Superior Court of Ontario strikes down Canada Labour Code Termination Clause

Ontario employers are well aware of the issues relating to poorly written termination clauses. Specifically, in Ontario employers who have termination clauses which are contrary to the Employment Standards Act, 2000, will be liable for common law notice if the employee is terminated without cause. There is little case law with respect to termination clauses in the federal sphere.

In a decision that arose out of the Superior Court of Ontario called Sager v TFI International Inc. [2020] O.J. No. 4817, the employee, Mr. Sager was terminated on July 31, 2019 without cause after being employed for approximately 3 years. The contract of employment indicated that the employer could terminate his employment on a without cause basis by giving Mr. Sager the greater of three months’ base salary or one-month base salary per year of completed service up to a maximum of 12 months.  It also indicated that the payment shall be inclusive of any and all requirements under the Canada Labour Code as indicated by the Court in its decision.

Under the Canada Labour Code (“CLC”) where an employee is terminated, section 230(1) requires that an employee who has been employed for at least three months be provided two weeks’ notice or two weeks’ pay in lieu of notice. It is important to note that the two subsections in 230(1) are distinct, the first states:

• notice in writing, at least two weeks before a date specified in the notice, of the employer’s intention to terminate his employment on that date, or

While the second states:

• two weeks wages at his regular rate of wages for his regular hours of work, in lieu of the notice.

When terminated an employee under the CLC is also entitled to be provided severance pay in the amount of two days per year of service or five days whichever is greater. In the Sager case, under the CLC the employee would have been entitled to a maximum of 15 days of severance pay if the employer adhered to the CLC and provided two weeks wages.

At the time of termination, the employer paid three months of base salary in accordance with the contract, significantly greater than the CLC entitlement.  Despite getting paid 3 months base salary, the employee decided to sue for wrongful dismissal. It should be noted that the Ontario Superior Court does have jurisdiction of wrongful dismissals of some Federal employees who are non-unionized. There is a 90-day time limit under section 240 of the CLC for a non-unionized employee to appeal a decision of an employer to terminate their employment. After the 90-day period expires, their only recourse is to advance to the Ontario Superior Court.

The argument made by the employee was that the termination clause found in the employment agreement was not compliant with the CLC because of the wording of section 231(a) which states “where notice is given by an employer pursuant to subsection 230(1), the employer shall not thereafter reduce the rate of wages or alter any other term or condition of employment of the employee to whom the notice was given except with the written consent of the employee”. Specifically, the employee argued that the clause was invalid because it relieved the employer of the statutory obligations during the notice period, including making pension contributions, continuing group benefits, paying his car allowance, paying vacation pay and paying his bonus.

The employer argued that the contract provided a greater entitlement to what was found in the CLC and was enforceable. Section 168 of the CLC specifically allows parties to enter into a contract where a provision allows for more favorable benefits than are found in the CLC.

The Court agreed with the employee, and indicated that section 231(a) of the CLC indicates that an employer cannot reduce the wages or alter any terms of employment during the notice period. The Court noted that the words in the termination clause that stated “the payment shall be inclusive of any and all requirements under the CLC” was fatal to the employer’s argument that the payment did not limit the employee’s entitlements on termination. The logic of the Court was that the wording limited the employer’s obligation to a single lump sum payment, and as a result allowed it to avoid the continuation of benefits, such as car allowance, participation in a group insurance plan and pension plan, and participation in a bonus program under the terms of his contract which was contrary to section 231(a) of the CLC.

With respect to the Court, under the CLC, the requirement not to alter any conditions of employment during the 2-week notice period does not mention a continuation of benefits during the notice period, nor is there any mention of any other continuation of benefits. In our view, by providing a significantly greater severance package than required by the CLC, the contract and in particular, the termination clause ought to have been upheld.  The CLC does not require the continuation of benefits if notice is provided and therefore, this clause ought to have been upheld

Additionally, section 231 refers to the situation under section 230(1) where notice is given, the drafters of the CLC in section 230 distinguish between notice under 230(1)(a) or wages under 230(1)(b). While this was not specifically argued in this case, arguably section 231 should only apply to clause 230(1)(a) because of its specific language, and the employer’s clause would have exceeded the requirements under 230(1)(b).

If you have any questions about termination clauses in your contracts, please give us a call and we would be happy to help.

Authored by: Travis Ujjainwalla

The material presented in this blog is to present general information on the subject matter and should not be regarded or relied upon as legal advice or opinion.