Canadian Employment Law Today

with Tim Mitchell Ask an Expert NortoN rose Fulbright Calgary Have a question for our experts? Email Jeffrey.R.Smith@thomsonreuters.com Canadian HR Reporter, a Thomson Reuters business 2014 2 | July 23, 2014 Termination provisions QuestioN: If an employee signs an employment agreement with a termination provision stipulating specific notice periods and severance payments that are greater than legislative minimums, are there any circumstances where the employee could legally challenge that provision? Answer: ere are definitely pitfalls in stipulating specific notice and severance pay entitlements in employment contracts. Employment standards legislation varies from province to province. However, provi- sions stipulating minimum periods of no- tice, pay in lieu and severance pay are com- mon, as are provisions disallowing attempts to contract out of statutory minimums. Generally speaking, the combined effect of these provisions is to allow the parties to an employment contract to stipulate any no- tice period/severance pay that is equal to or greater than the corresponding minimums set out in the applicable legislation. e ef- fect of a failure to do so was addressed by the Supreme Court of Canada in Machtinger v. HOJ Industries Ltd. In Machtinger, the employment con- tracts allowed termination of one Ontario employee with no notice and the other on two weeks' notice. ese provisions did not meet the Ontario Employment Standards Act requirements, which entitled each em- ployee to a minimum of four weeks' notice based on years of service. e court held that the insufficient notice provided for in the employment contracts rendered the termination provisions in those contracts void. As a result, the employees' presump- tive entitlement to reasonable notice of their terminations was not rebutted. 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 min- imum notice requirements was an order for payment to the employees of the four weeks' salary that would have met those require- ments. e court rejected this interpreta- tion as incompatible with the purpose of the legislation, which encouraged compliance with its minimum requirements and thus extended its protection to as many employ- ees as possible. If the only potential sanction for failure to respect the minimum notice periods was an order to provide the statu- tory minimums, employers would have little incentive to make compliant contracts with their employees. e reasoning in Machtinger has been extended in a number of subsequent chal- lenges of employment agreements that con- tain notice provisions that meet or exceed the statutory requirements at the time of dismissal but would have offended the legis- lation at some point in the future had the employment relationship continued. In Shore v. Ladner Downs, the employ- ment contract provided for 30 days' notice of termination 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 en- titled to and received more than twice the employment standards notice requirement, the notice provisions in the employment agreement were found to be void. e court rejected the employer's argu- ment that the agreement would not be- come void until such time as the statutory requirement for notice exceeded the 30 days provided for in the contract. According to the court, the plain language of the legisla- tion — "a requirement under this act or the regulations is a minimum requirement, and an agreement to waive that requirement is void" — supported an interpretation under which the contractual term was void from the outset. e court noted that the policy considerations identified in Machtinger would not be served if the individual em- ployee was left the responsibility for deter- mining, 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 employment contract had been for a fixed one-year term of employment as con- tended by the employer. However, the court found that the language of the agreement was insufficiently clear to create a fixed- term contract. e employer 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 Humane Society, the employees argued that their contractual notice provisions — "the employer may ter- minate the employee's employment at any other time, without cause, upon providing the employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation" — did not comply with the statutory requirements because the provisions failed to expressly provide for continuation of benefits during the no- tice period as required by the Ontario legis- lation. e court rejected that argument, holding that the provisions were precisely the type of provisions contemplated as be- ing valid in Machtinger — provisions that referentially incorporated the minimum notice periods or otherwise took into ac- count 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 requirement to make benefit plan contributions. Instead, because they were silent about the employer's obligations in respect of benefit plan contributions, the employer was obliged to — and did — com- ply with the requirements of the act. A similar employer argument did not fly in Wright v. e Young and Rubicam Group of Companies (Wunderman), where the em- ployment contract was not silent on bene- fits in the sense that the contract language excluded them. e contract entitled the employee 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 inclu- sive of "all … entitlements to compensation." On terminating the employee, the employer actually paid him 13 weeks of base salary plus RRSP contributions, car allowance payments, parking allowance payments and continued group benefits coverage. Disabil- ity and life insurance were discontinued at the end of his statutory notice period. It was undisputed at trial that the em- ployer had complied with its obligations to the employee under the Employment Stan- dards Act. e employee's statutory entitle- ment was five weeks' termination pay and five weeks severance pay. Despite this, the employee was found entitled to 12 months' reasonable notice on the basis that the con- tract's termination provisions were void. e court held that the express confine- ment of the employee's compensation en- titlement during the notice period to his "base salary" breached the provisions of the act that required continuation of benefits during the notice period. Payment of base salary, if treated as inclusive of all entitle- ments to compensation, meant that no other compensation was flowing to the employee. e fact that the employer had continued to provide the benefits did not prevent s. 5(1) of the Employment Standards Act from ap- plying. e contractual exclusion of bene- fits violated the act and rendered the notice provisions void. In Waddell v. Cintas Corp., the employ- ment 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 been transferred to Vancouver and his termination had occurred while he was terMiNAtioN on page 6 »

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