Termination Clauses – a Valuable Tool for Manitoba Employers

Authors: Bret Lercher, Paul McDonald

The vast majority of Manitoba businesses will eventually face the situation of terminating an employee without notice or cause. In those situations, the terminated employee is entitled to pay in lieu of notice of termination, among other payments, from the employer. However, the employer and terminated employee often have widely different views on the amount the employee is entitled to, which can result in prolonged negotiations and/or litigation in defence of their respective views.

For Manitoba employers, employment contracts can be a valuable tool to reduce, if not eliminate, the difficulty arising from without cause terminations and limit the associated costs.

Manitoba courts will likely enforce clauses within employment contracts which expressly define the benefits owing to employees upon termination without cause (“Termination Clause”), provided:

  • the defined benefits are no less than the benefits the employee is entitled to under The Employment Standards Code at the time of the termination,
  • the defined benefits are sufficiently clear and
  • the employment contract housing the Termination Clause is otherwise enforceable (collectively, the “Enforcement Criteria”).

Termination Clauses can be very beneficial to Manitoba employers – but the Enforcement Criteria must be met.

Due to the perceived imbalance of bargaining power in most employment relationships and the potentially significant disparity between the entitlements under a Termination Clause and entitlements in the absence of that clause, Manitoba courts are likely to closely scrutinize a Termination Clause and declare it unenforceable if the Enforcement Criteria are not met.

Last month, the Ontario Court of Appeal released a decision, Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (“Wood”), which demonstrates that Court’s proclivity to scrutinize Termination Clauses and the potential consequences of not meeting the Enforcement Criteria.

Ms. Wood was terminated without cause after almost eight and a half years’ service. She was provided with 13 weeks’ notice of termination and eight weeks’ severance pay upon termination. She sued her ex-employer for one year’s pay in lieu of notice of termination. In defending that claim, the former employer relied on a Termination Clause limiting her entitlement to “2 weeks’ notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company,” which was actually less than what the former employer provided her.

Ms. Wood claimed that since the clause was drafted in a manner that, if implemented, removed her ability to receive certain benefits and severance pay she was entitled to under Ontario’s employment standards legislation, it was unenforceable. The Ontario Court of Appeal accepted Ms. Wood’s arguments, declared the clause unenforceable and awarded her the pay and benefits she would have received had she received 39 weeks’ notice of termination.

Wood signals a continued commitment to a strict interpretation of Termination Clauses.

The Court of Appeal rejected the employer’s invitation to interpret the clause in a broad manner, allowing for a conclusion that the clause did not violate the governing legislation because, despite the fact that it precluded the employee from receiving severance pay and certain group benefits required by the employment standards legislation, it required the employer to provide pay in lieu of notice that exceeded the aggregate of all benefits the employee was entitled to under the governing legislation.

The Court of Appeal’s conclusion was reached in circumstances where Ms. Wood actually received notice, payments and benefits in excess of what she was entitled to under Ontario’s employment standards legislation. The Court reasoned that if a strict interpretation of the Termination Clause results in a conclusion that it could violate employment standards legislation, an employer cannot rely on it to limit an employee’s entitlements on termination – even if the employer administers the clause in a manner that is consistent with legislation or if the employer provides the employee with benefits that satisfy employment standards legislation.

Although Wood does not emanate from Manitoba, we expect Manitoba Courts to give the principles and reasoning found in the case serious consideration when interpreting Termination Clauses in the future.

The lesson that Manitoba employers can learn from Wood is that including Termination Clauses in employment contracts can result in cost certainty and savings, but only if used properly.

Employers who do not use written employment contracts, or who do not currently include Termination Clauses in their employment contracts, should strongly consider doing so. Employers who currently have a form of Termination Clause in their employment contract should take time to review them to ensure they are in compliance with the Enforcement Criteria and can be relied upon, if necessary.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.