

Another Contractual Termination Clause Goes Down in Flames

Another month another contractual termination clause goes under the judicial microscope and is found to be unenforceable.  The case is Andros v. Colliers Macaulay Nicolls Inc., 2018 ONSC 1256 (CanLII) decided on May 9, 2018. 

Paragraph 4 of the employment agreement entered into between Andros and Colliers provided:

4.  The Company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act or, at the Company’s sole discretion, either of the following:

a. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.

b. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary.

At the time of Andros’ termination, he had worked for the defendant during two periods – from September 2001 to August 2004, when he chose to leave the company to pursue other career opportunities.   He returned in February 2009 as a Senior Associate and was promoted on September 1, 2009 to Managing Director.  His employment was terminated on January 19, 2017.

At the time of his termination, the plaintiff received an annual salary of $170,000, benefits including RRSP contributions, dental, extended health, and life insurance benefits, he received a bonus in every year following his promotion in 2009 (the bonus was always paid in February following the company’s year end). 

The Company provided the plaintiff with his entitlements under the Employment Standards Act, 2000 (“ESA”) which were greater than those provided in the ESA.  In other words, the Company argued that it complied with the ESA and the employment agreement. 

The plaintiff argued that the termination clause in the employment agreement was void and unenforceable as it was contrary to the ESA and was an unlawful contracting out of the ESA. 

The Court agreed with the plaintiff saying:

… I find that the termination provision in Mr. Andros’ employment agreement potentially reduces the benefits to which he could be entitled on termination to something less than he would be entitled to under the ESA. Consequently, the termination provision is ineffective in rebutting the presumption of reasonable notice of termination at common law and is therefore unenforceable.

The motions judge relied upon the leading Court of Appeal decision in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII) where the Court set out the following principles applicable to the interpretation of the employment contracts:

At common law, an employee hired for an indefinite period can be dismissed without cause, but only if the employer gives the employee reasonable notice. In Machtinger v. HOJ Industries Ltd., 1992 CanLII 102 (SCC), [1992] 1 S.C.R. 986, at p. 998, the Supreme Court characterized the common law principle of termination of employment on reasonable notice “as a presumption, rebuttable if the contract of employment clearly specifies some other period of notice.” (para. 15) 

Ontario employers and employees can rebut the presumption of reasonable notice by agreeing to a different notice period. But their agreement will be enforceable only if it complies with the minimum employment standards in the ESA. If it does not do so, then the presumption is not rebutted, and the employee is entitled to reasonable notice of termination. (para. 16)

The question of the enforceability of the termination clause turns on the wording of the clause, the purpose and language of the ESA, and the jurisprudence on interpreting employment agreements. That jurisprudence is now well-established. I will summarize it briefly. (para. 25)

The importance of employment and the vulnerability of employees when their employment is terminated give rise to a number of considerations relevant to the interpretation and enforceability of a termination clause:

  • When employment agreements are made, usually employees have less bargaining power than employers. Employees rarely have enough information or leverage to bargain with employers on an equal footing: Machtinger, p. 1003.
  • Many employees are likely unfamiliar with the employment standards in the ESA and the obligations the statute imposes on employers. These employees may not seek to challenge unlawful termination clauses: Machtinger, p. 1003.
  • The ESA is remedial legislation, intended to protect the interests of employees. Courts should thus favour an interpretation of the ESA that “encourages employers to comply with the minimum requirements of the Act” and “extends its protections to as many employees as possible”, over an interpretation that does not do so: Machtinger, p. 1003.
  • Termination clauses should be interpreted in a way that encourages employers to draft agreements that comply with the ESA. If the only consequence employers suffer for drafting a termination clause that fails to comply with the ESA is an order that they comply, then they will have little or no incentive to draft a lawful termination clause at the beginning of the employment relationship: Machtinger, p. 1004.
  • A termination clause will rebut the presumption of reasonable notice only if its wording is clear. Employees should know at the beginning of their employment what their entitlement will be at the end of their employment: Machtinger, p. 998.
  • Faced with a termination clause that could reasonably be interpreted in more than one way, courts should prefer the interpretation that gives the greater benefit to the employee: Ceccol v. Ontario Gymnastics Federation (2001), 2001 CanLII 8589 (ON CA), 149 O.A.C. 315, Family Counselling Centre of Sault Ste. Marie and District (2001), 2001 CanLII 4698 (ON CA), 151 O.A.C. 35. (para. 28)

The judge in Andros considered the many cases that have interpreted contractual termination clauses and held that “at best, the termination provision in Mr. Andros’ employment contract is unclear or ambiguous as to whether he would have been entitled to severance had clause 4a applied on his termination, and employee benefits had clause 4b then applied.”  Since only a clear termination clause will serve to rebut the presumption of common law reasonable notice, the clause in Andros was found to be void.  Further, when interpreting termination clauses in employment contracts, the language used must meet the test of a “high degree of clarity” and any ambiguity will be resolved in favour of the employee.

The judge then went on to say that:

As noted in Wood (at para. 28), following Machtinger, an employee should know at the beginning of their employment what their entitlement will be at the end of their employment.  The termination provision is not explicit.  Mr. Andros would not have known, with certainty, when he signed the employment agreement whether he would be paid severance (if he were so entitled) in accordance with clause 4a, or whether he would be entitled to employee benefits in accordance with clause 4b.  Neither clause 4a nor 4b makes reference to entitlements under the ESA, other than notice, and neither clause makes reference to the employment standards legislation specifically or generally. 

Andros was entitled to be provided with reasonable notice at common law which the Court assessed at 8 months base salary. 

The court refused to order damages in respect of the loss of employee benefits beyond the 8 weeks that benefits were continued under the ESA.  In reaching that conclusion, the court found that he had not provided any evidence of actual loss incurred by him as a consequence of his loss of benefits (e.g. no evidence that he replaced the benefits that he would have had during the longer notice period).  

In terms of bonus, the employer argued that the bonuses are discretionary because:

  • they are based on corporate performance and not individual performance and therefore cannot form part of an employee’s compensation;
  • the employment agreement specifically provides that Mr. Andros is “eligible” for performance bonuses as opposed to “entitled” to them; and
  • at the time each bonus was paid to Mr. Andros the bonus statement unambiguously stated: “your bonus is awarded at the discretion of the company.”

Although the amounts varied from year to year, Mr. Andros received a bonus in each of the years he was employed as a Managing Director.  These components constituted a significant part of his compensation.  The bonus was found not to be discretionary and were an integral part of his compensation. 

The fact that the bonus plan said that they were “discretionary” doesn’t make it so.  As the court noted:

Damages for wrongful dismissal may include an amount for a bonus the employee would have received had he continued in his employment during the notice period, or damages for the lost opportunity to earn a bonus. This is generally the case where the bonus is an integral part of the employee’s compensation package: see Brock v. Matthews Group Limited (1988), 20 C.C.E.L. 110, at para. 44 (Ont. H.C.J.), aff’d (1991), 34 C.C.E.L. 50, at paras. 6-7 (Ont. C.A.) (appeal allowed in part on other grounds) (Brock); Bernier v. Nygard International Partnership, 2013 ONCA 780 (CanLII), affirming 2013 ONSC 4578 (CanLII), at para. 44 (Ont. S.C.), aff’d, at para. 5 (Ont. C.A.). This can be the case even where a bonus is described as “discretionary”: see Brock, at para. 44 (Ont. H.C.J.), aff’d, at paras. 6-7 (Ont. C.A.).

The bonus plan also provided that the“employee in good standing with the company at the time bonuses are payable”.  The employer relied on this clause to support its view that the bonus was not payable as the employee was not an employee in good standing. 

Although it is possible to displace the general rule that damages are to be based on total compensation, such was not the case in the Andros case.  Relying on Paquette v. TeraGo Networks Inc., 2015 ONSC 4189 (CanLII), varied on other grounds at 2016 ONCA 618 (CanLII):

A term that requires active employment when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.

The court therefore awarded a bonus for 2017 calculated based on the average of the bonuses received in 2014, 2015 and 2016.

Conclusion

Another termination clause gets set aside and yet again, the court applies the presumption of “total compensation” as the measure of damages at common law.  It is, clearly, getting more difficult to terminate an employee on the basis of a contractual termination clause or when trying to limit an employees damages entitlement on termination.  It is possible, but, as the court observed, a high degree of clarity is required with any ambiguity decided in favour of the employee (in most cases).