Enforceability, or not, of Contractual Termination Clauses
There's a recent decision by the Alberta Court of Justice (you know, the court formerly known as the "Provincial Court"), on a wrongful dismissal, in Plotnikoff.
The court looked at four issues, but for the purposes of this entry, only the first one is really interesting: Whether or not the employment contract had an enforceable termination clause limiting the employees entitlements on termination.
(Okay, the third issue - mitigation - is also of interest to me: The employee failed to take reasonable steps, but the employer failed to prove he'd have gotten a new job otherwise, so there was no reduction. This is a correct treatment of an issue the courts often get wrong.)
Here's the contract language:
The Company may terminate employment without cause...upon providing the Employee with notice as may be mandated by the Employment Standards legislation or such additional notice as the Company, in its sole discretion, may provide or, at our option, pay in lieu of such notice.
The arguable problem here is that it doesn't go on to clarify that the employee will get nothing in addition to those statutory minimums - what Ottawa lawyer Sean Bawden calls a "Porky Pig Clause". ("That's all, folks." It's clever. And his writing on the subject is illustrative of the fact that there's been quite a lot of case law on this question in Ontario, to the point that his "Porky Pig" characterization has been cited at least once.)
So, without that clause, does the contract clearly and unambiguously displace the employee's otherwise-presumed entitlement to reasonable notice at common law? It's a big question - defining whether the employee gets 8 weeks' notice or 10 months' notice.
The court concluded that it didn't. And there's a lot of case law aligned with this position, if mostly from other Provinces. So I've long drafted my contracts, for employer clients, with clarifying language spelling out that there won't also be common law pay in lieu of notice.
However, in theory, I've always taken a more nuanced view of this language, because I think decisions like this fail to pay adequate attention to the framing of the clause.
A Contrarian View: Does the Clause Confer Rights or Obligations on the Employer?
In my head, there's a distinction between two different but common framings of this termination language.
On the one hand, we have language like what this employer used, framed as "We may terminate employment on provision of x."
On the other hand, you sometimes see language that says, "If we terminate employment without cause, you'll get x."
While these phrases are used and interpreted interchangeably, to me they're VERY different structures with different implications. The former confers an explicit right of termination upon the employer. The latter creates an obligation upon the employer, and a corresponding right of the employee, triggered upon termination.
The implied term of reasonable notice - and I'd refer you to my "Defining Wrongful Dismissal" paper on this, and to Matthews where the SCC cited my paper - is that neither party will terminate the employment contract without cause, except upon provision of reasonable notice.
It's easy to conceptualize a contractual structure that creates additional employer obligations: There are plenty of frameworks out there, for example, where employees get both notice and severance entitlements. There's no reason these need to be exclusive. Thus, when a contract uses the, "If we dismiss you, you'll get x" framing, I refer to that as creating an inclusive entitlement. It creates a conditional contractual entitlement for the employee, without necessarily displacing other entitlements.
However, it's impossible that the employer might simultaneously have a right to terminate the contract on provision of x, while ALSO being contractually barred from terminating the contract except on 'reasonable notice'. Therefore, I regard the "We may terminate employment on provision of x" framing as exclusive - that by providing x, the employer has properly terminated the employment relationship.
Properly understood, exclusive language is plainly inconsistent with the implied term of reasonable notice continuing to govern the employment relationship, and so if it's otherwise properly implemented and compliant with all statutory obligations, it should have the effect of displacing common law entitlements. (To reiterate, my views on this are not reflective of Canadian wrongful dismissal case law to date.)
Nobody really wants to recognize such a fine distinction, though. Employers argue that both forms should be effective; employees argue that neither should be.
The Employer Pitch: The Intention is Obvious
Employers tend to argue that the clear understanding is that these types of language signal an intention to displace common law entitlements.
I've always been uncomfortable with employers taking a "You know what we mean" approach: Sure, as an employment lawyer, I read that language, and I obviously know what the employer is trying to accomplish with it. In either iteration of the language.
But when we're asking about the understanding of legally sophisticated parties, we're missing important dynamics of the employment relationship: How can the parties to the contract have mutually intended to do away with 'reasonable notice at common law' when the employee, at least, probably had no idea that it existed?
On the 'exclusive' framing, it's a different question with a coherent answer, though: It's less about the 'intent to do away with the implied term', and more about the intent to create a substantive contractual term that has the effect of replacing and displacing the implied term.
But I don't think that 'inclusive' language has that same obvious effect: Imagine a scenario where I take a job halfway across the country, and will incur significant moving expenses to do so. The new employer offers to subsidize a portion of this, and puts language in the contract saying "If you quit within 2 years, you have to pay us back." This is parallel to the 'inclusive' framing, but would anyone take this as displacing my obligation to give reasonable notice of resignation? No, of course not. That's ridiculous. It's an obligation in addition to my duty to give notice.
Let's make the scenario fully comparable, and imagine that I respond with, "Well, wait, you're only covering half of my expenses in the first place. So if you dismiss me within two years without cause, I want to be reimbursed for the other half." And we add language where the employer promises an increase to my moving allowance if I'm dismissed on a not-for-cause basis. Again, it would be ludicrous to take that as displacing the implied term of reasonable notice.
There are other scenarios too of real-world contract terms involving treatment of remuneration and benefits 'if' employment ends. Again, these are just conditional entitlements, and a suggestion that an "If employment ends" construct should be read as displacing other entitlements because - sometimes - lawyers might realize that this was the employer's intention in implementing the language? It doesn't hold water to me.
Other Notes on Contract Drafting
There's a lot of case law on these clauses in Ontario, and the statutory context is a bit different in a couple of ways that informs the debate.
In particular, in Ontario, there's an express statutory provision requiring benefits to be extended through the statutory notice period. A contractual term that purports to displace those entitlements will be void. Therefore, a contract that explicitly says "You get x and nothing else", if 'x' doesn't include benefit continuation, will be problematic.
This results in a lot of Ontario contracts trying to thread a needle between using inclusive language to capture ESA entitlements, and using exclusive language to displace common law entitlements.
There have been some cases reaching analytically inconsistent findings that language without a Porky Pig clause implicitly displaced common law entitlements but not statutory entitlements - and that therefore the language holds up as intended. But it's far more common for contracts to fall off one or the other pitfall here - that it excludes statutory entitlements in some form, or else that it fails to displace the implied term of reasonable notice.
It's not just 'benefits' either, that run the risk. Many contractual termination clauses limit the remuneration components to be calculated into termination entitlements - say, by specifying "salary", at which point a 'Porky Pig' clause will exclude overtime, commissions, non-discretionary bonuses, and other types of remuneration that are properly factored into statutory minimums.
Failsafe Clauses
Some lawyers like to use 'failsafe clauses', providing employment standards minimums as an alternative entitlement structure in the event that the contractual formula provides less. I'm not a fan of this, especially in the Ontario context, for a few reasons:
Firstly, the language tends to be confusing and unclear, often being capable of being read as simply an assertion that the formula complies with the statute. The more forks there are in contractual outcomes, the more ambiguity arises in how you apply those forks. Drafting a 'greater of' disjunction combined with a Porky Pig clause in a way that is coherent, precise, and unambiguous is a feat beyond the skill of many lawyers. (Could I? Probably. But I don't, for the other reasons here.)
Secondly, the contractual formula and statutory formula aren't always capable of apples-to-apples comparisons. If the statutory formula includes benefit continuation, what makes that 'greater than' or 'less than' a certain cash equivalent? If the contractual formula results in a less favourable payment schedule for a larger amount of money than the statute would require - or, in Ontario, allows for working notice where the statute requires a cash severance payment - how do we decide what's 'greater'.
Thirdly, and relatedly, I don't think that's how employments standards legislation properly works. Most employment standards statutes have 'greater entitlement' protections: A contract clause that provides more than the bare minimum, in respect of a given employment standard, supplants the minimum entitlement. So the statute sets a minimum wage, but if I contract to a higher wage, the statute protects the contractual wage instead.
But there's a very sound interpretive paradigm - and you'd probably be hard-pressed to find an experienced employment lawyer who will push back hard on this - that 'greater benefits' apply only in the analysis of discrete employment standard categories. There's no world in which I can have an employee sign a contract for higher than the minimum wage, but that denies them overtime, vacation, and other statutory entitlements, and then assert that the contract on the whole creates a greater benefit.
So not only is the apples-to-oranges analysis of statutory vs contractual entitlements practically impossible to make in a wholistic sense, but I would suggest that you can't necessarily make that comparison wholistically at all, because the greater benefits clause never allows an entitlement to an orange to be satisfied by any number of apples.
Employment Standards Plus
In recent years, I've developed a contractual formula method that I refer to as "ES+". Roughly, it goes something like this:
In the event of a not-for-cause dismissal, you'll get: (a) all entitlements under applicable employment standards legislation; AND (b) additional entitlements based on [here's a formula]; BUT (c) absolutely nothing beyond the combined entitlements reflected in subparagraphs (a) and (b).
It's never been tested in court, to my knowledge, but I like that it treats ES entitlements as a baseline, not as something we're trying to get out of. Far less likely to run awry by missing some employment standards contingency. As well, it's more reflective of the practical realities of dismissal, where you want to pay out statutory entitlements regardless, and then hold back on further amounts in exchange for a Release: Reflecting those different treatments in the contract itself has a certain elegance.
Benefits: Is Alberta really that different?
The established wisdom in Alberta is that benefit continuation is not necessary through statutory notice periods - at least, not under the statute itself.
This is an argument that we have persuaded a labour arbitrator to accept, in a decision that the ALRB has upheld as reasonable. That's not a binding interpretation on basically anyone: If I ended up in a wrongful dismissal case arguing that the exclusion of benefits runs awry of the Code, the court isn't bound by the ALRB, but it's persuasive that an expert tribunal accepted such an interpretation. So I'd say, while this proposition is a long way from widespread acceptance in Alberta, it's clearly not crazy to suggest that benefits are included in termination entitlements.
If the courts were to accept such an argument, many employment contracts in Alberta would have serious enforceability problems. (Not mine, though. The ES+ formulation is probably flexible enough to account for that.)
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
Comments
Post a Comment