March 3, 2017
Ensuring Enforceable Employment Agreements: Lessons from Wood v Fred Deeley Imports Ltd.
There is a presumption at common law that an employee is entitled to reasonable notice on termination. This presumption is rebuttable where there is an enforceable employment contract in effect between the parties that provides otherwise. It is common practice for employers to attempt to use employment contracts, and termination clauses within such contracts, in order to limit an employee’s entitlements in the event of termination.
In Wood v. Fred Deeley Imports Ltd, the Ontario Court of Appeal has provided further insight into the factors that will be considered in determining whether an employment contract is enforceable, and thus properly limits an employee’s common law entitlements on termination. Employers should revisit their employment contracts in light of the following important take-aways from Wood:
- Avoid Verbal Offers of Employment – The Court in Wood upheld the enforceability of written employment agreement signed after the employee started work, but only because the employee was aware of and had implicitly agreed to its terms as a condition of employment. As a best practice, employers should avoid making verbal offers of employment since such offers may render a subsequent written contract unenforceable, even if it is provided to the employee prior to the commencement of work. The employee should also be given sufficient time in advance of the start of work to review the contract and obtain independent legal advice.
- Termination Clause Must Not Exclude Benefit Contributions – A termination clause in an employment contract must not purport to exclude benefit contributions.In Wood, the Court found that the language in the agreement requiring the employer to provide “pay in lieu of notice” did not clearly or unambiguously require the employer to make benefit contributions during the notice period as required by the Employment Standards Act, 2000 (“ESA”). Since the clause also stipulated that the employer was not obligated to make any payments to the employee other than those expressly set out, the Court held that the termination clause contravened the ESA and was thus unenforceable.
- Avoid Possibility of Breach of ESA – A termination clause in an employment contract must not give rise to a possible breach of the ESA. The Court in Wood held that the termination clause was also unenforceable because there were ways that the employer could comply with the clause without satisfying its obligation to pay severance pay under the ESA.
- Complying with ESA does not Cure Deficient Clauses – While the employer in Wood had actually provided the employee with more than she would have received under ESA upon her termination, the Court nonetheless concluded that the enforceability of the termination clause must be assessed on its face. A deficiency in a termination clause that undermines its enforceability cannot be “cured” simply by complying with the ESA.
The decision in Wood makes it clear that employers have very little margin for error when drafting termination clauses in their employment contracts. If a termination clause is found to exclude any of an employer’s ESA obligations to an employee upon termination, the clause will be unenforceable and the employer will be liable to provide common law reasonable notice to the employee.
Avoid unexpected surprises on termination by ensuring existing employment agreements are reviewed periodically to ensure they continue to be fully compliant with the ESA.
If you have any questions about this topic or any other topics relating to workplace law, please contact a Mathews Dinsdale lawyer.
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