Federally regulated employers, check your employment contracts: Court finds termination provision unenforceable

January 12, 2021 | Michael Cleveland

In a decision that will be of interest to federally regulated employers, the Ontario Superior Court recently reviewed the enforceability of a termination provision in an employment agreement governed by the Canada Labour Code (the “CLC”). Given the relative rarity of such litigation in federally regulated industries, the decision in Sager v. TFI International Inc., 2020 ONSC 6608 (CanLII) (“Sager”) serves as a reminder to those employers to ensure that their employment agreements provide for the continuation of all terms and conditions of employment during the statutory notice period.

In Sager, the Plaintiff was Vice-President of Sales and Customer Care who was terminated without cause after working for the employer for less than three years. His employment agreement contained a provision stating that, upon the termination of his employment without cause, he would receive a lump sum payment equal to “the greater of 3 months’ base salary or 1 month base salary per year of completed service to a maximum of 12 months.” The agreement went on to provide that this payment was “inclusive of any and all requirements” owed to him under the CLC.

However, the employee was entitled to a variety of other benefits in addition to his base salary, including a car allowance and participation in a group insurance plan, a pension plan, and a bonus program. Thus, on a motion for summary judgment the employee argued that this termination provision was unenforceable because it contravened s. 231(a) of the CLC, which requires employers to maintain the terms and conditions of the employee’s employment during the statutory notice period.

The employer argued that the termination provision relieved the Company of its obligation to continue these benefits during the notice period because it provided a lump sum payment well in excess of the statutory minimum amount of notice required under the CLC.

The Court agreed with the employee, holding that the termination provision was inconsistent with the CLC. By stating that the lump-sum payment was inclusive of all requirements under the CLC, the agreement excluded payment on termination of the above-noted benefits to which the employee was entitled, along with benefits continuation during the statutory notice period. In the Court’s view, this amounted to a change in the employee’s terms of employment during the statutory notice period, meaning that the provision was inconsistent with s. 231(a) of the CLC.

Any attempt to contract out of the minimum standards required by employment standards legislation renders the contractual provision null and void. Thus, in the result the termination provision was void and the employee was entitled to reasonable notice of termination in accordance with the common law. Based on factors including the employees’ age, length of service, his senior role with the Company, the availability of other employment, and the fact that the Company had provided assurances of long-term employment, the Court determined that the Plaintiff was entitled to 9 months’ notice of termination. In addition to his base salary, the employee was entitled to the other forms of compensation which he would have earned had he remained employed for that period, including bonus payments.

Interestingly, the Court did not address s. 168(1) of the CLC, which provides that, if a contract is more beneficial to an employee than the minimum employment standards under Part III of the CLC, the contract will govern:

Saving more favourable benefits

168 (1) This Part and all regulations made under this Part apply notwithstanding any other law or any custom, contract or arrangement, but nothing in this Part shall be construed as affecting any rights or benefits of an employee under any law, custom, contract or arrangement that are more favourable to the employee than his rights or benefits under this Part.

While the issue of the enforceability of termination clauses is frequently the subject of litigation in provincially regulated industries, it is less common for these clauses to be litigated in the context of employment relationships governed by the Canada Labour Code. Rather than commencing litigation, employees covered by the Canada Labour Code often pursue an unjust dismissal complaint with the Labour Program; this option was not open to the plaintiff in Sager because of his managerial position.

The Court’s decision in Sager serves as a reminder to federally regulated employers to review their employment contracts to ensure that they do not modify the conditions of employment during the statutory notice period.

We encourage you to contact a member of Miller Thomson’s National Labour & Employment team if you have any questions regarding the above.

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