As many HR professionals know, it is common for employee benefit plans to not allow certain benefits to be continued after an employee has been dismissed, especially Long-Term Disability (LTD) coverage. However, incorporating language in an employment contract that reflects this reality can render a termination clause legally unenforceable for violating applicable employment standards legislation. This is a lesson that one employer learned the hard way in a recent Ontario decision.
In Ramotar v. Trader Corporation [“Ramotar”], the Ontario Small Claims Court held that an employee was entitled to wrongful dismissal damages because the termination clause in her contract was legally unenforceable. The clause stipulated that her benefits continuation was conditional upon such coverage being available from the insurer (and for failing to provide compensation in lieu of benefits). Ramotar underscores the importance of having a lawyer with expertise in employment law vet the termination clauses in your employment contracts for legal enforceability, in order to minimize wrongful dismissal liability.
Background
Provincial and territorial employment standards legislation across Canada generally requires employers to provide employees with, among other things, advanced notice of dismissal (or pay in lieu thereof) where their employment is being terminated without cause or in the absence of them being guilty of “willful misconduct”. These periods of notice or pay in lieu of notice vary depending on an employee’s length of service (as well as the jurisdiction) and are referred to as statutory notice periods.
Employment standards legislation also generally requires employers to continue all employee benefits during the relevant statutory notice period. Further, where an employer fails to continue all employee benefits, they are generally required to provide the employee with compensation in lieu of benefits, being the amount the employer should have contributed to maintain the employees’ benefits under the plan.
Although employers are legally required to continue all employee benefits during the statutory notice period, the terms of many employee benefits plans do not allow for certain benefits to be continued after an employee has been dismissed, especially LTD benefits. Accordingly, employers often cannot continue all benefits through the statutory notice period, and they are required to provide employees with compensation in lieu of those benefits instead.
In addition to having statutory termination entitlements under employment standards legislation, Canadian employees can also be entitled to substantially more at common law, which is called “reasonable notice”. It varies by jurisdiction, but statutory entitlements are generally capped at several weeks of notice/pay in lieu, whereas an employee can be entitled to up to 24 months of reasonable notice (or even more in exceptional circumstances) at common law.
There are two circumstances where employees are not entitled to reasonable notice: (i) if there is just cause for their dismissal (which is a very high bar); or (ii) if there is a legally enforceable termination clause in their employment contract. To be legally enforceable, a termination clause must provide the employee with at least their minimum statutory entitlements under employment standards legislation, and it must not potentially violate such legislation in any way.
The Court’s Decision in Ramotar
The employee in Ramotar brought a wrongful dismissal action against her former employer after she was dismissed without cause. Notably, her employment contract contained a termination clause which provided:
“In the event that it becomes necessary to terminate your employment without cause… the Company will provide you with such notice (or payment in lieu of notice), severance pay, if owing, accrued vacation pay and any other compensation or benefits that may be required to meet the requirements of the Employment Standards Act, 2000 [the (“ESA”)].” [Emphasis added.]
Additionally, the second paragraph of the clause further stated that:
“If your employment is terminated without cause, the Company will continue your group insurance benefit coverage for such period as the [ESA] shall require, provided such coverage is available from the insurer.” [Emphasis added.]
Finally, the clause also stated that the employee agreed to “waive any entitlement or claim to any payment other than provided for in [the clause]”. In other words, it stated that she would not receive anything beyond the entitlements set out in the termination clause.
The Court interpreted the language in the second paragraph of the clause, which stated that benefits continuation would be provided only where “such coverage is available from the insurer,” as placing a limitation upon the broader language in the first paragraph which stated that the employee would receive “any other compensation or benefits that may be required to meet the requirements of the [ESA].”
Ultimately, the Court held that the termination clause violated the ESA and was legally unenforceable because: (i) it did not provide for pay in lieu of any benefits where coverage was not available from the insurer; and (ii) it stipulated that the employee was not entitled to anything beyond the entitlements set out in the clause. As a result, the court rendered the entire termination clause invalid and ruled that the employee was entitled to common law reasonable notice. The court further ruled that the employer wrongfully dismissed the employee by failing to provide her with reasonable notice or pay in lieu thereof. Based on the relevant factors, the court found that the employee was entitled to 10 weeks of pay in lieu of reasonable notice in total, which was five times more than she was entitled to under the ESA.
The Bottom Line
As Ramotar illustrates, the courts will invalidate termination clauses where they can be considered to violate applicable employment standards legislation in any way, regardless of whether the employer intended to violate the ESA. Indeed, even where a termination clause contains clear language stating that an employee will receive everything that they are entitled to under applicable legislation, other language contained in the clause may be interpreted as placing limitations on those entitlements, in violation of the legislation.
The offending language in the clause in Ramotar is but one example of the countless drafting errors that can invalidate termination clauses and expose employers to wrongful dismissal liability. Thus, employers wishing to avoid such liability should ensure that their termination clauses are periodically vetted by a lawyer with expertise in employment law for enforceability, as the law in this area is constantly changing.
If you have any questions regarding the enforceability of your current employment contracts or need assistance with preparing contracts with enforceable termination clauses, please do not hesitate to contact us for expert legal advice and guidance.
