June 18, 2013

Minimum Statutory Rights Required for Employment Contract to be Enforceable

A recent decision of the Ontario Superior Court highlights for employers the need to ensure that their employment contracts do not fall below the minimum entitlements under employment standards legislation.

Much of wrongful dismissal litigation centers on creative attempts by plaintiff-side employment lawyers finding ways to argue that termination clauses in employment agreements are unenforceable and that a dismissed employee is therefore entitled to common law reasonable notice of termination.

The starting point of such arguments is Machtinger v. HOJ Industries, [1992] 1 S.C.R. 986 (“Machtinger”). In that decision, the Supreme Court of Canada held that a termination clause that provided two employees with less notice than that to which they were entitled under employment standards legislation was void. That case concerned contracts of employment that purported to allow the employer car dealer to dismiss without cause one employee, Mark Machtinger, without any notice or cause, and another employee, Gilles Lefebvre, upon the provision of two weeks’ notice. Under the provincial Employment Standards Act (the “Act”), the two employees were entitled to a minimum of four weeks’ notice when they were dismissed after approximately seven years’ service.

Although the car dealer paid each employee the equivalent of four weeks’ salary at dismissal, the employees sued, alleging that they were entitled to damages for notice of termination at common law. At issue in this case was whether employment terms that did not comply with the minimum notice requirements of the Act were capable of displacing the common law presumption of reasonable notice. The Court held that such terms did not, holding that “if a term is null and void, then it is null and void for all purposes….” In other words, the unlawful terms were incapable of ousting the common law’s jurisdiction.

This principle was recently followed by the Ontario Superior Court of Justice in Wright v. The Young and Rubicam Group of Companies (Wunderman), 2011 ONSC 4720 (CanLII). That decision concerned John Wright, who was hired on December 20, 2004 as the Defendant’s executive vice president and director of integrated marketing. Wright signed an employment agreement at the time of hire containing a termination provision that attempted to limit his entitlement to pay in lieu of notice by relying upon a particular severance formula. The termination provision also contained language suggesting that his contractual rights were “inclusive of all notice, statutory, contractual and other entitlements to compensation and statutory severance and termination pay” he had in respect of the termination of his employment, and that he would not receive any “other severance, separation pay or other payments” at dismissal.

To the Defendant’s misfortune, the termination provision made no mention of the continuation of Wright’s benefits for the statutorily mandated notice period. Instead, the clause referred to payments of salary only. Thus, when Wright was dismissed after five years’ service, he commenced an action for wrongful dismissal, alleging the termination provision of his employment agreement was unenforceable for breaching the Employment Standards Act, 2000 (the “ESA”).

Relying upon Machtinger, the Court found in Wright’s favour. The Court held (at paras. 16 and 17):
The agreement provides for payment of base salary only. Payment of base salary, if treated as inclusive of all entitlements to compensation, means that there will be no other compensation flowing to the employee – in short, no benefits.

In my view, the clause excludes benefits and is therefore in violation of s. 5(1) and s. 61(1)(b) of the [ESA].

The Court additionally held the termination provision to be unenforceable because it would have provided Wright with less salary than that to which he was entitled under the ESA had Wright’s employment been terminated at points of time in the future. As a result of the Court’s ruling, Wright was awarded damages for wrongful dismissal.

Tips for Employers

• Have your employment contract templates reviewed regularly. Case law continues to evolve and what was once viewed as permissible and enforceable may (over time) become suspect due to evolving case law. Also, templates tend to get modified over time in many human resource departments; such modifications sometimes render a once enforceable employment contract potentially unenforceable.

• Ensure that your employment contract template complies with all ESA minimum requirements (including pay in lieu, vacation during the pay in lieu period, benefits during the pay in lieu period, and pro-rated severance pay).

• If your employment contracts provide that employees are only entitled to the minimums under the ESA, ensure that the contract does not require the employees to mitigate their damages (mitigation of damages is not required under the ESA).

• Ensure that you have a saving clause that provides that in no event will the employee receive less than his/her ESA minimum entitlements. Another way such contracts are drafted is to provide that an employee will be entitled to the greater of: (i) his/her minimum entitlements under the ESA; or (ii) the amounts provided for in the contract. Such drafting ensures that the employee cannot successfully argue that the contract provides that he/she is entitled to less than his/her ESA minimum entitlements.

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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