What constitutes a Termination Provision?

As defined in the Ontario Employment Standards Act, a termination clause is: "Part of a contract of employment that governs the rights and obligations of the employer and employee if the employer dismisses the employee without cause or if the employee terminates the employment relationship." Essentially, a termination clause governs what will happen to the employment agreement in the event of its termination, whether it be by the employer or the employee . Its purpose is victim avoidance: if the terms of the termination clause are sufficiently clear, the employer will be in a position to avoid further litigation and any associated damages. In other words, well-drafted termination clauses go a long way towards ensuring that the legal battle over how an employment relationship ends is mostly averted. This is beneficial for both employers and employees.

Essential elements in a Termination Provision

A termination clause will typically contain a number of specified key components such as: (i) the notice period applicable to the employment relationship; (ii) the severance pay/termination package amount that will be paid to the employee upon its termination; (iii) conditions that must be met in order for the employee or the employer to terminate the employment relationship; and/or (iv) the situations where the employer can pay out the notice period instead of allowing the notice period to expire including when there has been just cause for termination, upon resignation or upon the sale of a business.
Notice Period: the notice period should be clearly stated as either a set period of time (commonly 1-3 weeks for employees with less than 5 years of service term and 4 weeks or more for employees with 10 years or more of service term), a specific date (e.g. terminating the employee immediately upon receipt of the notice), or an event upon which notice will become effective.
Severance/Termination Package: the severance package that will be paid to the employee upon termination should be clearly stated, including any bonuses, commissions or vacation entitlements that will be paid to the employee as part of the termination package. It is common to see severance provisions stating that employees will receive the full amount of the statutory package (i.e. notice period and severance) bi-weekly until all amounts are paid.
Conditions: conditions which must be met in order for the employee or the employer to terminate the employment relationship include: resignation; just cause for termination; sale of business; lay-off; employment outside of Canada; and passing away. The employee’s benefit entitlements during the applicable conditions should also be addressed in the termination clause.
Payout instead of Notice Period: Payout of the notice period should be stated and whether or not the notice period can be paid out and terminated immediately upon receipt of the notice.

Types of Termination Provisions

In the context of employment agreements there tends to be three types of termination clauses: for cause, without cause, and constructive dismissal.
Termination for cause. This is usually the most advantageous for the employer as all employment obligations are discharged, an employee generally won’t receive any notice of this termination or pay in lieu of notice (often referred to as severance), and the employer can litigate in Ontario as there is no common law employment relationship to be considered. A clause which would apply in the situation is below (although this is a simplified version of most actual clauses):
"Notwithstanding any other clauses of this agreement, the employment of the Employee may be terminated without notice or payment or compensation of any kind to the Employee if the Employee commits a serious breach of this agreement, any statutory breach, a criminal offence, fraud, dishonesty or willful misconduct of any kind".
Termination without cause. In these situations severance is paid, the employer must consider the totality of the common law judge’s decision on how long the employee will be employed for, and pay for severance. Normally an employer will also want to litigate in Ontario. The clause below is an example of an without cause clause (the wording below is merely an example, and not recommended to be used as is):
"The Employee’s employment may be terminated without cause by the Employer, without notice or pay in lieu thereof, except where such notice or pay in lieu of notice is required by applicable employment standards legislation, subject to the terms of this agreement, all benefits accrued by the Employee shall cease on the termination date, and the Employee shall be entitled to the minimum severance compensation owing as then calculated under the applicable employment standards legislation in addition to any termination pay offered by the Employer at its sole discretion".
Constructive dismissal. Termination for constructive dismissal occurs when an employee is not technically fired, but instead put into a position where they cannot reasonably choose to continue their employment. In these situations it is usually argued that the employer breached the contract and terminate the relationship through actions rather than directly. This is considered such an affront to the employee that they have no choice but to leave. In these situations the employer would face the same liability as a without cause dismissal because employment obligations are over and an employee would be entitled to pay in lieu of notice. The clause below is an example of a constructive dismissal clause (the wording below is merely an example, and not recommended to be used as is):
"A constructive dismissal shall be considered a termination without cause for purposes of this agreement and severance entitlement".

Legal aspects of a Termination Provision

Employment agreements in Ontario are often silent on the subject of termination. This silence is despite the fact that case law has provided guidance concerning the standard of notice or pay in lieu of notice required in the event of termination without cause. Employers often include in employment agreements what is sometimes misleadingly referred to as a "termination clause" to try to avoid the common law rules and judicial guidance on the topic of notice and compensation upon termination. Most employers believe that a termination clause will provide certainty or predictability in the event of an employee’s termination.
A termination clause is only effective if it is enforceable. If a termination clause is enforceable, the benefit is that it will usually limit an employer’s common law liability to the minimum notice or pay in lieu of notice prescribed by statute, which is usually far less than required at common law. An example of a termination clause that attempts to limit liability to the minimum statutory entitlements prescribed in the Employment Standards Act, 2000, S.O. 2000, c. 41 (the "ESA") is set out below:
Notwithstanding any provision of the ESA or the common law, if the employment of the employee is terminated for any reason other than wilful misconduct, disobedience or neglect of duty, the employee will be entitled to receive from the company the lesser of: (a) the minimum notice or pay in lieu of notice as is prescribed by the ESA; or (b) the compensation as may be provided by the company.
While this clause may limit liability to the statutory minimums in the ESA, the reality is that such a termination clause will likely be found to be void by virtue of the fact that fails to comply with the prescriptive requirements of the ESA. The Supreme Court of Canada addressed the issue of whether a terminated employee was entitled to common law reasonable notice or pay in lieu of notice on two occasions. On both occasions, the Supreme Court found that clauses that attempt to limit liability to the statutory minimums in the ESA were void unless those clauses set out the employee’s statutory entitlements in their entirety. These decisions have encouraged employees to seek remedies by initiating litigation or threats of litigation, or by commencing a trespass action against recalcitrant employers.
When determining whether to enforce a termination clause, the courts assess the language of the contract as well as the factual matrix between the employer and employee. Courts interpret restrictive provisions in employment agreements narrowly and in favour of the employee. Courts have found that the effects of enforcing a termination clause on continuing contracts of employment must also be considered. Courts have also held that the perceptions of fairness by the parties are relevant. The court will set aside the termination clause if it finds that there was a fundamental unfairness to the employee in entering into the employment agreement. The unfairness does not need to be the result of the actions of the employer; it can arise by reasons of poor drafting or lack of full disclosure of the effect of the clause.
Termination clauses are not always ineffective but certain terms in terms of termination clauses will decrease the likelihood that the courts will enforce those provisions. Employers should formulate termination clauses with caution and with the appropriate legal advice.

How best to draft a Termination Provision

The best approach when drafting a termination clause that is both reasonable and provides the company with significant protection is to state that an employee may be terminated: (a) at any time by either party without notice and without cause; but, (b) will be entitled to receive a minimum amount of compensation equal to three (3) weeks of the employee’s base salary at the time of termination. In the Statement of Terms of Employment, the employee is told that if he/she works with the company for three (3) years or more, his/her termination will include an additional week for every year worked as set out in the formula above. This formula ensures that the employee receives at least three (3) weeks’ salary in the event of termination, and encourages long-term employment by providing greater compensation in the event of termination after longer service. If an employee works for a company for 10 years or more, an increase in the severance formula is reasonable since, after 10 years, the employee is essentially part of the team, and a reasonable amount of pay should be set aside to reflect the years served. If, for example, an employee finished with the company in 2013 and received, say, 12 or 15 weeks’ compensation, no court would perceive this as being a penalty or unfair advantage to the employee . The termination clause would be considered proper, fair and enforceable.
In drafting an enforceable termination clause and balancing it with the rights of the employee, one of the common pitfalls that employers make is to not offer a significant enough severance package to those employees who fall under the statutory exemption of federally regulated employees. This is not a problem for unionized and provincial employees. A federally regulated employee who is terminated without cause is entitled to receive the base compensation for the remainder of the contract period if the contract has a term of three months or more. In calculating the compensation, any non-monetary benefits provided to the employee, such as long-term disability or medical benefits, must also be calculated as part of the compensation. Offering the same base compensation to both federally regulated and provincial employees would create litigation and possible penalties to the company for our failure to comply with the Employment Standards Act.
Every termination clause should be reviewed as times change and the courts continue to find term clauses to be indefensible.

Common mistakes to avoid when drafting a Termination Provision

One of the most common pitfalls is for the employer or employee to fail to realize that an employment agreement which governs all aspects of the employment relationship includes a termination clause. These parties must remember that every employment contract has at least two parts – the entire contract which is supplemented by the Employment Standards Act minimums and the termination clause which usually has an either/or effect, being either for notice or for pay in lieu of notice. If it is the latter, then the employer will only have to pay the amount in the termination clause upon termination of the employment.
Employers can fix this problem by clearly marking the termination clause with pay in lieu of notice language and including it as a separate clause within the employment contract. They should also make sure that the termination language complies with the Employment Standards Act minimums. If the period of notice or pay exceeds the notice under the termination clause, the employer has breached the employment agreement. Employees can protect themselves by ensuring that they are aware of the termination clause and how it interacts with the Employment Standards Act minimums. Another common pitfall is the incorrect termination clause – where the language of the termination clause does not comply with the Employment Standards Act minimums. The best way to avoid this pitfall is to have a clearly worded termination clause, where the employer knows what its obligations are. In a situation where the termination clause is well written, it is fairly uncommon for a court or arbitrator to strike down the independent legal validity of the termination clause entirely and instead, it will vary, as the courts will enforce what they consider to be the parties’ true intentions.

Updating Termination Provisions in new Agreements

Modern employment contracts are evolving rapidly to account for the realities of 21st-century life. The rise of the gig economy, remote work and the impact of career management tools like LinkedIn have caused a fundamental shift in the way workers perceive their employment arrangements. An employment contract that may have been suitable five years ago is frequently no longer acceptable to either party today.
When negotiating or drafting an employment agreement, it is important to keep in mind how the contract will be terminated. A contractual termination clause which complies with employment laws at the time of drafting may become non-compliant over the time that the contract is in force. This is because employment law is constantly changing, both as a result of legislation and as a product of judicial interpretation.
A contract formed today will set out terms for termination based on the law today. However, the law may change during the period that the contract is in force, perhaps because of a new regulation or a court decision. A disputed termination may therefore hinge on whether the employer has complied with the laws at the time of the termination.
For example, the Court of Appeal has recently held that the statutory severance pay cap does not apply in cases of constructive dismissal. The leading companion case to this decision also clarifies that a clause may not be enforceable in a new employment contract if the same clause in a previous agreement was unenforceable . Employment agreements entered into after these decisions may therefore need to contain new termination clauses, in order to reflect the legal position. If the old terminated contract contained a vague termination clause, an employer may be able to argue that a new contract, containing an enforceable clause, does not replace the old one. In that case, the question of whether the employee is entitled to the statutory maximum, or the common law reasonable notice period, will need to be resolved.
The growth of remote workers also affects the enforceability of termination clauses. It is not sufficient to set out the parties’ choices of law, and then provide that disputes will be settled in a specific location. Jurisdictional issues cannot be determined solely by the creation of a choice of law provision. This relationship becomes more complicated when parties are located in different countries at the time of drafting the agreement.
The key to negotiating a termination clause that will stand the test of time is to ensure that the clause is up to date at the time that it is invoked, and that it is enforceable under current employment law. To this end, employers must regularly review their employment agreements, as well as any other documents that contain termination provisions, to ensure that they still reflect the most up-to-date legal obligations.