The Ontario Court of Appeal has provided clarification on the enforceability of termination clauses in employment agreements that contain failsafe provisions in its June 22 decision in Amberber v. IBM Canada Ltd.
What You Need To Know
- A "failsafe provision" is a portion of a termination clause which provides that, regardless of any other terms or conditions of a termination clause, an employee who is terminated on a not-for-cause basis will always receive at least what he or she is entitled to under employment standards legislation.
- It is good practice to regularly review and update termination provisions in employment contracts to ensure conformity with the current state of the law.
- A clear failsafe provision in an employment contract can be an effective tool for tailoring termination clauses while still ensuring a terminated employee will always be entitled to at least his or her minimum entitlements under the Employment Standards Act, 2000 (ESA).
The Amberber Decision
The employee in this case was subject to a written contract of employment. The contract contained a termination of employment clause that entitled him to notice or pay in lieu of notice equal to the greater of (a) one month's salary, or (b) one week of salary for every completed six month period worked since his initial service date, up to a maximum of 12 months' salary. This amount expressly included all payments to which the employee might be entitled under employment standards legislation and at common law.
The contract also included a failsafe provision that stated:
In the event that the applicable provincial employment standard legislation provides you with superior entitlements upon termination of employment (statutory entitlements) than provided for in this offer of employment, IBM shall provide you with your statutory entitlements in substitution for your rights under this offer of employment.
After he was terminated, the employee claimed that he was entitled to pay in lieu of notice at common law. He argued that the termination provision in his contract was unenforceable because it violated—or potentially violated—the minimum requirements of Ontario's ESA. This is an argument that has been made successfully in a number of different cases recently, often on the basis that, in certain circumstances, the formula set out in the employment contract for calculating an employee's termination entitlements could result in a payment that is less than the employee's ESA entitlements.
However, the Court of Appeal held that, when read as a whole, this termination clause was clear and did comply with the ESA. The parties had set out a formula for calculating the amounts owing to a terminated employee. The amounts owing included any entitlement under employment standards legislation and the common law. To the extent that the ESA provided for something superior, the employee would receive the statutory entitlement. In other words, the failsafe provision ensured that any portion of the termination clause that fell short of the Employment Standards Act, 2000, would be "read up" so that it complied with the legislation.
The Court of Appeal distinguished this failsafe provision from the severability clause it had ruled on in 2017, in North v. Metaswitch Networks Corporation, 2017 ONCA 790. In that case, the employment agreement contained a clause providing that if any part of the agreement was illegal or unenforceable, it was to be severed from the agreement and the rest of the agreement would remain in full force and effect. The Court of Appeal held then that the severability clause could not operate to "save" part of a termination clause—rather, where a termination clause contracts out of one employment standard, the court is to find the entire termination clause to be void.
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