Court Strikes down Canada Labour Code Termination Clause

We previously wrote a blog article with respect to the decision of the Ontario Superior Court striking down a termination clause under the Canada Labour Code R.S.C., 1985, c. L-2. (the “Code”).  The Code applies to federal works and undertakings, such as banks and shipping companies.

In Sanghvi v. Norvic Shipping North America Inc., the Court has struck down yet another termination clause under the Code.  The case involved a Senior Vice-President, whose employment was terminated as a result of a corporate restructuring. The employee had completed 3 years of employment at the time. The employment contract of the employee stated that his employment could be terminated without reason in accordance with the following conditions:

This contract of employment is terminable, without reasons, by either party without giving any notice during probationary period and one month notice on confirmation. The Company reserves the right to pay or recover salary in lieu of notice period. Further, the Company may at its discretion relieve you from such date as it may deem fit even prior to the expiry of the notice period.


At the time of his termination, Mr. Sanghvi was given one month’s salary in lieu of notice. The employer argued that the clause was enforceable as it provided him a greater amount than what was required under the Code.

Under section 230 (1) of the Code, an employee on termination, is required to be provided two (2) weeks’ notice or two (2) weeks’ wages at his regular rate of wages for his regular hours of work in lieu of the notice.  Section 235 (1) of the Code also requires an employer to pay an employee who is terminated without cause severance pay calculated as the greater of (a) two days’ wages for each completed year of employment or (b) five days wages. In this case, under the Code, Mr. Sanghvi was entitled to 2 weeks’ wages plus an additional 6 days of severance pay. He received a month’s salary, which exceeded the statutory requirement under the Code.

Despite this, the Court still determined that the clause was invalid because the contract set a maximum payment of one (1) month as pay in lieu of notice. The Court determined that the clause was invalid, as it did not comply with the Code when the contract was entered into. The possibility of a violation of the Code existed given the contract language. In particular, had he been terminated after 7 years of employment, he would have been entitled to more than a month of compensation under the Code (10 days’ termination pay and 14 days’ severance pay).  The Court relied on the decision of Covenohov Pendylum Ltd., for the legal requirement that if a clause has the potential to conflict with the minimum employment standards at any time after hiring, the clause is void.  In this case, the employee was awarded 8-months’ notice as reasonable notice.

For federally regulated employers governed by the Code, it is important to recognize that any contract purporting to limit statutory entitlements will be considered void. It is critically important to ensure that termination clauses are drafted in a manner that provides at least the minimum entitlements under the Code, reflective of both the notice of termination and severance pay requirements.