Journal

Otherwise known as
Michael’s soapbox

2017-10-30T16:16:49+00:00 October 18, 2017|Employment Contracts, Employment Law|

Employment Contracts – You Win Some You Lose Some

A fairly recent case from the Ontario Superior Court of Justice provides some needed confirmation that, when properly drafted, courts will indeed enforce a termination contract in a written contract of employment.  The case is Farah v EODC Inc., 2017 ONSC 3948 (CanLII).  The employee signed a series of employment contracts each containing a termination clause that sought to displace the common law presumption of reasonable notice of termination.

In the Spring of 2015, EODC asked each of its employees, including Mr. Farah, to sign an updated employment contract in return for a “cost-of-living increase of 2 percent”.  According to the Court:

[the employment contract] was dated June 1, 2015, but was made effective as of September 2, 2013. Both parties signed the agreement. The signature of Philip Lynch, Managing Director of EODC, is dated June 30, 2015. The Applicant’s signature is dated July 8, 2015.

The contract contained the following clause:

At any time, following the conclusion of the Probationary Period, the Employer may terminate the Employee without just cause simply upon providing him/her with the entitlements prescribed in the Employment Standards Act, 2000 (“the Act”) or any amendments thereto. The Employee hereby acknowledges that he/she has had the opportunity to review the relevant portions of the Act and/or to consult with legal counsel about their impact on his/her current entitlements upon termination of his/her employment.

On September 1, 2016, Mr. Farah, along with a number of other employees, was terminated, however, later that afternoon he was contacted and told that the notices had been “issued erroneously and that he was to report back to work the following morning (Friday, September 2, 2016)” which he did and continued to work until November 23, 2016, when he was again terminated.  The company offered to pay him 6 weeks’ termination pay and 6.42 weeks of severance pay, plus an additional one week’s pay in consideration of the Applicant’s execution of a full and final release.

He rejected the offer, and brought an application to the court for wrongful dismissal.  He argued, in part, that the termination provision in the employment contract was unenforceable as it was ambiguous and therefore could not serve to displace the common law presumption of reasonable notice and, further, that the clause was unenforceable for lack of consideration.

Specifically, the applicant argued that the words “with the entitlements prescribed in the Employment Standards Act, 2000” were ambiguous and void.  It also argued that the employer failed to define Probationary Period and, thus, was evidence of a further ambiguity.

Although the Court agreed that the term “Probationary Period” was undefined in the most recent contract, it nonetheless  found that it was unambiguous in the context of the entire employment relationship which included an earlier contract that defined Probationary Period.

Following a review of the case law, the court considered whether “entitlements prescribed in the Employment Standards Act, 2000” was ambiguous.  The Court found that it was not, and stated:

…. the Court finds that the interpretation of the Termination Clause and its intention to provide the Applicant “with the entitlements prescribed in the Employment Standards Act, 2000” to be clear and unambiguous. Accordingly, the contractual term rebuts the common law presumption and prevails.

With respect to the “consideration” argument, the Court found that the 2% wage increase provided to the applicant was sufficient consideration in the circumstances.  Specifically, the company’s evidence was that the cost-of-living increase was provided in exchange for signing the contract (including the termination clause) and that, had the applicant not signed the agreement, he would not have received any increase.  The company gave evidence to the effect that one other employee who refused to sign was not paid the increase.

The court agreed that this 2% wage increase was sufficient consideration for the contract.

Lessons for Employers

There are many (many) cases over the past few years where courts have taken highly technical interpretations of termination clauses in employment contracts and found them to be unenforceable.  Where that occurs they read in the common law requirement that the employer may only terminate the employee with reasonable notice or pay in lieu of such notice at common law.  It is difficult to reconcile the cases in this area, to the point where some have argued that the courts have adopted a “palm tree justice” approach to the interpretation of employment contracts.

The Farah case provides some balance and confirmation that the court will enforce a termination clause in an employment contract where it clearly and unambiguously rebuts the common law presumption of reasonable notice.  In this case, the clause was found to do so.  That said, there are a few conclusions reached in the case (particularly as relates to the consideration) that are troubling, but, in the end, the clause was enforced.