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Is This The Definitive Word on Termination Provisions/Consideration?

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A series of Ontario cases dating back to 2012 has put into issue the question of what does, or doesn’t, make a termination provision enforceable.  After a number of recent employer-friendly decisions, the Ontario Court of Appeal has weighed in with a decision that contains some good news, and some bad news, for employers.

In Wood v. Fred Deeley Imports Ltd., the court primarily looked at: (i) whether or not consideration was required to uphold an employment agreement; and (ii) whether the termination provision in the agreement was unenforceable (thereby opening the door to a common law notice award).  The Plaintiff, Julia Wood, was an 8.4 year employee at the time of her termination.  She signed an employment agreement the day after she started work that contained a termination provision which provided for “2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment…”.  The termination provision also stated that “… the Company shall not be obliged to make any payments to you other than those provided for in this paragraph” and “The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000”. On termination, the employer provided Wood with 13 weeks of working notice, followed by a lump sum payment equal to 8 weeks of pay.

In looking first at the consideration issue, the court found that Wood had been provided with a copy of the Agreement prior to her start date, although it wasn’t signed until the day after she started work.  The court determined that this was not a case where Wood was seeing the Agreement for the first time when she signed it, nor was it a case where a new material term was introduced into the Agreement at the time of signing.  The court went on to find that the signing of the Agreement the day after Wood commenced employment was merely an administrative convenience and therefore fresh consideration such as a signing bonus was not required in order to make the Agreement valid and enforceable.  The employer was therefore successful in arguing that the Agreement was not void for lack of consideration.

However, things went downhill from there for the employer.  In looking at the termination provision, the court found that it contravened the Employment Standards Act, 2000 (ESA) and therefore was unenforceable.  It came to this conclusion for two reasons.  First, the court found that because the termination provision did not expressly require the continuation of benefits through the ESA notice period, it was in contravention of the minimum standards of the ESA.  This was so even though the employer gratuitously provided benefit continuance through the entirety of the ESA notice period.

Second, the court found that although it was possible that the termination provision could provide notice and statutory severance in accordance with or even in excess of the ESA, it was also possible for it to undercut the minimum provisions of the ESA.  Simply put, even though the “2 weeks per year” calculation could potentially result in the employee receiving more than her ESA notice and severance entitlements, it could also have the opposite effect.  In particular, Wood received less than her ESA severance in the case at hand because the payment of 8 weeks at the end of her working notice period was less than the 8.4 weeks of severance that she was entitled to under the ESA.

The court reviewed termination provisions in other cases and once again made it clear that each case will be decided based on its own facts.  For example, a termination provision which is not well drafted but does not expressly contract out of the ESA may yet be enforceable, despite this case. On the other hand, a termination provision which expressly contracts out of the ESA, as was the case here, will not be enforceable.

The broken record continues – the importance of properly drafting termination provisions cannot be understated and with so much at stake, it is critical that employers regularly review and update their termination provisions with the assistance of legal counsel.

The court’s decision in Wood v. Free Deeley Imports Ltd. may be found here.

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