Employment agreements are a critical tool in every business large or small. Employment agreements give employers certainty as to the terms both during and after employment. In particular, certainty as to the post-termination obligations of the employer. Employment agreements are intended to bring certainty to a key resource of a business – its employees. But, is this certainty always reliable?
This edition of The Battlefront will look at a recent court case where the form of an employment agreement undermined the certainty of the employer/employee relationship although the employer appears to have acted in substantial compliance with the applicable employment law.
Legal Form Trumps Intent
In the case of Wood v. Fred Deeley Imports Ltd. (2017 Ontario Court of Appeal), the employee entered into an Employment Agreement that included a clause entitling the employee to two weeks’ notice (or severance pay in lieu) for each year of service if terminated without cause. The clause used language to clearly state that the Employer was not obliged to pay any amounts other than this severance amount. The language was intended to bring reliability and certainty to termination by itemizing the obligations of the Employer as a complete list of all severance entitlements.
When the employee was subsequently terminated, the Employer honoured its contractual obligation by giving a combination of working notice and a lump sum payment which together exceeded two weeks’ compensation for each year of service. The Employer also made other payments for the employee’s benefits plan during the working notice period. After termination, the employee was not satisfied and launched a claim against the Employer alleging various contraventions of employment law. Most allegations were unsuccessful, but the employee was successful on one important point.
In its decision, the court conducted a formalistic analysis of the employment agreement. The termination provision of the employment agreement set out the employee’s severance entitlement and stated that the Employer would not be obligated to pay any other amounts and such severance included all entitlements under the Employment Standards Act 2000, (the “ESA”). The court noted that: (1) this contractual severance entitlement was higher than the requirements of the ESA; (2) the Employer paid more than the employment agreement required; and (3) the total value received by the employee was higher than the minimum value required by the ESA.
However, the agreement made no mention of the Employer continuing to pay the employee’s benefits throughout the severance period. The ESA establishes various minimum requirements, one of which is benefit continuation during the period of notice. On the face of the employment agreement, the Employer was not obligated to make any benefit payments.
The court found this language contravened the strict technical requirements of law. The ESA states that any clause that results in, or could result in, an employee waiving ESA entitlements is void and not enforceable. So, even though the Employer paid a higher overall financial amount than the minimum required by the ESA, this severance clause waived ESA entitlements and hence was not enforceable.
The post-termination actions by an employer cannot cure an employment agreement that does not comply with the ESA. A technical default trumps the actions of the employer! Even a clause which does not at the time of hiring violate the ESA, but which could be read in a manner so as to violate the minimum requirements in the future, is void and unenforceable at law.
As a result of its analysis, the court held the termination clause of the employment agreement was unenforceable. Without a severance clause, an employee is entitled to much greater common law notice when terminated without cause. The court proceeded to review the circumstances of the employee’s employment and set the severance entitlement at more than double the two weeks’ compensation per year of service. This was more than four times higher than the minimum requirements of the ESA! The employee was also awarded costs for the successful court challenge.
In this situation, the Employer appears to have attempted to comply with the ESA, but was trumped by a technical default in the employment agreement!
Side Note – Attempt by the Employer to get a Release
In the course of negotiations, the Employer made an offer to the employee for additional compensation on the condition the employee sign a release. The court rejected that approach as the Employer was attempting to get something new (i.e. a release) while only offering to pay the employee’s existing ESA entitlements. The court rejected this attempt. The ESA already required the Employer to give the additional compensation so the employee was not getting any new value for giving a release. An employer must act carefully when seeking a signed release from a departing employee!
Thoughts to Take Away
Technical compliance is important! The area of employment law is continually evolving with court decisions that vigilantly protect employee rights. Courts routinely take the position that employee are vulnerable, particularly when entering into an employment relationship. Employers have an overriding obligation to ensure compliance with applicable employment law. Permitting an employer’s post-termination actions to cure a technical default in an employment agreement would just encourage employers to be quick and inattentive when preparing the employment agreement. Standard-form employment agreements may be a good starting point in many cases, but employers must carefully review each situation to ensure each employment agreement is crafted to fit each time when it is used. One size may not fit all! Employees are significant investments and assets of all businesses, large or small. Some time and attention prior to the start of the employment relationship can be a worthwhile investment to provide the certainty and reliability that employers are looking for in an employment agreement. Attempting to fix a technical defect during, or after, an employment relationship may not be possible and certainly will be more expensive than being proactive on the front end. Remember, employees are a critical asset of a business, and so are employment agreements!
Ian S. Scarlett publishes as TheMidMarketLawyer.com and has been practising mid-market business law on the front line for more than two decades at Loopstra Nixon LLP. Ian has experience in advising clients in a broad range of industries across Canada as well as assisting foreign companies on their inbound Canadian legal needs. Ian is the former Managing Partner and is currently on the Executive Committee of the firm. More information on Ian is available at themidmarketlawyer.com including previous issues of The Battlefront.
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About The Battlefront
This article contains general information only. The Battlefront is a brief canvasing of the topic presented and should not be relied upon as professional advice in making any personal or business decisions. Always consult with a licenced legal professional before making any decisions regarding your own personal or business needs. The author takes no responsibility to update any of the information presented in this article. All rights reserved. © Loopstra Nixon LLP 2017