Court of Appeal Finally Brings Much Needed Clarity to Issue of Benefits in Contractual Termination Provisions

(c) istock/Choreograph

It’s here. On February 23, 2017, the Court of Appeal for Ontario released its much anticipated decision in Wood v. Fred Deeley Imports Ltd., 2017 ONCA 158 (CanLII).

After an initial reading of the case I tweeted, “I think we have our number one case of importance to Ontario Employment Law for 2017.” To which one observer responded, “Sean, it is only February! I will remember this tweet when you write your annual "Top 5" cases.” While I stand to be corrected in ten months, I was aware of the date when I authored that tweet.

While Wood is not quite everything that I had hoped it would be, it’s still a lot of things. It could well be the most important decision to Ontario employment law this year.

Background and Context

For those who are not complete law nerds like I am, Wood concerned a contractual termination provision. The issue of what it takes to make such a provision ‘legal’ has been, with no exaggeration, thee issue of concern to the Ontario employment law bar for the last six years or so. In case you have missed it, here’s a discussion of why: "Benefits": The Most Important Word in Ontario Employment Law.

When Wood was argued back in September of 2016, I blogged about how I thought the case would be or could be resolved. (See: Will Wood Finally Answer the Question of Benefits? There’s Hope.)

For what it’s worth, I wasn’t entirely correct in my predictions. Surprisingly, the court went the other way on the issue of consideration, a finding which is important in and of itself. However, where it counted, I was dead-on correct.

Facts

The only thing that really matters to the decision is the termination provision. It read as follows:

[The employee’s employment may be terminated] by providing [the employee] with 2 weeks' notice of termination or pay in lieu thereof for each completed or partial year of employment with the Company. If the Company terminates your employment without cause, the Company shall not be obliged to make any payments to you other than those provided for in this paragraph, except for any amounts which may be due and remaining unpaid at the time of termination of your employment. The payments and notice provided for in this paragraph are inclusive of your entitlements to notice, pay in lieu of notice and severance pay pursuant to the Employment Standards Act, 2000.

Also of some relevance is the fact that, if one looks at the termination clause itself, together with the actual payments that the employer made (or offered to make), Wood received more compensation than she would have received under the ESA. The termination clause provided for more than twice as much notice as the employment standard under the ESA – 18 weeks, instead of 8 weeks. Wood received a total of 21 weeks’ salary (13 weeks’ working notice plus a lump sum payment for eight weeks), which was more than the 16.3 weeks’ salary she was entitled to under the ESA for notice (8 weeks) and severance pay (8.3 weeks). Deeley made contributions to Wood’s health and dental plan throughout the 13 weeks of working notice and offered to make its annual contribution to her RRSP (in exchange for signing a release).

Decision

In resolving that the clause was not legally enforceable, the Honourable Justice John I. Laskin (Justices Feldman and Hourigan concurring) reasoned as follows:

[15] At common law, an employee hired for an indefinite period can be dismissed without cause, but only if the employer gives the employee reasonable notice. In Machtinger v. HOJ Industries Ltd., [1992] 1 S.C.R. 986, at p. 998, the Supreme Court characterized the common law principle of termination of employment on reasonable notice “as a presumption, rebuttable if the contract of employment clearly specifies some other period of notice”.

[16] Ontario employers and employees can rebut the presumption of reasonable notice by agreeing to a different notice period. But their agreement will be enforceable only if it complies with the minimum employment standards in the ESA. If it does not do so, then the presumption is not rebutted, and the employee is entitled to reasonable notice of termination.

[17] Deeley and Wood did agree to a different notice period. Thus, the main question on this appeal is whether the termination clause they agreed to contravenes the ESA. Wood submits that the clause does contravene the ESA because it excludes Deeley’s statutory obligation to contribute to Wood’s benefit plans during the notice period and does not clearly satisfy Deeley’s statutory obligation to pay severance pay on termination.

…

[20] An employment standard is a requirement or prohibition under the ESA that applies to an employer for the benefit of an employee. The following employment standards in the ESA are relevant to the interpretation of the termination clause:

• As Wood was employed for over eight years, Deeley was required to give her at least eight weeks’ notice of termination (s. 57(h)) (“working notice”);
• Deeley could give Wood less than eight weeks’ notice, but only if it paid her a lump sum equal to the amount she would have received during the eight-week notice period (s. 61(1)(a)) (“pay in lieu of notice”);
• Deeley was required to continue to contribute to Wood’s benefit plans during the eight-week period (ss. 60(1)(c) and 60(1)(b));
• Because Deeley had a payroll of at least $2.5 million, and Wood was employed for over five years, Deeley was required to pay Wood severance pay on termination (s. 64(1));
• Deeley was required to pay Wood severance pay equal to one week’s salary for every year or part of a year she was employed. Therefore, Deeley was required to pay Wood severance pay equal to eight and one-third weeks’ salary (s. 65(1));
• Deeley could not contract out of these employment standards, and any termination clause that did so would be void (s. 5(1));
• Deeley could provide Wood with a greater benefit than any of the employment standards, and if it did so, that employment standard would not apply (s. 5(2)). Deeley, in fact, did provide Wood with greater notice than the employment standard of one week’s notice for every year of employment.

[21] In summary, Deeley’s statutory obligations to give Wood at least eight weeks’ notice of termination of her employment, to continue its contributions to her benefit plans during the notice period, and to pay her severance pay of eight and one-third weeks’ salary were employment standards. Deeley was precluded from contracting out of any of these employment standards, unless it substituted a greater benefit for Wood. Contracting out of even one of the employment standards and not substituting a greater benefit would render the termination clause void and thus unenforceable, in which case Wood would be entitled to reasonable notice of termination of her employment at common law.

…

[39] Deeley submits that though the termination clause does not expressly require it to continue to contribute to Wood’s benefit plans during the notice period, we can read this obligation into the wording of the clause. Deeley argues that the word “pay” – in the phrase “two weeks’ notice of termination or pay in lieu thereof” – is broad enough to include both base salary and benefits.

[40] This argument cannot succeed. An employer and an employee can contract out of common law reasonable notice, but they must do so in clear and unambiguous language. The word “pay” does not clearly include both salary and benefits. At best for Deeley the word is ambiguous. I would therefore interpret “pay” as referring only to salary or wages, not to benefits. That interpretation is consistent with the consideration I referred to earlier: where the language of a termination clause is unclear or can be interpreted in more than one way, the court should adopt the interpretation most favourable to the employee.

…

[44] That the enforceability of the termination clause depends only on the wording of the clause itself, and not on what the employer may have done on termination, is implicit in the judgment of Iacobucci J. in Machtinger, explicit in the ESA, consistent with the considerations governing the interpretation of employment agreements, and supported by at least two decisions of the Ontario Superior Court of Justice. I will elaborate on these four points.

[45] First, nothing in Machtinger suggests that an employer’s conduct on termination, or during the notice period, can remedy an otherwise illegal and unenforceable termination clause. Instead, Iacobucci J. states, at p. 1004, “[I]f an employment contract fails to comply with the minimum statutory notice provisions of the Act, then the presumption of reasonable notice will not have been rebutted”.

[46] Second, the ESA itself is perhaps more explicit. An employer’s obligation to continue its contributions to an employee’s benefit plans during the notice period is an employment standard (ss. 60-61), and s. 5(1) of the ESA states expressly that an employer cannot contract out of, or waive, an employment standard. In other words, an employer’s later compliance with an employment standard – here, Deeley’s contributions to Wood’s benefit plans – cannot cure the termination clause’s exclusion of the employer’s obligation to contribute to those benefit plans during the notice period.

[47] Third, allowing employers to rely on their conduct at the time of termination of employment would also be inconsistent with one of the important considerations governing the interpretation of termination clauses: these clauses should be interpreted in a way that encourages employers to draft agreements to comply with the ESA. If employers can always remedy illegal termination clauses by making payments to employees on termination of employment, then employers will have little incentive to draft legal and enforceable termination clauses at the beginning of the employment relationship: see Machtinger, p. 1004.

[48] Finally, two well-reasoned Superior Court decisions reject the argument that an employer’s later compliance with its statutory obligations can affect the interpretation of a termination clause in an employment agreement: the decision of Low J. in Wright v. Young and Rubicam Group of Cos. (Wunderman), 2011 ONSC 4720 (CanLII), [2012] C.L.L.C. 210-018; and the decision of Leach J. in Stevens v. Sifton Properties Ltd., 2012 ONSC 5508 (CanLII), 5 C.C.E.L. (4th) 27.

…

[61] … the severance pay issue differs from the benefit contributions issue. The termination clause does not refer to Deeley’s obligation to contribute to Wood’s benefit plans during the notice period, and indeed excludes that obligation. In contrast, the termination clause refers to and includes Deeley’s obligation to pay severance pay. The question on this appeal is whether it does so in a way that complies with the ESA.

[62] The termination clause required Deeley to give Wood “two weeks’ notice of termination or pay in lieu thereof for each year or partial year of employment”. These payments and notice were “inclusive of [Wood’s] entitlements to notice, pay in lieu of notice and severance pay”. In my view, drafted in this way, the clause does not satisfy Deeley’s statutory obligation to pay severance pay. Deeley could fulfil its obligations under the clause in ways that would deprive Wood of her statutory severance pay. The termination clause is thus unenforceable, and Wood is entitled to common law reasonable notice.

[63] Under the ESA, an employer’s obligation to give an employee notice, or pay instead of notice, and its obligation to pay an employee severance pay are separate obligations. So, under the ESA, Wood was entitled to eight weeks’ notice of termination (or pay instead), and severance pay of 8.3 weeks’ salary. If Deeley had drafted the termination clause to reflect these separate obligations, the clause would be enforceable. For example, the clause would be enforceable if it provided: “Deeley is entitled to terminate your employment … by providing you with one week’s notice of termination or pay in lieu thereof for each completed or partial year of employment, and severance pay equal to one week’s salary for each completed or partial year of employment”.

[64] But in the termination clause, Deeley combined its separate obligations. Doing so raises problems with the clause’s enforceability. The problems arise because there are three ways in which Deeley could meet its obligations under the clause, and only one of those three ways would clearly satisfy its obligation under the ESA to pay severance pay.

[65] First, Deeley could have given Wood a lump sum payment equal to 18 weeks’ salary (pay equal to 2 weeks’ notice for every completed or partial year of employment – 9 x 2 weeks’ salary). Under this scenario, Wood would have received pay instead of notice and the severance pay she was entitled to under the ESA. In fact, Wood would have received slightly more than the ESA minimums – 18 weeks’ salary, instead of 16.3 weeks.

[66] Second, Deeley could have given Wood working notice of 18 weeks. Under this scenario, Wood would receive more notice than she was entitled to under the ESA, but she would not receive any severance pay.

[67] Third, Deeley could do what it actually did and give Wood a combination of working notice and a lump sum payment. Depending on how much working notice it gave, Wood may or may not receive the severance pay she was entitled to under the ESA. In this case, Deeley gave Wood 13 weeks’ notice. Under the termination clause, it was required to give her a further lump sum payment of five weeks’ salary (18 minus 13). But a lump sum payment of five weeks is less than the severance pay of 8.3 weeks she was entitled to under the ESA. Thus under this scenario, Wood would not receive enough severance pay. If, however, Deeley had given Wood nine weeks’ notice of termination and a lump sum payment equal to nine weeks’ salary, then Wood would receive the severance pay, to which she was entitled.

[68] In summary, Deeley could fulfil its obligations under the termination clause it drafted in one of three ways. One of those ways would give Wood the severance pay she was entitled to under the ESA. One would not. And the other may or may not, depending on how much working notice Deeley gave Wood.

[69] Thus, the clause allowed Deeley not to pay Wood her statutory severance pay, or to pay her less severance pay than she was entitled to under the ESA. And from Wood’s perspective, when she signed her employment agreement she would not know whether she would receive her statutory severance pay if her employment ended. As the termination clause did not clearly satisfy Deeley’s obligation to pay Wood her statutory severance pay, the clause is unenforceable, and Wood is entitled to reasonable notice of the termination of her employment at common law.

Although the Court of Appeal made no reference to its recent decision in Oudin v. Centre Francophone de Toronto, 2016 ONCA 514 (released June 28, 2016), which was denied leave to appeal to the Supreme Court of Canada on February 2, 2017, it did reference its previous decision in Roden v. Toronto Humane Society, (2005), 2005 CanLII 33578 (ON CA), 202 O.A.C. 351. In distinguishing that case, Justice Laskin reasoned as follows:

[52] The last basis on which Deeley seeks to uphold the motion judge is this court’s decision in Roden. Wood, however, says that the case is distinguishable because of the different wording of the termination clause in Roden. I agree.

[53] In Roden, the termination clause in issue stated that the employer, The Toronto Humane Society, could terminate the employment of the plaintiff Roden “upon providing the Employee with the minimum amount of advance notice or payment in lieu thereof as required by the applicable employment standards legislation”: see para. 55. Roden made the same argument as Wood: the termination clause contravened the ESA and was void because it failed to include The Toronto Humane Society’s obligation to continue its contributions to Roden’s benefit plans during the notice period.

[54] Gillese J.A., writing for the panel, rejected this argument. In her view, the termination clause was simply silent about The Toronto Humane Society’s obligation to continue to contribute to Roden’s benefit plans. The clause did not contract out of an employment standard and thus was not void. She wrote, at para. 62:

The without cause provisions in question are of precisely the type that Iacobucci J. says are valid: they referentially incorporate the minimum notice period set out in the Act. The without cause provisions do not attempt to provide something less than the legislated minimum standards; rather, they expressly require the Society to comply with those standards. As I have said, in my view, the provisions do not purport to limit the Society’s obligations to payment of such amounts. That is, they do not attempt to contract out of the requirement to make benefit plan contributions. Because the contracts are silent about the Society’s obligations in respect of benefit plan contributions, the Society was obliged to – and did – comply with the requirements of the Act in that regard.

[55] The difference between Roden and this case lies in the wording of each termination clause. In Roden, the clause dealt only with The Toronto Humane Society’s obligation to give the notice of termination, as required by the ESA, or to pay Roden a lump sum for the notice period. It did not exclude The Toronto Humane Society’s additional obligation to continue to contribute to Roden’s benefit plans during the notice period. It said nothing about that obligation.

[56] In this case, by contrast, the termination clause is not merely silent about Deeley’s obligation to contribute to Wood’s benefit plans during the notice period. It uses language that excludes that obligation: the payments Deeley agreed to make are the only payments Wood is entitled to; they are “inclusive” of her entitlements under the ESA.

[57] The “all inclusive” language in Wood’s termination clause, and its absence in Roden’s termination clause, is what distinguishes the two cases. Deeley limited its obligations on the termination of Wood’s employment to the payments specified in the termination clause. And those payments did not include its required contributions to Wood’s two benefit plans during the notice period. The termination clause is therefore void and unenforceable.

[58] And, because the clause is void, it cannot be used as evidence of the parties’ intention. It would therefore be wrong to infer that the parties would have intended to substitute for the void termination clause, a clause that complied with the ESA: Machtinger, at pp. 1001-2.

The Court of Appeal did affirm Justice Dow’s decision that the reasonable notice period was 39 weeks, and the same was awarded to Ms. Wood.

Commentary

Where to begin?

I guess I will begin with the issue that I got wrong, that of consideration. In my earlier post I wrote, “I think the court will strike down the entire contract for want of consideration. I think the contract was signed too late for the reasons explained in Holland v. Hostopia.com Inc., 2015 ONCA 762 (CanLII).” But the Court of Appeal disagreed. At paragraph 12 of his reasons for decision Justice Laskin wrote:

A written employment agreement is not unenforceable merely because the employee signs it after starting to work. A written employment agreement might well be unenforceable if an employer includes in it a material term that was not part of the original employment relationship: see Holland v. Hostopia.com Inc., 2015 ONCA 762, 342 O.A.C. 99. But Deeley did not do so.

I am going to go out on a limb and suggest that neither the offer extended to Ms. Wood nor the email that followed was as detailed as the written contract of employment provided to her after she started working, such that it could hardly be said that Deeley had not “attempted to include in it, a material term that was not part of the original employment relationship.” But, such was not the finding of the court. I don’t think this changes the law, but turns on a factual finding.

Next, the severance issue. I wrote about the issue of severance with respect to the case of Garreton v Complete Innovations Inc., 2016 ONSC 1178 (CanLII), about which I blogged in my post, Employment Contract Deemed Void Ab Initio for Failing to Account for Hypothetical Severance. At that time I wrote that I believed the judge in that case, Justice Pattillo, was correct. Seems as though I was right.

Next, Roden and Oudin. For what it’s worth: (a) I think the decision in Oudin is wrong and the decision in Wood is right; and (b) I think the Supreme Court of Canada’s decision to deny leave to Oudin does not mean anything (a point I made explicit in my post Supreme Court of Canada Denies Leave to Appeal in Oudin: But Does That Really Mean Anything?)

With respect to Roden, I have often said what Justice Laskin said, one way to potentially ‘save’ an otherwise illegal termination provision is to omit the inclusion of Porky Pig’s oft-cited refrain, ‘that’s all, folks.’ With respect to Justice Gillese’s logic that one can infer that an employer will maintain benefits where a contract is wholly silent on the issue, I cannot help but recall what my friend and fellow employment lawyer Melissa Seal said with respect to the Oudin decision:

I have always been troubled by the seeming expansion of Stevens. My initial reading of that case made some sense to me- the problem was not that the employer left out a reference to benefits. The problem was that the employer placed a limit on entitlements and then said, effectively, "and that's it- you get NOTHING else." [my paraphrase, my emphasis]

Such a limitation is clearly contrary to the ESA on its face.

I have been troubled to see the courts wade in and knock out contracts that have notice limits and simply don't MENTION other things like benefits, severance, or accrued vacation/wages. This always seemed to me like it was going one step beyond what the courts are supposed to be doing: interpreting contracts in accordance with the parties' intentions.

Frankly, now that we are in the age where the courts must assume a duty of good faith in bargaining, I would think that this strengthens the notion that any ambiguity should be resolved in favour of an interpretation that is in accordance with the law (i.e., in good faith), rather than one that is contrary to it. [Emphasis now that of Sean Bawden.]

Where one party has drafted a contract- the terms of which are in clear breach of a statute- by all means, the court should drive a truck through the offending provision. Where, however, there is a contract which is silent on a particular point, and the interpretation of that point can either mean that the contract complies with the law or not, I think it is going too far for the courts to say that it should be struck out as void- at least not without some parol evidence that the parties actually intended the illegal interpretation.

Silence should not be a shortcut to conclusion of illegality without something more.

My own two cents, and worth both (now extinct) pennies.

Is silence golden? It’s not - but it’s better than trying to limit the employee’s entitlements to an illegal amount.

Finally, the issue of benefits. I have written more about this issue than I wish. With no exaggeration, it is quite possible that I have written more about this issue than anyone else. (For those who have someone how missed such posts see for example my post “Benefits”: The Most Important Word in Ontario Employment Law.)

In every post I wrote to consider this issue I concluded by pleading for the Court of Appeal to address the Wunderman and Stevens decisions. And, while the court did not expressly say “and the contrary decisions are wrong”, I feel pretty confident saying that it appears clear that such decision are, and always have been, ‘wright.’

I have already spilled far too much digital ink and time on this issue. Suffice to say, I unreservedly agree with the court’s decision in this case. Moreover, I believe that Wood finally brings such much needed clarity to this issue.

Takeaways for Employees with Labour Pains

For employees with labour pains the takeaway is this: Have your employment contract professionally reviewed before agreeing to a severance package. If the provision is ‘illegal’, then you’re entitled to reasonable notice and that amount is very likely going to exceed what’s in your contract.

Takeaways for Employers with Labour Pains

Employers: Have an experienced employment lawyer review your employment contracts now. We finally have clarity on what is required and the news is not good for employers, “Contracting out of even one of the employment standards and not substituting a greater benefit would render the termination clause void and thus unenforceable, in which case [the employee] [will] be entitled to reasonable notice of termination of her employment at common law.” Reasonable notice is almost assuredly going to be more than you want to pay. The only way to avoid such a legal obligation is a legally enforceable employment contract and if you’re not 100% sure that your contract is, then now is the time to find out.

To subscribe to Labour Pains enter your email address:

Delivered by FeedBurner

--

As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.