Canadian HR Reporter

Canadian HR RepoRteR october 6, 2014 INSIGHT 15 A look at the various pitfalls of specifying notice periods in contracts Question: If an employee signs an employment agreement with a termination provision stipulating specific notice periods and sever- ance payments that are greater than legislative minimums, are there any circumstances where the employee could legally chal- lenge that provision? Answer: ere are definitely pit- falls in stipulating specific notice and severance pay entitlements in employment contracts. Employment standards leg- islation varies from province to province. However, provisions stipulating minimum periods of notice, pay in lieu and severance pay are common, as are provisions disallowing attempts to contract out of statutory minimums. Generally speaking, the com- bined effect of these provisions is to allow the parties to an em- ployment contract to stipulate any notice period/severance pay that is equal to or greater than the corresponding minimums set out in the applicable legislation. e effect of a failure to do so was ad- dressed by the Supreme Court of Canada in Machtinger v. HOJ In- dustries Ltd. In Machtinger, the employment contracts allowed termination of one Ontario employee with no notice and the other on two weeks' notice. These provisions did not meet the Ontario Employ- ment Standards Act requirements, which entitled each employee to a minimum of four weeks' notice based on years of service. e court held that the insuf- ficient notice provided for in the employment contracts rendered the termination provisions in those contracts void. As a result, the employees' presumptive en- titlement to reasonable notice of their terminations was not rebut- ted. Reasonable notice was seven and seven-and-one-half months for the two employees. e employer had argued the appropriate remedy for a failure to comply with the minimum no- tice requirements was an order for payment to the employees of the four weeks' salary that would have met those requirements. e court rejected this interpre- tation as incompatible with the purpose of the legislation, which encouraged compliance with its minimum requirements and thus extended its protection to as many employees as possible. If the only potential sanction for failure to respect the minimum notice periods was an order to provide the statutory minimums, employers would have little incen- tive to make compliant contracts with their employees. The reasoning in Macht- inger has been extended in a number of subsequent challenges of employment agreements that contain notice provisions that meet or exceed the statutory requirements at the time of dis- missal but would have offended the legislation at some point in the future had the employment relationship continued. In Shore v. Ladner Downs, the employment contract provided for 30 days' notice of termina- tion from either party. e em- ployee had been employed for nine months when terminated with the stipulated notice. Under the governing employment stan- dards legislation, the employee would have been entitled to only two weeks' notice. Despite the fact that the employee was entitled to and received more than twice the employment standards notice re- quirement, the notice provisions in the employment agreement were found to be void. e court rejected the employ- er's argument that the agreement would not become void until such time as the statutory requirement for notice exceeded the 30 days provided for in the contract. Ac- cording to the court, the plain language of the legislation — "a requirement under this act or the regulations is a minimum require- ment, and an agreement to waive that requirement is void" — sup- ported an interpretation under which the contractual term was void from the outset. e court noted that the policy consid- erations identified in Macht- inger would not be served if the individual employee was left with the responsibility for determining, at the point of termination, whether the statutory minimum had risen above the notice period stated in the contract. In Slepenkova v. Ivanov, the two weeks' notice provided would have been sufficient if the employ- ment contract had been for a fixed one-year term of employment as contended by the employer. How- ever, the court found that the lan- guage of the agreement was in- sufficiently clear to create a fixed- term contract. It was found to be a contract for an indefinite term and the two weeks' notice did not comply with the act as a result. In Roden v. e Toronto Hu- mane Society, the employees ar- gued that their contractual notice provisions — "the employer may terminate the employee's employ- ment at any other time, without cause, upon providing the em- ployee with the minimum amount of advance notice or payment in lieu thereof as required by the ap- plicable employment standards legislation" — did not comply with the statutory requirements because the provisions failed to expressly provide for continua- tion of benefits during the notice period as required by the Ontario legislation. e court rejected that argument, holding that the provi- sions were precisely the type of provisions contemplated as being valid in Machtinger — provisions that referentially incorporated the minimum notice periods or otherwise took into account later changes to the act or to the em- ployees' notice entitlement under the act. ey did not attempt to contract out of the employer's re- quirement to make benefit plan contributions. Instead, because they were silent about the em- ployer's obligations in respect of benefit plan contributions, the employer was obliged to — and did — comply with the require- ments of the act. A similar employer argument did not fly in Wright v. e Young and Rubicam Group of Compa- nies (Wunderman), where the em- ployment contract was not silent on benefits in the sense that the contract language excluded them. e contract entitled the em- ployee to 13 weeks of "base salary" on termination after five years of employment. It also stated that the payments of base salary were to be inclusive of "all... entitle- ments to compensation." On ter- minating the employee, the em- ployer actually paid him 13 weeks of base salary plus RRSP contri- butions, car allowance payments, parking allowance payments and continued group benefits cover- age. Disability and life insurance were discontinued at the end of his statutory notice period. It was undisputed at trial that the employer had complied with its obligations to the employee under the Employment Standards Act. e employee's statutory en- titlement was five weeks' termina- tion pay and five weeks' severance pay. Despite this, the employee was found entitled to 12 months' reasonable notice on the basis that the contract's termination provi- sions were void. e court held that the express confinement of the employee's compensation entitlement dur- ing the notice period to his "base salary" breached the provisions of the act that required continua- tion of benefits during the notice period. Payment of base salary, if treated as inclusive of all entitle- ments to compensation, meant no other compensation was flowing to the employee. e fact that the employer had continued to pro- vide the benefits did not prevent s. 5(1) of the Employment Standards Act from applying. e contrac- tual exclusion of benefits violated the act and rendered the notice provisions void. In Waddell v. Cintas Corp., the employment contract provided for termination on the notice prescribed by the Ontario Em- ployment Standards Act, or four weeks — whichever was greater. e employee had commenced his employment in Ontario but had transferred to Vancouver and his termination had occurred while he was working in Vancou- ver. Because he was employed in British Columbia at the time of his termination, it was the B.C. Employment Standards Act that governed. The court held that it was enough to nullify the termination clause that there was a possibility it could fail to meet the require- ments of the B.C. act. It found that possibility in the method of calculating pay in lieu of notice in the two statutes. Although the number of weeks of notice was the same in both provinces, the B.C. legislation used a different formu- la for calculating compensation. e difference could have been significant if the compensation of the employee included commis- sions in addition to regular salary, as it did for the employee who was a sales manager. Accordingly, the employee was entitled to seek rea- sonable notice. In Kosowan v. Concept Elec- tric Ltd., a contract provision set out the employee's entitlement on termination without cause as follows: "You will be entitled to advance notice or severance pay thereof in accordance with the Employment Standards Act of Alberta." e employee was ter- minated and given four weeks' pay in lieu of notice as provided for in the legislation. e Alberta Court of Appeal held that he was entitled to claim reasonable notice if wrongfully dismissed as the language of the employment contract did not confine the employee's entitle- ment to statutory minimum no- tice; it merely entitled him to it. Another common provision of employment standards legis- lation — one that preserved any civil remedy an employee might have apart from the legislation — allowed him to claim reasonable notice in addition to the statutory notice. A sloppily drafted policies and procedures reference manual was found equally ineffective to limit an employee's entitlement in Gil- lespie v. 1200333 Alberta Ltd. e notice provision stated that "notice of termination for regular full- or part-time employees will for (sic) the guidelines as set out by Albert (sic) Labour - Employ- ment Standards." e court found that the reference to "guidelines" was not specific enough to put the employee on notice that her rights were limited to the statutory mini- mums specified in the code or to exclude the employee's common law right for reasonable notice. A contractual provision that termination notice would accord with legislated provincial stan- dards was to be interpreted as an agreement regarding minimal no- tice, not an agreement to exclude the presumptive entitlement to reasonable notice. Although em- ployers were free to make con- tracts that limited an employee's notice entitlement to the statutory minimums, any such agreement had to be clear and unambiguous. ese examples illustrate the importance of careful drafting in an employment contract and the importance of reviewing the contract periodically, particularly where some change has occurred. e provision of a specific notice entitlement is a dangerous prac- tice based on the jurisprudence. For more information see: • Machtinger v. HOJ Industries Ltd., 1992 CarswellOnt 892 (S.C.C.). • Shore v. Ladner Downs, 1998 CarswellBC 973 (B.C. C.A.). • Slepenkova v. Ivanov, 2009 Car- swellOnt 3749 (Ont. C.A.). • Roden v. e Toronto Humane Society, 2005 CarswellOnt 4479 (Ont. C.A.). • Wright v. e Young and Rubi- cam Group of Companies (Wun- derman), 2011 CarswellOnt 10754 (Ont. S.C.J.). • Waddell v. Cintas Corp., 2001 CarswellBC 2798 (B.C. C.A.). • Kosowan v. Concept Electric Ltd., 2007 CarswellAlta 310 (Alta. C.A.). • Gillespie v. 1200333 Alberta Ltd., 2012 CarswellAlta 206 (Alta. Q.B.). Tim Mitchell is a partner at Norton Rose Fulbright in Calgary. He can be reached at (403) 267-8225 or tim. mitchell@nortonrosefulbright.com. Tim Mitchell toughest hr Question You ask why all workers commuting to and from work are not compensated when an accident takes place. The answer is in that golden rule: Was she "in the course of " — meaning was the worker paid to travel or receiving a travel allowance? Some occupations dealing with such a situation are nurse care at home, such as vocational nurses, or workers in which travelling is a function of their duties. Of course, any staff receiving a travel allowance to attend a conference, as an example, would be also covered should an injury occurred. But the same worker is taking herself out of "in the course of " after conference hours or at such time when she is no longer remunerated. The "in the course of " condition must be satisfied before a work accident can be allowed. — Marc Bedard, commenting on Jeffrey R. Smith's blog "Workers' compensation a matter of location" Join the conversation online. Comment freely on any blog on www.hrreporter.com. ReAdeR CoMMenTs e provision of a specific notice entitlement is a dangerous practice based on the jurisprudence.

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