In my employment law course, we discuss the SCC decision in Machtinger v. HOJ Industries for the proposition that a notice of termination clause in an employment contract is void if it violates Employment Standards legislation, with the result that common law “reasonable notice” is required. “Reasonable notice” is almost always more than ESA minimum notice.
In Wright v. Young and Rubicam, an Ontario Court clarified that a notice of termination clause in an employment contract is void as long as it is possible that it could violate the ESA, even if in fact the employer did not violate the ESA when it fired the employee bound by the contract.
Facts in a Nutshell
The employee was a senior executive. He signed a contract with a long, complicated termination clause. In essence, the clause set out a menu of entitlements to compensation that would flow to the employee if he were to be dismissed, with more money owing the longer he worked for the company. He was fired after 5 years. According to the clause, he was entitled to “13 weeks’ Base Salary…” Thirteen weeks’ pay was greater than his present entitlement under the ESA, which would have been 10 weeks’ pay (5 weeks’ notice + 5 weeks’ severance pay). The contract clause also said that the monies paid were “inclusive of all … entitlements to compensation.” The employer paid the 13 weeks’ salary, plus continued various other benefits for that period.
Although the employer complied with the ESA when it terminated Wright, in other circumstances, the contract clause would violate the ESA. Does the fact that the contract clause could violate the ESA if Wright was fired at different times render the clause unenforceable?
The Court ruled that since the contract contemplates situations in which the notice clause would violate the ESA, the notice clause is void, and Wright is entitled to “reasonable notice”, which the Court sets at 12 months.
The Court looked at various examples of where the contract clause would violate the ESA. For example, if Wright had been fired after 8.5 years’ service, the notice clause in the contract would have granted him 16 weeks’ salary, but under the ESA, he would have been entitled to (Quick, what’s the answer, employment law students: ___ weeks’ pay). The answer is more than 16 weeks’ pay, assuming he would have received severance pay.
Also, the ESA requires the employer to continue benefits contributions during the notice period (section 61(1)). The contract clause contemplated that the lump sum payments would be “inclusive of all entitlements to compensation” owed the employee. Benefits are compensation. Therefore, the Court ruled that the contract’s requirement to pay “base salary” ignores the ESA requirement to also provide benefits during the period of notice. That is a second way that the contract violated the ESA.
Moral of the Story
If you can imagine a situation in which the notice clause in an employment contract would run afoul of any clause in employment standards legislation, then the notice clause is unenforceable and the employee is entitled to “reasonable notice”. The obvious solution for employers is to include a clause that is crystal clear that the employee is at all times entitled to at least all of the entitlements owed under the ESA. Any benefits above the ESA level constitute additional consideration to the employee.
If you are an employee or prospective employee, and the notice of termination clause in the contract put before you provides, or could provide, for less protection than required by the ESA, it might make sense to just keep your mouth shut, knowing that if the employer later tries to rely on the clause, you can always bring an ESA complaint or sue for “reasonable notice” damages. Remember that a contract clause that violates the ESA is not enforceable, even if you have agreed to it.
Can you draft a contract clause that would ensure that a notice of termination clause in a contract does not run into the problem confronted by the employers in Machtinger and Young & Rubicam?