Another judicial reminder to draft proper termination clauses

A recent Superior Court of Justice decision serves as a reminder that termination clauses that are not consistent the Employment Standards Act 2000 (ESA) will be found to be unenforceable by the court. When that happens, the clause effectively disappears. An employer that terminates an employee’s employment without a clause must provide prior reasonable notice of termination.

In Tan v. Stostac Inc., the plaintiff Hans Tan had been working as a depot manager with Stostac. The 40-year-old was laid off just before the fifth anniversary of his hiring near the beginning of the COVID-19 pandemic. Stostac attributed this decision to adverse economic conditions relating to the pandemic or supply chain difficulties that caused revenues to drop substantially. Despite sending out more than 80 applications, Tan was unable to find another job.

When he was hired by Stostac, Tan signed an employment agreement that included the following termination provision:

“The Employer may end the employment relationship at any time without advanced notice and without pay in lieu of such notice for any just cause recognized at law. Subsequent to the probationary period, the Employee understands and agrees that employment may be terminated at any time by the Employer providing the Employee with two (2) weeks of notice, pay in lieu of notice or a combination of both, at the Employer’s option, plus one additional week of notice (or pay in lieu) for each year of completed service to a maximum of eight (8) weeks … the provisions of the Ontario Employment Standards Act, 2000, as they may from time to time be amended, are deemed to be incorporated herein and shall prevail if greater.”

Sotstac no doubt believed it could terminate Tan by following the formula and by thus giving him seven to eight weeks of notice of termination.

Judge awarded seven months’ pay

Tan sought a longer notice period, arguing that the termination clause in his contract was inconsistent with the ESA. Justice Michael Dineen agreed, awarding the plaintiff seven months’ pay in lieu of reasonable notice.

As Dineen J. noted: “In my view, the termination clause in this case suffers from the same flaw identified in the line of cases cited above by giving the defendant the right to terminate the plaintiff’s employment without notice of payment for just cause that might fall short of non-trivial willful misconduct. I do not accept that the attempt to incorporate the ESA’s provisions in the final sentence of the clause’s “without cause” portion detracts from the clear assertion of a right to terminate without notice for any just cause.”

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Dineen went on to explain that, at common law, an employee terminated without cause is entitled to reasonable notice when there is no enforceable clause covering termination.

The Waksdale case and its progeny govern

His Honour cited the precedent set in Waksdale v. Swegon North America Inc., where the court ruled that a clause providing for no notice when there is “cause” is unenforceable since, even with cause, ESA notice is required. His Honour also referenced Sewell v. Provincial Fruit Co. Limited, a case where I represented a client who was the first to benefit from the precedent established by Waksdale.

As the judge wrote in Sewell, “Courts … should exercise their discretion in favour of protecting employees and must look at the employment agreement as a whole, over its entire expected duration, to determine whether it satisfies the minimum requirements of employment standards legislation.

In Tan, the judge urged companies to be extra vigilant about drafting enforceable termination agreements:

“As a result of the power imbalance between employers and employees and the likelihood that many terminated employees may not be aware of or able to enforce their statutory rights, courts are especially vigilant to interpret employment contracts in a way that encourages employers to draft contracts that comply with their statutory obligations,” Dineen concluded.

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