When it comes to limiting termination obligations, there is nothing more valuable for an employer than a properly drafted employment agreement. An enforceable termination provision can potentially reduce an employee’s termination entitlements from 24+ months of compensation under the common law to 8 weeks or less.
But over the last several years, Ontario employers have faced an increasingly difficult task in drafting enforceable termination provisions.
Two new Ontario Court of Appeal decisions, released one day apart, provide some welcome clarity and show what a common-sense approach to employment agreements looks like. Baker confirms that courts should read employment agreements as a whole, rather than search for technical reasons to invalidate them. Wigdor applies that same common-sense approach to bonus plans, with a very expensive US$4.7 million reminder of what can happen when the drafting does not reflect the minimum requirements of the ESA.
Baker: Courts Should Not Strain to Find Reasons to Invalidate Employment Agreements
In Baker v. Van Dolder’s Home Team Inc., the Ontario Court of Appeal consolidated the appeals of two Ontario Superior Court decisions over whether the phrase “at any time” or “for any reason” was enforceable. In one decision under the appeal, the Court had held that the term “at any time” rendered a termination provision unenforceable because it implied that the employer could fire an employee even in violation of the Employment Standards Act, 2000 (the “ESA”). In the other decision under the appeal, the Court had held that, as the agreement repeatedly confirmed the employee’s entitlements to their statutory minimums, there was no issue triggered by the language of “at any time and for any reason”.
In review, the Court of Appeal smartly confirmed that employment agreements are to be interpreted using a practical, common-sense approach. Relying on a prior Supreme Court of Canada decision regarding contractual interpretation, the Court of Appeal held that the focus should be on what is reasonably understood when reading the agreement as a whole. This effectively closes the door on years of decisions where the courts have isolated a few words to search for a hypothetical way in which the agreement could be said to have violated the ESA.
But employers should not take Baker as meaning that termination provisions no longer need careful drafting. It remains the case that if the termination provision or another provision in the agreement would provide the employee with less than their ESA entitlements, then the agreement is unenforceable and the employee continues to have their full statutory and common law termination entitlements.
Wigdor: The Companion Lesson on How Ignoring Common Sense Can Cost You $4.7m
One day after releasing Baker, the Ontario Court of Appeal released a companion lesson with the decision of Wigdor v. Facebook Canada Ltd.
In that case, the issue was whether the employee was entitled to incentive compensation during the notice period. The easiest way to understand the answer is to ask a simple question: what would have happened if the employee had been given working notice? He would have continued working and his incentive compensation would have continued to accrue. The ESA requires employers to continue an employee’s terms and conditions of employment during the statutory notice period. A bonus plan therefore cannot say that all entitlements stop immediately upon termination if that would leave the employee worse off than if working notice had been provided.
In Wigdor, because the bonus provision provided less than the employee’s minimum ESA entitlement, the limiting language was unenforceable. An employer cannot state that all bonus entitlements end when notice of termination is given. As a result, the employee was entitled to the bonus during the ESA notice period, and also throughout the much longer common law notice period. That drafting error resulted in an award of approximately US$4.7 million.
What Should Employers Do?
Together, Baker and Wigdor provide an important roadmap for employers. The key is not to simply have an employment agreement. Employers should make sure that the employment agreement and every compensation plan that operates with it consistently preserve ESA minimums while clearly limiting any greater common law entitlements.
For assistance with reviewing or updating employment agreements, termination provisions, bonus plans or equity compensation plans in light of Baker and Wigdor, please contact our firm.
