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.