It has been well established that a termination clause will fail when it creates not only an actual, but also a potential violation of the statutory requirement. Such was the decision of the B.C. Court of Appeal in its 1998 decision of Shore v Ladner Downs.
In 2011, the Ontario Superior Court came to the same conclusion. In this case, the plaintiff successfully argued that the agreement would be offside the statute after 5 years of employment. 1
The same reasoning was followed by the Ontario Court of Appeal in a 2017 decision. The appellate court again saw the potential violation as the key, 2 in this case dealing with the notice entitlement following 3 months of employment.
The termination provisions contained in Articles 2.1(a) and 2.2 of the contract are contrary to ss. 54, 57 and 58 of the ESA in that they purport to allow the respondent to terminate, without cause, the employment of the appellant, in the event that she had been continuously employed for more than three months, by providing less than the statutory minimum notice period. In determining whether the contract is in compliance with the ESA, the terms must be construed as if the appellant had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void..
This principle is well founded. In all of the cases to date applying this concept, save one, it has been the passing of time which has triggered the potential of the violation.
Testing the Potential Violation
A trial level decision in Ontario considered the "potential" argument on facts, which at trial, were seen to have required a lengthy period of future employment to put the termination clause offside. Given other reasons made by the trial judge, which were reversed on appeal, the trial court found that the termination clause was in potential violation of the ESA, which required continued employment to age 78, an event which would occur in 2035. The case was dealing with an employment relationship from 2008 to 2015. This was found at trial to have put the "potential" argument into the classification of "too remote".
The business of the plaintiff had been sold. The new employment contract ignored the plaintiff's past employment up to the date of the sale. The Court of Appeal concluded that this agreement could not contract out of the statutory requirement to count the entirety of the employment history. For this reason, the contract term was unenforceable and, more importantly, this issue of "too remote" was not reviewed on appeal. 3
The comments made by the trial judge are a rare reflection of grading, so to speak, the nature of the violation.
The Ontario Court of Appeal considered an unusual termination clause in its June 2018 decision. 4
The argument of the ESA violation was complicated. At the time of termination, the formula offered in the contract for termination compensation did not violate the Act. However, when the agreement was initially signed, it did show a potential violation of the ESA after 5 years of employment. This defect in the formula was then cured by the passing of time by the termination date. This argument conceptually has validity. At the moment the agreement was signed, it was potentially offside. The fact that this was remedied by the passing of time may arguably not detract from that submission. The motion decision did not directly address this argument.
The motion’s judge, who had denied the summary judgment application of the defendant, had found that the termination clause did not violate the ESA, based on the saving clause. 5 This particular argument of the potential of the violation of the ESA was not raised by the plaintiff in his submissions to the Court of Appeal.
The question will arise as to how far the "potential" argument will stretch. Should, for example, the employer have a modest work force which is far from the $2.5 million payroll threshold, must the contract contemplate severance pay? Where no benefits are provided, must the agreement call for benefits, if provided at some future date, be extended for the ESA period? Should the agreement contain a clause allowing for mass termination protections when the total number of employees is well south of the minimum requirement?
Arguably such a small company could be acquired by a larger entity and all these issues may be live. Must the contract contemplate such an event? This remains undecided.
The cases which have looked to the concept of a potential violation have each shown, but one, that it has been the passing of time that led to the potential of a violation of the statute, as opposed to a merger or other similar event. This may emerge as a pivotal distinction. The exception is reviewed below. 6
This expanded concept of the potential violation was argued in the case below.
The clause in an August 2020 decision did not include a term for the payment of severance pay. 7The plaintiff's years of service easily qualified but the payroll of the employer, which was a small dental office did not. The plaintiff had asserted that the offending clause was ambiguous. The clause read as follows:
Your employment may be terminated without cause for any reason upon the provision of notice equal to the minimum notice or pay in lieu of notice and any other benefits required to be paid under the terms of the Employment Standards Act, if any. By signing below, you agree that upon receipt of your entitlement under the Employment Standards Act, no further amount shall be due and payable to you, whether under the Employment Standards Act, any other statute or common law.
The court concluded that it should "not strain to create ambiguity where none exists". The clause above was considered by the court to show intended compliance with the statute:
When considering the wording of the clause in issue and the intent of the parties demonstrated in the wording of the clause, indicating compliance with the requirements of the ESA, I cannot conclude that the clause could or should be interpreted as contrary to or inconsistent with the provisions of the ESA. I do not find anything which would suggest that the termination clause should be interpreted as contrary to the ESA.
The decision did not deal head-on with the assertion made that the failure to address severance pay entitlement made the agreement unenforceable, but rather concluded the liability for this hypothetical sum was addressed in the agreement by the saving clause. 8
The same case also considered an argument that the benefits clause was also potentially in violation of the statute. The agreement called for benefits to be paid during the ESA notice period. The employer did not, in fact, provide benefits. The argument was made, unsuccessfully, that had benefits been provided, the statute required benefits be "continued" as opposed to paid. The same reasoning, as above, denied this submission. The agreement did not succeed due to its failure to address the just cause distinctions, making all of the above obiter.
Sole Discretion to Terminate at Any Time
The recent decision of the Ontario Superior Court considered such a clause as summarized above. 9There were other reasons to set aside the termination clause, apart from this issue.
On this subject, the court found that such a stated contractual right was in violation of the statutory protections afforded to a person returning from a leave or the prohibition against terminating a person for exercising a statutory right. 10
One might expect that such issues as severance pay where the payroll falls dramatically below the threshold of $2.5 million may be a bridge too far. What if the payroll when the agreement was signed was over 2.5 million and then declined? Of when the payroll was $2.4 million but then increased over the threshold. Or if there were no benefits when the agreement was signed but later added, where the agreement does not speak to benefits in the termination clause? Stay tuned.