Canada: Enforceability Of Termination Clauses In Employment Contracts – Trending Towards Clarity, Or More Uncertainty?

It is a basic principle of employment law in Ontario that employees terminated without cause are presumed to be entitled to common law reasonable notice of termination unless the parties clearly agreed to a different notice period, typically through a termination clause in an employment agreement, that does not violate the statutory minimums prescribed by the Employment Standards Act, 2000 (the "ESA"). One issue that frequently arises is whether the parties clearly agreed to a notice period that displaces an employee's presumed entitlement to common law reasonable notice.

The January, 2018 decision of Nemeth v Hatch from the Court of Appeal for Ontario appeared to clarify how courts should treat this issue:

[9] The need for clarity does not mean that the parties must use a specific phrase or particular formula, or state literally that "the parties have agreed to limit an employee's common law rights on termination". It suffices that the parties' intention to displace an employee's common law notice rights can be readily gleaned from the language agreed to by the parties.

In that case, the termination clause read [emphasis added]:

The Company's policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation.

The Court of Appeal concluded that (a) this clause clearly evidenced an intent to displace the presumption of common law reasonable notice, and (b) the clause did not violate the ESA's statutory minimums. It was an enforceable termination clause.

However, a recent decision of the Divisional Court appears to have restricted the scope of the principle from Nemeth. In Movati Athletic (Group) Inc. v. Bergeron, the employer appealed a summary judgment decision in which the motions judge held that the following termination clause was unenforceable because it did not clearly displace the employee's presumed entitlement to common law reasonable notice:

Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time.

The Divisional Court dismissed the appeal. The court agreed with the motions judge that the language in the termination clause was ambiguous and did not displace the employee's presumed entitlement to common law reasonable notice. The Movati termination clause was substantively similar to the Nemeth termination, except it provided that the employer could provide pay in lieu of notice "pursuant to" the ESA, instead of "the notice required by" the ESA in Nemeth. The court considered this to be a relevant difference:

[36] The words "pursuant to the ESA" may be interpreted to mean that the notice period in the termination clause complies with the minimum requirements in the legislation, but they do not clearly provide that reasonable notice at common law no longer applies.

Further, the court agreed with the motions judge that the clause was ambiguous – the phrase "for the minimum period required by the Employment Standards Act, 2000" in the clause could either apply just to benefits continuance, or to pay in lieu of notice and benefits continuance. Since ambiguities must be resolved in favour of the employee, the Divisional Court concluded that the motions judge made no palpable or overriding error.

Employers and employer-counsel should take note of this decision, which appears to refine the approach set out in Nemeth. While a termination clause is not required to contain exact or specific words to displace the presumption that the common law applies, its language must evidence a clear intent to displace the presumption.

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