Nicole Howell nhowell@hhbg.ca 604.696.5116
I. Fixed term contracts II. Drafting termination clauses III. BONUS: Consideration – an important ‘hot off the presses’ BCCA decision from last month IV. Employees nearing retirement
I. FIXED TERM CONTRACTS Why? • Can’t afford to hire a permanent employee • The work is for a specific project or a set time period • Want to avoid severance obligations
Pitfalls The reality is that fixed-term contracts are misunderstood: • Absent an early termination clause, employers are liable to pay out the balance of the fixed term contract • Even if the employee finds another job (no duty to mitigate unless stated) • If the fixed-term contract expires and the employee continues working, they automatically revert back to their common law entitlement to reasonable notice o Ranging from 1 – 24 Months, based on an employee’s age, position, length of service, and chances of re-employment
Howard v. Benson 2017 ONCA 256 • The employee was on a five-year fixed term contract with an early termination provision that read: Employment may be terminated at any time by the Employer and any amounts paid to the Employee shall be in accordance with the Employment Standards Act of Ontario .
2 problems with the termination clause: a. It was not clear whether the term “any” meant that the payments would be discretionary; b. It was not clear whether “amounts paid” mean commission, bonus etc. or just base salary.
• What happened: o The termination clause was unenforceable o There was no implied duty to mitigate the damages o mitigation was an aspect of common-law and the parties had contracted out of common-law notice o No duty to mitigate was stipulated in the contract o The employee was paid out the balance of his 5 year contract
Takeaways: • Avoid fixed term contracts • If you DO need a fixed term contract: o have an enforceable early termination clause; o consider the employee’s duty to mitigate; and o if the contract needs to be extended, address this in writing before the fixed term expires
If Not Fixed-term Contracts, Then What? • Stick with a contract of indefinite hire • with a clearly worded termination clause • that effectively contracts out of the employee’s common law right to notice.
II. DRAFTING TERMINATION CLAUSES • Absent an enforceable termination clause, employees have an implied right to reasonable notice under the common law • Several ways to limit an employer’s liability on termination: a. Statutory entitlements only b. Set amount (e.g. 6 months) or formula (e.g. 2 weeks for each year) • Consider imposing a duty to mitigate • Consider whether bonuses and other perks will be excluded from this entitlement: i. Needs to be clearly stated ii. Can’t avoid any statutory obligations
Creating a specific ‘for cause’ termination clause • Basic ‘for cause’ provision: the company has no notice or severance obligations to the employee in the event of a termination for cause. • Some employers go further and specifically list what will amount to cause. • If you fail included a catch-all phrase at the end that also incorporates common law cause, you may be limited to the examples you have identified for cause. • Either way, the court will use a contextual analysis to determine whether – despite the misconduct – cause has been established. • Cause is typically an uphill for employers, so again, the more the ‘without cause’ provision limits liability, the less you have to worry about upholding / or relying on a ‘for cause’ termination.
Wood v. Dealey 2017 ONCA 158 The Company is entitled to terminate your employment at any time without cause by providing you with 2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph� 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.
2 problems with the termination clause: a. The clause excluded the employer’s statutory obligation to contribute to Ms. Wood’s benefit plans during the statutory notice period (required under the Ontario ESA) b. The clause did not require the employer to pay severance upon termination (required under the Ontario ESA).
Takeaways: • Where the termination clause says that the payment it describes is the only one that will be given to the employee, the clause will not be enforced if it does not clearly and unambiguously cover all possible liabilities under the ESA • Actions of the employer subsequent to the signing of the contract and the termination, such as additional payments, will have no bearing on the enforceability of the contract
North v. Metaswitch 2017 ONCA 790 � (c) Without Cause – The Company may terminate your employment at any time in its sole discretion for any reason, without cause, upon by [sic] providing you with notice and severance, if applicable, in accordance with the provisions of the Ontario Employment Standards Act (the “Act”). In addition, the Company will continue to pay its share all [sic] of your employee benefits, if any, and only for that period required by the Act. The reference to notice in paragraphs 9(b) and (c) can, at the Company’s option, be satisfied by our provision to you of pay in lieu of such notice. The decision to provide actual notice or pay in lieu, or any combination thereof, shall be in the sole discretion of the Company. All pay in lieu of notice will be subject to all required tax withholdings and statutory deductions. In the event of the termination of your employment, any payments owing to you shall be based on your Base Salary, as defined in the Agreement.
• Problem with the termination clause: It limited the notice to base salary and excluded commission. o • BUT� there was a severability provision at the end of the contract: 17. General Provisions (a) If any part of the Agreement is found to be illegal or otherwise unenforceable by any court of competent jurisdiction, that part shall be severed from this Agreement and the rest of the Agreement’s provisions shall remain in full force and effect.
What happened: • There were two approaches open to the Court in addressing this contract • First approach: looks at the contract as a whole and applies the severability provision first, and only then looks to the remedial power of the ESA to void any clause that is in violation of that Act. o Rationale: gives effect to the intention of the parties through the language of the contract. I.e. the parties would have intended the severability clause to take effect to save the contract if there were any issues.
• Second approach: treats employment contracts differently than other commercial contracts and sanctions employers for their failures to comply with the ESA. This principled approach first applied the ESA and voids any provision that purports to contract out of it. Only then would the severability clause be applied to any other relevant part of the contract. • Using this second approach, the ONCA voided the notice provision and found the employee was entitled to common law notice. • Of note, the offending portion was in its own separate paragraph and could have been cleanly excised from the notice provision.
Takeaway : Severability clauses will not protect employers from illegal termination clauses.
III. CONSIDERATION • Consideration is the benefit received by each party to make a contract enforceable E.g. employers receive the benefit of the employee’s services and o employees receive the benefit of compensation • Without consideration, a contract is NOT enforceable. • Until May 18, 2018, if an employer wanted to vary a contract, fresh consideration (a new benefit) was required for both parties.
Rosas v. Toca 2018 BCCA 191 • The BC Court of Appeal now says that new consideration is not required to modify an existing contract. • Facts: Rosas won 4.1M in the lottery and loaned $600,000 to her friend Toca who agreed to repay her the following year. Each year, Toca asked for an extension to repay the loan. After 7 years, Rosas sued her friend. Supreme Court said Rosas received no consideration for each new contract extension and was out of time on original contract ( 6 year limiation). • The BC Court of Appeal favourably cited the dissenting judge’s decision in an Alberta Court of Appeal employment case in which the dissenting judge advocated for this approach.
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