Termination Clause Waiving Past Service Void as per ESA and a Savings Clause Does Not Help:

In Groves v UTS Consultants ( 2019 ONSC 5605) Justice Nishikawa had a situation where the Plaintiff sold his business by way of a share transaction and then entered into an employment agreement. Prior to the transaction, the plaintiff had been an employee for 22  years. He was terminated 3 years after the purchase.

The termination clause in the new employment agreement read as follows:

This agreement may be terminated in the following manner in the specified circumstances:

b) By the Company at any time for cause without notice or pay in lieu;

c) By the Company at any time without cause provided that the Company provides you with notice in writing or pay in lieu of notice (as salary continuation) or some combination thereof equal to four (4) weeks base salary for each year of service that you have with the Company calculated from the date of this letter (and, for greater certainty, excluding any period of service you had with the Company prior to the date of this letter) with a guaranteed minimum notice or pay in lieu of notice equal to three (3) months base salary; provided that the maximum notice period or pay in lieu of notice that you will receive shall in no circumstances exceed twelve (12) months. Notwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the Employment Standard Act (Ontario). In addition, the severance package will also include continuation of medical and dental benefits during the severance period. Any variable pay owing to you will be prorated for the year’s service and paid at the time of termination. For greater certainty, you agree that for purposes of calculating any entitlement which you may have arising from the termination, without cause, of your employment with the Company, any prior service with the Company is excluded and you hereby waive and release any prior service entitlements.

The validity of this clause was successfully attacked on the following grounds :

  1. As the clause purported to not count his first 22 years of service, it offended Section 9 (1) of the ESA which deems employment to be continuous notwithstanding a sale of the employer.
  2. The Plaintiff signed a resignation at the time of the purchase. The Court held that this was intended to cover only his status as a director and officer, not as an employee. Moreover as severance pay covers even non-continuous service ( see Section 65(2) ) the clause is illegal.
  3. By basing the notice only on base pay and not total compensation, it breached the ESA.
  4. The savings clause did not save these defects : As the judge said :
    e)   Saving clause

    [60]           Relying on the Court of Appeal’s decision in Amberber v. IBM Canada Ltd., 2018 ONCA 571 (CanLII), 424 D.L.R. (4th) 169 [Amberer], UTS submits that even if the Termination Provision breaches the ESA, it contains a “saving clause” that would permit this court to apply it. In Amberber, the Court of Appeal “read up” a termination provision to comply with the ESA because the provision was capable of an interpretation that would be in compliance with the ESA: Amberber, at para. 54.

    [61]           In this case, the Termination Provision states that “[n]otwithstanding the foregoing, the Company guarantees that the amounts payable upon termination, without cause, shall not be less than that required under the notice and severance provisions of the [ESA].”

    [62]           When the employer has sought to contract out of the ESA, a saving provision cannot be used to rewrite the express language in an agreement to cause it to comply: Rossman v. Canadian Solar Inc., 2018 ONSC 7172 (CanLII), 300 A.C.W.S. (3d) 69, at paras. 67-70. The Termination Provision cannot be interpreted to comply with the ESAbecause, contrary to s. 9(1), it specifically precludes an interpretation that would include Mr. Groves’ prior service with UTS. As a result, the saving clause does not assist and the Termination Provision cannot be read up in order to bring it into compliance with the ESA.

This to me is the most important part of this case because up until now there seemed to be some confusion as to whether nor not these types of clauses could fix an otherwise broken illegal termination clause.

There were two other arguments that the Judge did not feel had to be dealt with:

  1. The Just Cause argument :
    (c)   Just cause

    [58]           A single breach of the ESA is sufficient to invalidate a termination provision: Cormier v. 1772887 Ontario Ltd., 2019 ONSC 587 (CanLII), 302 A.C.W.S. (3d) 767[Cormier]. Since I have found that the Termination Provision is contrary to the ESA and since Mr. Groves was not terminated for cause, I need not consider whether the ability to terminate for cause without notice or pay in lieu of notice also violates the ESA. I note, however, that in Plester v. PolyOne Canada Inc., 2011 ONSC 6068 (CanLII), 216 A.C.W.S. (3d) 654, at paras. 53-56, aff’d, 2013 ONCA 47 (CanLII), 225 A.C.W.S. (3d) 1024, the court held that the ESA requires that notice and severance be paid unless the employer can demonstrate “wilful misconduct… that is not trivial and has not been condoned by the employer.”

  2. The Salary Continuation argument:
    (d)   “Salary continuation”

    [59]           Similarly, I need not consider whether the Termination Provision breaches the ESA because it allows for the payment of four weeks per year of service as “salary continuation.” Nonetheless, I note that in Wood, at paras. 60-69, the Court of Appeal held that under the ESA employees are entitled to receive severance pay in a lump sum and are not required to work in order to receive it.

    It seems that the judge probably favoured both these arguments but didn’t want to decide more than was strictly necessary. Perhaps another case will consider these arguments.

And finally the Judge considered whether the Release that the Plaintiff signed upon the sale would disentitle him to a consideration of his prior 22 years service when calculating his common law notice entitlement upon his termination in 2017.

In connection with the sale of UTS, the Plaintiff signed a release releasing UTS and the purchaser from:

all claims, demands, actions, causes of action, debts… which the undersigned in any capacity whatsoever (including, without limitation, as officer, director, shareholder, employee, creditor or otherwise) had, now has or hereafter can, shall or may have, for or by reason of or in any way arising out of, relating to or in connection with, any cause, matter or thing whatsoever existing up to the present time and, without limiting the generality of the foregoing, arising from: (1) the undersigned having been an officer, director, shareholder, employee or creditor of the Corporation, or (2) any Claims for unpaid remuneration, termination or severance pay. 

This is what the Judge said on this issue:

That leaves the issue of whether, by virtue of signing the Release, Mr. Groves released any claim to common law notice. In Kerzner, the Court of Appeal did not interfere with the motion judge’s decision that the employee waived common law entitlements for service prior to the execution of the release. See also Ariss, at para. 39.

[66]           In Kerzner, however, the release did not specifically waive the employee’s ESA entitlements. In this case, the language of the Release is broader than the provision in Kerzner. The Release states that it releases and discharges “any claims” for “termination or severance pay” which are not common law entitlements, but rather entitlements under the ESA. Given that this violates the ESA, it is null and void for all purposes: Cormier, at paras. 87-88.

[67]           In Kerzner, the Court of Appeal rejected the application of Biancaniello v. DMCT LLP, 2017 ONCA 386 (CanLII), an argument that UTS puts forward here, as addressing the scope of a release that was otherwise permissible: Kerzner, at para. 36.

[68]           Moreover, based on the evidence, I find that Mr. Groves did not release his claim to common law notice. Based on the terms of the SPA, he understood that his employment with UTS would continue. There was no break in service, and none was contemplated. Had the employment relationship with UTS been clearly severed, Mr. Groves may have turned his mind to what claims or entitlements he was foregoing by signing the Release. Given that Mr. Groves’ resignation was a formality, I find that he did not agree to forego his entitlement to common law reasonable notice.

I think that there is a much simpler way of dealing with this issue.

The Release only deals with issues ” existing up to the present time”, in other words at the time of the sale, not the termination of his employment, which occurred 2 years later. The only effect this Release would have on his employment would be that after the sale he could not complain that he was owed vacation pay or bonuses for service prior to the sale. It did not effect a possible future event.




Court Confirms No Obligation on Employer To Provide Benefits to Employees on LTD or STD:

In City of Toronto v CUPE Local 79  (2019 ONSC 4045) Justice Swinton judicially reviewed an arbitrator’s award which held that it is a breach of the Ontario Human Rights Code for the City to only provide part time benefits ( as opposed to better full time benefits ) to an employee who was being accommodated with part time work because he could no longer work time due to his disability .

In finding that the arbitrator’s decision was not reasonable, she said the following:

The arbitrator correctly stated that she was bound by the Court of Appeal’s decision in Ontario Nurses’ Association v. Orillia Soldiers Memorial Hospital (1999), 1999 CanLII 3687 (ON CA), 42 O.R. (3d) 692 (“Orillia Hospital”).   However, she candidly expressed her preference for a different approach that had developed in the arbitral jurisprudence, but was rejected by the Court of Appeal in Orillia Hospital.

[20]           In that case, the Court of Appeal held that the Code does not require an employer to make contributions to benefit programs for a disabled employee who is off work, since contributions to benefit programs are a form of compensation.  At para. 27, the Court stated,

Disabled nurses do not receive this compensation because they are not providing services to their employer.  It is not prohibited discrimination to distinguish for purposes of compensation between employees who are providing services to the employer and those who are not.

[21]           The Court also held that even if a disabled employee is the subject of constructive discrimination within s. 11 of the Code because he or she does not receive employer contributions to benefits, “[r]equiring work in exchange for compensation is a reasonable and bona fide requirement” (at para. 58).  The Court explained that accommodation refers to workplace adjustments to allow the employee to work (at para. 55):

The duty is on the employer to take all steps short of undue hardship to accommodate the needs of the person discriminated against so that they can compete equally with the other employees.

At this point of her reasons, one would have thought that the logical conclusion would be that the grievance must fail.  Employees in the full-time unit receive greater benefits than those working part-time hours.  For example, the City pays 100% of the cost of benefits for full-time employees in the full-time unit, while the City pays a pro-rated percentage for those in the part-time unit.  As well, some of the benefits are different in terms of payment for shifts missed because of sickness and injury.   In accordance with Orillia Hospital, the employer does not discriminate by failing to provide the added benefits to which a full-time employee is entitled to a person working part-time hours, even if the person is working part-time because of disability.  The difference in treatment with respect to compensation and benefits is because of the number of hours worked, not because of disability, and the employer is not required to compensate the disabled employee for time not worked.  

This case would apply equally to a non-union environment.

Of course an employer may, as part of its STD and/or LTD policy, agree to provide benefit coverage to those employees not able to work because of their disability, but the OHRC does not require them to do so .

Similarly it would seem that there would be nothing to prevent an employer from agreeing to provide benefit coverage for a limited period of time. For example the Employer may agree to provide benefits during the STD period but not the LTD period.

This raises an interesting issue that I often see in my mediation and arbitration practice, that is whether to terminate an employee who is on LTD for a lengthy period and claim that the contract is frustrated. Of course under the Ontario Employment Standards Act this triggers an obligation to pay both termination pay and severance pay, but not common law notice.

I have often wondered why employers feel the need to terminate employees in these situations when it often generates a severance obligation that could have been avoided if no termination  took place.

When I have asked this question I am often told that one the reasons for doing this is to end the costs of providing benefits to disabled employees

Well it now seems that there is nothing in law that would prevent an employer from including a provision in their STD or LTD plans which imposes a time limit on how long the benefits will continue.

Therefore there would be no financial cost in simply continuing the status of the disabled employee as an employee of the Company.

Of course, under the ESA, either party can claim that a contract is frustrated, thereby triggering the obligation to pay termination pay and severance pay. Therefore the disabled employee could trigger their own termination even if the employer did not wish to terminate the employment relationship .

Ontario Court Appeal Rules on Pro-rata Bonuses:

In Andros v Colliers Macauley Nicolls Inc ( 2019 ONCA 679) the Ontario Court of Appeal considered the issue of a bonus which is payable after the expiry of the notice period but during which the employee either worked part of the year or whose notice period included part of that year .

Here is the scenario:

The bonus year is the calendar year. The employee is terminated on March 31st. The Court awards a notice period of 6 months, taking the employee to September 30th. The bonus is payable only  to employees in ” good standing ” or in ” active employment ” as of  December 31st.

This is what the Court said :

[55]      Absent a contracting out, allowing for common law damages that include compensation in lieu of a pro rata share of a bonus in circumstances where the bonus is an integral part of the compensation package is the only sensible approach. Although the notice period in this case ended a few months before the bonus would have come due, one can well imagine a scenario in which the notice period could expire on the very eve of the bonus payment date. In those circumstances, the appellant’s position would lead to the untenable result that the dismissed employee would get no part of the bonus he or she had earned through a combination of his or her labour during that calendar year and over the course of the notice period that followed.

[56]      The greater the bonus in relation to the employee’s overall compensation and the shorter the notice period, the greater the unfairness of the situation. By way of example, if the appellant is right, then an employee who is terminated in early December, but only eligible to a couple of weeks of notice, would not be eligible to seek damages for a pro rata share of his or her bonus for the eleven months of work he or she completed and the short notice period that followed. Absent clear language in the contract, I do not accept the inherent unfairness that would arise in precluding those employees terminated without cause from seeking a pro rata share of their bonuses only by virtue of the fact that the notice period ended before the bonus payment date, particularly where the bonus payment date is entirely in the discretion of the employer.

[57]      Accordingly, the question is not whether the bonus would have been “received” during the notice period, but whether it whether it was “earned” or “would have been earned” during that period. Damages may be sought as compensation for what an employee would have earned had his or her contract of employment not be breached. This reasoning is similar to Taggart where an active service prerequisite to the accrual of pension benefits did not preclude damages for lost pension benefits during the notice period after wrongful dismissal. As noted by Sharpe J.A. in Taggart, it is important to recall the legal nature of the claim. In Taggart, the legal nature of the claim was not for the benefits themselves, but for “damages as compensation for the … benefits the [employee] would have earned had the [employer] not breached the contract of employment”: at para. 16 (emphasis added). Equally, the claim here was not for the bonus itself, but for the share of the bonus that the respondent would have earned had the appellant not breached the contract of employment.

This case is very important for these reasons:

  1. It actually uses words like “fairness” in deciding what is legal.
  2. It distinguishes “earning ” a bonus by doing the underlying work and ” receiving ” the bonus on a certain later date.
  3. It reiterates that the damage calculation is based on calculating what the employee lost because of not being able to work out their notice period as opposed to suing for the payment of a specified bonus or stock option etc.
  4. It leaves employers free to try to cut off these payments if they use explicit language, without telling us what that language should look like.
  5. If a bonus is earned pro rata as long as the employee is working , then could an employee who quits half way through the year demand payment of one half of his bonus once the amount for the year is determined?

Ontario Court of Appeal Says Any Defect in a Termination Clause Voids the Entire Clause:

In Andros v Colliers Macauley Nicolls Inc ( 2019 ONCA 679) the Ontario Court of Appeal considered the legality of the following termination clause:

4. Term of Employment

The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act or, at the Company’s sole discretion, either of the following:

a. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.  

b. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary. 

In beginning their analysis, the Court went back to first principles, which they set out as follows:

[20]      It is not possible to simply void the part of a termination clause that offends the ESA. If a termination clause purports to contract out of an employment standard without clearly substituting a greater benefit in its place, the entire termination clause is void: North v. Metaswitch Networks Corporation, 2017 ONCA 790 (CanLII), 417 D.L.R. (4th) 429, at para. 24; Hampton Securities Limited, at para. 7. As Laskin J.A. said in Wood, at para. 21: “Contracting out of even one of the employment standards and not substituting a greater benefit would render the termination clause void and thus unenforceable”: see also paras. 64, 69. This is true even if the employee actually receives his or her statutory entitlements after termination. Accordingly, the enforceability of a termination clause is determined by the wording of the clause alone, not by an employer’s conduct after termination: Wood, at paras. 43-44.  

The Court then on to find that paragraph 4 (a) was illegal because it did not mention severance pay and paragraph 4 ( b) was illegal because it did not include either benefits or severance pay .

The Court then went on to say that because paragraphs 4 (a) and (b) were illegal, the whole termination clause was void.

[27]      Strictly speaking, given her finding that the ESA had been contracted out of under clauses 4(a) and 4(b), it was unnecessary for the motion judge to consider ambiguity. The termination clause was unenforceable given that it contracted out of statutory entitlements without substituting a greater benefit: Wood, at para. 21.

In other words, the first part of the clause guaranteeing the employee no less than the ESA ( which would seem to  be enforceable ) was in effect ” poisoned ” by the second illegal clause.

So you do really throw out the entire  baby with the dirty bathwater.

This case should have a dramatic impact on the analysis  of termination clauses because all the employee has to do is find one defect and the whole clause gets thrown out.

There are many types of ESA defects that creative lawyers have already litigated and some ideas that are yet to be tested. This case makes this search for these defects extremely important and reiterates that an all embracing ” clean up cause” may not ward off an attack.

Of course all of this could be avoided if employers drafted termination clauses that provided for somewhat more than the ESA but less than the common law.