2018-03-20 14:54:47Business LawEnglishLearn what makes an employment contract termination clause clear and enforceable, and review the details of an important Canadian court...https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2018/03/lawyer-reviews-employee-contract-termination-clause.jpghttps://quickbooks.intuit.com/ca/resources/business-law/employment-contract-termination-clause/Are Your Employment Contract Termination Clauses Clear and Enforceable?

Are Your Employment Contract Termination Clauses Clear and Enforceable?

4 min read

Termination clauses have been a hot point of contention in Canadian employment law for years. Confusion abounds on what must be present to make a termination clause enforceable. In January 2018, the courts heard another case on the issue, Nemeth v. Hatch Ltd., and its decision did little to clear up the issue. But you can still pick up a few important takeaways by unpacking the court’s decision piece by piece.

The Nemeth v. Hatch Ltd. Case

Joseph Nemeth worked for Hatch Ltd. for 19 years. Then Hatch let Nemeth go, providing him with notice and severance pay in accordance with his employment contract. Nemeth filed suit, arguing he was entitled to a longer notice period and more severance pay.

Nemeth claimed common law standards entitled him to more benefits upon termination. Hatch countered that Nemeth’s contract, which he agreed to when he took the job, took precedence over common law. But Nemeth came back and argued that the ambiguous wording of the contract, plus its silence on the issue of severance pay, made the contract void.

The courts returned a decision that mostly favoured Hatch. It rejected Nemeth’s ambiguous wording argument. A termination clause does not have to use specific language, the courts ruled, as long as it makes clear what the employee agrees to. The courts also shot down the idea that the lack of information on severance made the whole contract void.

Nemeth did pick up a small victory in one area. The courts ruled he was entitled to 19 weeks of notice, the period mentioned in his contract, rather than the minimum of eight weeks required by the Employment Standards Act of 2000.

The Importance of Wording

At the center of the issue was the wording of Nemeth’s contract. His termination clause was written as follows:

"The Company’s policy with respect to termination is that employment may be terminated by either party with notice in writing. The notice period shall amount to one week per year of service with a minimum of four weeks or the notice required by the applicable labour legislation."

While the clause makes clear what notice Nemeth is entitled to, its provisions differ from the standards set by the ESA. According to Nemeth, the contract needed to contain express language that it was ousting ESA standards. Because it didn’t, the contract was not enforceable.

The courts saw it differently. Nemeth knew what he was agreeing to, they ruled, and thus the specificity of the language didn’t matter.

Even so, as a business owner, you should err on the side of too much information in your contracts. Why not add a sentence that explicitly excludes entitlements under common law? It only takes another minute and a few more drops of ink. And, you never know, it might save you if you get a judge not as employer-friendly as the one Hatch got.

Silence on Severance Pay

Nemeth’s second complaint was that his contract contained no wording on severance pay. According to Nemeth, this silence made the entire contract void. He reasoned that Hatch’s silence meant he intended to deviate from common law standards without providing an explanation, which the ESA requires.

Again, the courts disagreed, ruling that his contract dealt only with his entitlement to notice, not severance pay. Thus, Nemeth was still entitled to severance according to ESA rules, and the rest of the contract dealing with notice remained valid.

Hatch again picked up a big victory here. Even though the company did not take the time to specify anything about severance, it did not hurt the company in court.

But why leave it to chance? Make your termination clauses thorough, specifying exactly what does and doesn’t line up with common law. That way you leave no loopholes open through which an employee might get the contract voided.

Don’t Be Ambiguous

Go back and look at the wording of Nemeth’s contract. Observe what it says about his entitlement to notice. It states he’s entitled to one week for each year he was employed there or the amount required by law. But it doesn’t say which takes precedent.

Nemeth worked at Hatch for 19 years, which he argues entitled him to 19 weeks of notice, even though the law, also referenced in his contract, requires only eight weeks.

Here the courts sided with Nemeth. If the termination clause had specified that the law took precedent, the outcome might have been different. But since it didn’t, Nemeth got the benefit of the doubt due to ambiguous wording.

So don’t be ambiguous. Use specific language to make the terms of the contract clear to all parties.

Balancing Employer and Employee Concerns

In the Nemeth v. Hatch decision, the courts make a good faith effort to do right by both employer and employee. The courts upheld the contract despite it featuring some imperfect and imprecise wording by Hatch. But the courts also sided with Nemeth where the wording was so ambiguous it failed to make the terms of the agreement clear.

When drafting a termination clause, make the terms abundantly clear, and make sure your employees know what they’re signing. That alone drastically cuts your chances of a lawsuit if you have to terminate a worker. But if you do end up in court, your clear and unambiguous wording should work in your favor.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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