However, termination clauses are closely scrutinized by the Courts in several ways, which is why it is of the utmost importance to have a good employment lawyer involved in drafting the contract at the outset.
One of the key problems that such clauses frequently suffer is statutory non-compliance. The Employment Standards Act sets out minimum entitlements on termination, and the Act is express that any attempt to contract out of the minimum standards is void. So when you get a contract saying that an employee can be fired at any time without notice, the Courts will usually disregard that language, and find accordingly that the employee is entitled to "reasonable notice". (The Supreme Court has been very clear: You don't read in an intention to limit the notice period. If the clause is void, it is ignored. The message is clear to employers: If you want to limit your liabilities, you have to do it properly.)
Under Ontario's Employment Standards Act, an employee with 3 months of service is entitled to a minimum of one week notice. An employee with 12 months of service is entitled to a minimum of two weeks' notice. An employee with 3 or more years of service is entitled to 1 week's notice per completed year of service, up to a maximum of 8 weeks.
In addition, in some contexts there may be statutory 'severance' payable as well. That's distinct from notice, but let's leave it aside for now for the sake of simplicity.
First, suppose my contract entitles the employer to fire me at any time on 8 weeks' notice or pay in lieu thereof. That should be fine, at least from an ESA perspective, because unless the ESA is amended at some point the contract will never entitle me to less than the statutory minimum.
Next, suppose instead that I have a contract entitling my employer to fire me at any time on only 4 weeks' notice or pay in lieu thereof, and I get fired after 6 years of service. My statutory minimum entitlement is 6 weeks; the contract says I only get 4, so the contractual provision is void and I get to claim "reasonable notice" - several months, depending on the exact circumstances.
What happens, though, if I have a contract promising 4 weeks' notice and I get fired after only 2 years? Statutory minimum is 2 weeks; the contract says I get 4. That should be fine, right?
This issue isn't frequently explored in the jurisprudence, but there have now been a few cases across the country dealing with it, and the results are pretty one-sided. If the formula doesn't comply with the Employment Standards Act formulaically, the clause is void "ab initio" (from the start).
In Shore v. Ladner Downs in 1998, the British Columbia Court of Appeal dealt with this issue: The contract permitted termination on 30 days notice, and even though the statutory minimum notice for the dismissed employee was two weeks at the point of discharge, the employer could not rely on the provision.
Many employers prefer to simplify matters, keying the notice payable to the employment standards minimum themselves. This is theoretically fine, but still not without its risks. The language used must still be precise in order to accomplish its objective. Using language like "the applicable law" probably will not be clear enough, yet being too specific can be a problem, too. In Waddell v. Cintas Corp, another B.C. case, the initial employment contract had been entered into in Ontario, and the employee later transferred to B.C. His contract, however, tied his entitlements to Ontario's Employment Standards Act, which calculates entitlements slightly differently from B.C.'s employment standards regime, which could theoretically result in a conclusion that the contractual entitlements (as determined with reference to Ontario's ESA) would be less than the minimums to be determined under the B.C. statute (which now governed the employment relationship). Therefore the contractual provision was void and the employee was entitled to "reasonable notice".
It's a tricky area of law. Occasionally a contract will use language creating a formula for notice based on each "completed year of service". Most of the time, when you see this language, there's a minimum, or else an additional/alternative tie-in to the employment standards minimum.
For example, Obaidi v. Home Depot deals with a contractual provision offering 2 weeks pay in lieu of notice "per completed year of service", but no less than 2 weeks notice and no more than 26 weeks notice. (Though that case deals with lack of consideration - it's a different issue.) Likewise, in Ahmed v. Athabasca Tribal Council Ltd., the language promised the employment standards minimums plus one month "for each completed year of service".
This type of language is generally fine.
However, I have also seen contracts drafted by lawyers which only deal with notice "per completed year of service", with no other minimum. Meaning that a person fired after 364 days of service has, under the contract, no entitlement to notice. Despite the fact that, under the ESA, there's a minimum notice period of one week. See the problem?
Obviously, an employee fired after 364 days would not be held to the contractual term if the statutory entitlement was greater. But the point is that it's a bigger problem than that. Even if, at the point of dismissal, the contractual entitlements exceed the statutory minimums, the termination provision in its entirety would likely be seen as being void, with the result that the employee would be able to seek reasonable notice. So if I'm entitled only to two weeks notice per completed year of service, and I'm fired after 18 months, then my contract says I get two weeks, and the ESA says I get a minimum of two weeks, but regardless, I'd be able to seek common law reasonable notice, which would usually be much more substantial.
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.