By Howard Levitt and Peter Carey
In no other area of the law (save insurance) have the courts been so active in invalidating terms in private contracts
This has changed for a number of historical reasons and now most non-unionized individuals, at least at a certain level, have a lengthy complex document that they have to sign when they commence new employment. The part of the employment contract that employees should be very concerned with is the termination provision. Typically, once the written employment contract is signed, the employee and the employer put it in a drawer and never look at it again until the relationship is terminated. Then, that employment contract becomes very important indeed.
The take-away from this column is that, no matter how logical and well written the termination provisions in your employment contract appear to be, they probably aren’t valid or enforceable at law. We are constantly arguing with other lawyers about whether termination provisions in employment contracts are enforceable. Why, you may ask, with an army of lawyers drafting such contracts can’t they get it right?
That’s easy. The courts keep changing the law. In no other area of the law (except insurance perhaps) have the courts been so active in invalidating terms in private contracts between two parties.
In 1974, the courts held that all employment contracts in Ontario included an implied term that an employee could not be dismissed without reasonable notice or severance pay in lieu thereof. As a result, employers began to add termination clauses to employment contracts to limit the severance that they would have to pay to terminated employees. In 1993, in a case in which Howard acted, the Supreme Court of Canada held that if a termination clause in an employment agreement violated a provincial employment statute, then that termination provision was invalid.
As a result, employers began putting in “savings provisions” in employment contracts. These savings provisions would state that, even if the employment contract might result in the employee receiving less than the statutory minimum payment, the employee would nonetheless receive that minimum statutory payment. In 2019, the courts held that such saving provisions were illegal and would result in the entire termination clause being unenforceable.
In 2020, the courts held that, if it was ever possible, even after decades of service, that a termination provision could, under any circumstances, theoretically result in an employee receiving less than that to which they would be entitled under the Employment Standards Act, then the entire termination provision was unenforceable.
The courts have explained why they treat employment contracts differently than other contracts. Employees typically do not have equal bargaining power with employers. Employees are likely unfamiliar with employment standards legislation and the rights it provides them. As a result, the courts “encourage” employers to, at least, contract with employees to provide the statutory minimum. If they do not, then the termination provision will be struck down and the employer will have to pay the (usually much greater) common law severance.
We predict that this trend will continue. The courts will continue to erode attempts by employers to limit the notice and payments which would otherwise be due to a dismissed employee.
If you are an employer, this means that you should be conducting frequent audits to determine your potential liability if your employment contracts would become invalid as the result of changing laws, laws which, in this area, seem to change virtually every year.
If you are an employee, you should look at the termination provisions in your employment contract with skepticism until you receive professional advice. You should also be wary of being asked to sign a new employment contract which may contain terms which are not as advantageous as the prior agreement.