Termination clauses: Every word matters when contracting out of the common law

A termination clause in an employment contract may be ineffective if not carefully drafted. An employer in Ontario recently learned this lesson first-hand in Movati Athletic (Group) Inc. v. Bergeron, 2018 O.N.S.C. 7258. The decision highlights the process for determining whether contractual language will displace the common law right to reasonable notice, and provides helpful guidance to employers in drafting enforceable termination provisions.

Overview of case

In this decision, Movati sought to overturn the trial court’s order granting summary judgment and awarding Ms. Bergeron damages in lieu of reasonable notice at common law. Ms. Bergeron was a general manager of one of Movati’s health and fitness facilities. The terms of her employment were set out in a written employment agreement, which contained the following termination clause:

“Movati Athletic Inc. may terminate your employment without cause at any time during the term of your employment upon providing you with notice or pay in lieu of notice, and severance, if applicable, pursuant to the Employment Standards Act, 2000 and subject to the continuation of your group benefits coverage, if applicable, for the minimum period required by the Employment Standards Act, 2000 as amended from time to time.”

Ms. Bergeron was terminated without cause and Movati agreed to pay her two weeks’ pay in lieu of notice pursuant to the minimum period required by the Employment Standards Act. However, in granting Ms. Bergeron’s motion for summary judgment, the trial court held that Movati could not rely on the termination clause in Ms. Bergeron’s employment agreement to contract out of obligations under the common law. Instead, the trial court found Ms. Bergeron was entitled to common law notice of three (3) months’ pay.

In coming to this conclusion, the trial court held the termination clause did not meet the “high degree of clarity” required to displace common law rights, and resolved the ambiguity in the language in Ms. Bergeron’s favour.

Takeaways

Employers may find themselves wondering exactly what was unclear or ambiguous about this termination clause. The court explained that the language used did not clearly indicate the statutory payments under the Employment Standards Act would be the only payments made upon termination. The court went on to state that the common law presumption would have been rebutted if the employer had used the following wording:

“upon termination, severance, if applicable will be paid only pursuant to the Employment Standards Act…only for the minimum period required by the Employment Standards Act…”

The appellate court found no palpable and overriding error in the trial court’s interpretation of the agreement, and upheld the order granting Ms. Bergeron’s motion for summary judgement.  In reaching this conclusion, the appellate court set out a helpful roadmap for employers in determining whether a contractual provision can rebut the common law notice:

1. All contractual provisions must meet the minimum notice requirements for termination without cause set out in the Employment Standards Act;
2. There is a presumption that an employee is entitled to common law notice upon termination of employment without cause;
3. Provided minimum legislative requirements are met, an employer can enter into an agreement to contract out of the provision for reasonable notice at common law upon termination without cause;
4. The presumption that an employee is entitled to reasonable notice at common law may be rebutted if the contract specifies some other period of notice as long as that other notice period meets or exceeds the minimum requirements of the Employment Standards Act;
5. The intention to rebut the right to reasonable notice at common law “must be clearly and unambiguously expressed in the contractual language used by the parties”;
6. The need for clarity does not mean a specific phrase or particular formula must be used, but the wording must be “readily gleaned” from the language agreed to by the parties;
7. Any ambiguity will be resolved in favour of the employee and against the employer who drafted the termination clause;
8. Surrounding circumstances may be considered when interpreting the terms of a contract, but they must never be allowed to overwhelm the words of the agreement itself.

The appellate court also highlighted the importance of consistency when drafting employment contracts. Here, Movati had used limiting language in the contract’s probation clause (i.e., that Ms. Bergeron’s receipt of notice of termination during the probation period was limited to “only” providing her with “minimum” notice necessary to ensure compliance with the Employment Standards Act), but had not used such language in the termination clause. By reading the contract as a whole, and considering the difference in language between the probation clause and the termination clause, the appellate court strengthened its decision that the trial court committed no palpable and overriding error in concluding the termination clause was not sufficiently clear to rebut the common law entitlement to reasonable notice.

The importance of the case

This decision serves as a stark reminder to employers of how specific the wording of termination clauses must be in order to effectively rebut the presumption that the reasonable notice requirements of common law apply. This precision in drafting applies to the contract as a whole and not simply the termination clause on its own.

If you have any questions regarding this article, please contact Jessica Fairbairn.

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