Friday, June 8, 2012

Employment Contracts - All the Small Things

I recently posted about the growing body of case law suggesting that a failure of a contractual notice formula to at last meet the statutory minimum notice period in all possible scenarios renders the provision void.

In that case, I noted that statutory severance can complicate matters, but I did not elaborate on the point.

Under Ontario's Employment Standards Act, employees with more than three months have entitlements to minimum notice periods.  This caps at 8 weeks for an employee with at least 8 years of service.  We call this "statutory notice".

In addition to statutory notice, some employees are entitled to additional amounts, which we refer to as "statutory severance".  In order to be so entitled, an employee must have at least 5 years of service, and the employer must have an Ontario payroll of at least $2.5 million per year.  (Mass layoffs can trigger the severance obligation for employers who don't meet the payroll threshold, too.)  This accrues at 1 week per year of service, rounded down to the month (so if I have just over 10 years and 5 months of service, my severance pay is 10 and 5/12 weeks).  This caps at 26 weeks, for those with 26 or more years of service.  (Naturally, in the event that the ESA definition of 'just cause' is made out, statutory severance doesn't apply.)

So, for some long service employees, statutory minimums can reach as high as the equivalent of 34 weeks' pay.

However, the difference in the nature of these entitlements requires some attention in drafting employment contracts.

You see, if a contract says that an employer can terminate an employee on 8 weeks notice, that will likely be ESA compliant, and may be enforced by a Court.  An employee with 10 years of service, who is entitled to severance, will be able to insist on the 8 weeks' pay in lieu of notice, as well as the 10 weeks' severance pay, but may not be able to claim for additional common law notice, because the contract gave the employer the entitlement to fire on a fixed amount of notice.  Other entitlements - outstanding wages, commissions, vacation pay, etc. - are all fair game to pursue, but not notice.

However, employers and their lawyers want to make the termination clause final and certain, ensuring that the employee knows, "This is what you're getting, and you won't get anything else beyond it."  The concern is that there have been cases where Courts have decided that language along the lines of "If you are fired, you will be given x notice or pay in lieu of notice" fails to actually displace the presumption of reasonable notice, because it fails to clarify that the employee won't get more than that.

In my view, framing the notice period in terms of the employer's entitlement should solve this problem:  Saying that the employer is entitled to terminate the relationship on x notice clearly displaces any obligation on the employer to provide greater notice.  Yet even I tend to err on the side of caution and disclaim further obligations.

And if you drafted the language to clarify that the employee isn't getting any more notice or pay in lieu than x, that's still not going to be a problem.

Where you start running into problems, however, is when you start getting too specific as to what the employee will receive, and too broad as to the entitlements that satisfies.

The Wright Case

In the 2011 case of Wright v. The Young and Rubicam Group of Companies (Wunderman) from the Ontario Superior Court of Justice, the employment contract at issue included a relatively complicated formula:

The employment of the Employee may be terminated by the Employee at any time on 2 weeks prior written notice (one week’s notice during Probationary Term), and by the Company upon payment in lieu of notice, including severance pay as follows:
a)         during Probationary Term – one week’s notice;
b)         within two years of commencement of employment – four (4) weeks Base Salary;
c)         after two and up to three years after commencement of employment – six (6) weeks’ Base Salary;
d)         after three but less than five years after commencement of employment – eight (8) weeks' Base Salary;
e)         five years or more and up to ten years after commencement of employment – thirteen (13) weeks' Base Salary, plus one (1) additional week of Base Salary for every year from 6–10 years of service up to a maximum of 18 weeks;
f)         after more than ten years but less than 19 years from the commencement of employment – six months’ Base Salary;
g)         After 19 years or more from the commencement of employment – 34 weeks' Base Salary (or eight months)
This payment will be inclusive of all notice statutory, contractual and other entitlements to compensation and statutory severance and termination pay you have in respect of the termination of your employment and no other severance, separation pay or other payments shall be made.

The employee was terminated after just over five years, giving him a contractual entitlement to 13 weeks' pay, whereas his statutory minimum was 5 weeks' notice and 5 weeks' severance.  So it would have been fine.

But what you need to remember, and what the Court decided (relying on the Shore v. Ladner Downs case which I sometimes allude to), is that you need to look at the language itself - and not the specific context - to determine whether or not it is enforceable.

And there are two glaring problems with this language.

Problem 1:  Partial Years of Severance

There's a problem for employees with certain lengths of service.  The trouble happens once you hit 8 years and 1 month.  At that point, the contract says that you get 16 weeks.  The ESA says that you get 16 and 1/12 weeks.  Likewise, at 9 years exactly, you're fine again, but throughout the following year the contractual term would short you by your partial year of severance.  (The judge says that the same is true of 10.5 years.  I don't think that's correct - paragraph (f) is fine until you get over 18 years of service.  (Six months is 26 weeks.  At 18 years of service, notice plus severance is 26 weeks.  Once again, the partial year's severance up to 19 years gets shorted by the contract.

In other words, over the course of a 19 year+ career, there will have been three 11-month periods of time in which an employee would be left marginally short of his statutory entitlements.  This is a big enough problem to void the contract.

Problem 2:  Benefits

Whenever the employee's entitlements are limited to "base salary", that should raise red flags.  It doesn't mean that there actually is a problem, but that's the starting point for a lot of difficulties.

In this case, the issue is that the contract doesn't provide for a continuation of benefits.  Under the ESA, benefits must be continued through the statutory notice period.  In the event that they aren't continued, the employee is entitled to the money the employer would have applied to the benefit plan.  The employer argued that it doesn't *displace* the continuation of benefits either, and pointed out that the employee's benefits were actually continued through the statutory notice period.

The judge, however, disagreed on the interpretation of the contract.  There's some discussion of the contra proferentum rule, but I'm not sure that's quite correct.  (Ambiguity is to be decided against the party that drafted the contract.  However, it seems odd to apply that rule in such a way that decreases the liability of the drafter so as to make the agreement void.)  The Court concluded that employers commitment to not provide "other payments" extended to payments to the benefits provider.  Whether or not you agree with that, I would argue that, with the agreement silent as to benefits, at a minimum there's a prospect that the employee could be entitled to monetary compensation under the ESA for the cancellation of benefits.

Other Thoughts

The benefits problem arose in large part because of the broad language disclaiming "other payments".  I've often seen language indicating that a sum would be inclusive of all entitlements to everything under the sun, including all entitlements under the ESA, the Human Rights Code, the Occupational Health and Safety Act, etc.  (I've also seen contracts use such vague language as "the applicable laws", which would likely be too vague to be enforced.)

There's little doubt that a provision in a contract waiving rights against subsequent breaches of the Human Rights Code would be disregarded, so the language is of little value, but the attempt to lump them all together might undermine the rebuttal of the presumption to reasonable notice.

One other interesting thought:  Whether or not an employee is entitled to severance is contingent on contextual factors.  All employees will be entitled to statutory notice of termination after three months, but only under certain circumstances with an employee be entitled to severence.  It's a contingent entitlement, and I don't think the Courts have ever considered how that fact interacts with this doctrine.

Many employers will never be on the hook for severance - their business models just wouldn't bring them to that point.  It would seem silly to say that they need to account, in their contractual language, for the purely hypothetical possibility that they might someday have to pay severance.  But consider the employer whose payroll varies from year to year between 2.4 million and 2.6 million.  What is clear is that a termination clause is either valid or it isn't.  It won't flip back and forth between being enforceable and not being enforceable depending on the staff complement.  So language which rules out the prospect of severance pay may not be enforced, regardless of whether or not severance pay may be required of the employer.

The twist is that there are really easy fixes for this sort of thing.  Lawyers try to be fancy, and implement complicated formulas to show off, but minor defects can be fatal.  Keep it simple, ensure that the contract expressly guarantees minimum compensation in accordance with the applicable employment standards, and the contract - in that sense, at least - should be fine.


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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