Court of Appeal upholds termination clause

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A recent Ontario Court of Appeal decision represents a promising shift in how courts will interpret termination clauses.  In Nemeth v. Hatch Ltd. (January, 2018), the employer terminated a 19-year employee. The employer provided notice, severance, benefits, and pension contributions, all in accordance with the Employment Standards Act, 2000 (the “ESA”), based on its interpretation of the following termination clause:

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 employee argued that he was entitled to common law notice of termination, because the  termination clause did not have explicit language excluding such an entitlement.  He further argued that the termination clause was void because it was silent with respect to the ESA obligation to pay severance, thereby evidencing an attempt to contract out of the employer’s statutory minimum obligations.

The employee’s arguments raised two important questions regarding the interpretation of termination clauses:

  1. Is it necessary to include explicit language to displace entitlement to common law reasonable notice? and
  2. Is silence with respect to an ESA obligation evidence of an intention to contract out of the ESA?

Fortunately for employers, the Ontario Court of Appeal answered “no” to both questions.  As to the first question, the Court applied the following principle from the Supreme Court of Canada’s 1992 decision in Machtinger v. HOJ Industries Ltd:

The well-established presumption is that on termination, an employee is entitled to common law notice; however, this presumption may be rebutted if the contract of employment “clearly specifies some other period of notice, whether expressly or impliedly”, provided that it meets the minimum entitlements prescribed under the ESA.

The Court of Appeal noted that the need for clarity does not require a specific phrase or formula.  Instead, it is enough that the intention to displace common law notice be evident from the language.  Applying this principle to the case before it, the Court concluded that it was clear that the parties intended to preclude the employee’s entitlement to common law notice.  The disputed termination provision clearly specified a different notice period, which met the minimum requirements of the ESA.

The Court then considered whether the termination provision was void for purporting to contract out of the ESA.  The Court distinguished Nemeth from Wood v. Fred Deeley Imports Ltd. (2017).  Readers of Focus may recall that in Wood the termination clause was silent with respect to the ESA requirement to make benefit contributions during the notice period (see Ambiguities in employment contracts continue to trip-up employers – Ontario Court of Appeal refuses to enforce termination clause and awards common law reasonable notice).  The termination clause also contained the following statement “…the Company shall not be obliged to make any payments to you other than those provided for in this paragraph.”

It was this last sentence that was fatal to the termination clause in Wood. The Court in Wood interpreted this last sentence as limiting the employee’s entitlement to only what was set out in the termination clause, and excluding anything else. Since the clause failed to contemplate ESA benefit contributions, it had the effect of providing less than the ESA minimum.  As such, the Court in Wood refused to enforce it.

By contrast, in Nemeth, although the termination clause did not specifically mention ESA severance, there was no language that operated to exclude it.  Since the termination clause in Nemeth did not purport to provide less than the minimum severance obligations under the ESA, it was upheld.

The employee was, however, successful on one interpretation issue.  The employer provided eight weeks notice in accordance with the ESA, based on the following sentence:

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 found that the sentence could be interpreted in one of two ways – either to limit notice to the ESA minimum, or to provide a greater period of notice (one week of notice for each year of service).  The Court relied on the principle that where a clause is open to more than one interpretation the interpretation most beneficial to the employee should be preferred. As a result, the employee’s notice period was increased from eight weeks to 19 weeks, based on his 19 years of service


In our view

The decision in Nemeth confirms that, provided the parties’ intention to displace common law reasonable notice is clear, explicit language to that effect may not be strictly necessary.  Further, a failure to mention a particular ESA entitlement may not by itself be interpreted as an attempt to contract out of that obligation.  Although these principles are helpful to employers, the decision also makes clear that any ambiguities in an employment agreement will be interpreted against the employer.  As such, employers should continue to use clear and unambiguous language in employment agreements to avoid the risk of differing interpretations.

For further information please contact André Champagne at 613-940-2735 or Sophie Gagnier at 613-940-2756.