Saturday, July 16, 2011

Contractual Termination Clauses

One of the best pieces of advice for employers is to include a termination provision in any employment contract. Specifically what the calculation of the notice period must be set out in the provision itself. There are a few rules for making them enforceable: They can't, in any circumstance, provide for notice less than the guaranteed statutory minimum, and if signed after the formation of the initial contract there must be "fresh consideration".

They can be keyed directly to the Provincial statutory minimum, but even then a large employer has to be cautious: In one case where an employee was transferred from Ontario to B.C., and his contract referred to the Ontario Employment Standards Act, the provision was found void in B.C. because in some circumstances Ontario's minimums are less than B.C.'s.

The advantage of these clauses is two-fold for an employer: Firstly, they usually reduce liability. Common law "reasonable notice", which can be displaced by these clauses, is often quite significant. Secondly, regardless of how much contractual notice is provided for, there is an advantage to having certainty: If the clause is enforceable, then how much is owed is simple arithmetic, and litigation is likely unnecessary.

I recently had a reader find one of my blogs through a search to the effect of "Is an ESA termination clause reasonable for a management position?" Which is an interesting question, and I'd like to discuss it.

The reasonableness of a clause isn't really a legal question. It's hard to argue unconscionability of notice clauses, given that there's a statutory standard set. That being said, there is a line of jurisprudence saying that the termination provisions set for an employee when he signed on with the mail room probably weren't intended to continue through to his rise through the ranks to the executive level. (There are ways of dealing with that scenario, as well.)

Rather, the reasonableness is a practical market question. Does the employee have the bargaining power to go back and say "Please change this"? If the employee does so, will the employer just say "No, forget it, we're withdrawing the offer."

This is the simple reality of employment contracts: The employer often has an immense amount of bargaining power at hire. Canadian law limits the employer's bargaining power after the hire, limiting the employer's ability to change the terms down the road, but the initial contract...well, freedom of contract goes a long way. Few employees will be in a position to dictate the terms of their employment.

The notice provision is particularly difficult to negotiate, because for the employee it means going back and effectively saying "In the event that I fail to prove to you just how invaluable I am, I want more significant entitlements." Still, sophisticated commercial actors should be aware that the notice provision is a reality that needs to be addressed, and that there are plenty of different circumstances that could lead to it being triggered, many of them not being performance related at all. So for an employee taking a high-level position, it's fair ground to bargain the notice provision.

Employees: Remember, it's not about "getting fired", it's about "job security". And that's a key phrase especially for employees leaving existing employment situations - it's pretty natural to want some assurances of job security, and an ESA termination provision is no assurance of job security at all.

It's also worth noting that there are management positions and management positions. I've had employee clients from different organizations with almost identical managerial titles, one of whom supervised from zero to four employees, and the other of whom routinely supervised in excess of fifty employees.

So there's no "one size fits all", and it's impossible to say in general whether or not a specific clause is reasonable. Suffice it to say, however, that if you accept it, you could well be stuck with it.


This blog is not intended to, and does not, provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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