Since the days of the Supreme Court's decision in Machtinger v HOJ Industries Ltd, it has been well established that employers in common law provinces can contractually limit the amount of common law notice or pay in lieu to which an employee might be entitled upon termination. The case law on drafting such clauses, however, is ever evolving and courts are evidently wary of enforcing these provisions, except in the clearest of cases.
Recently in Holm v AGAT Laboratories Ltd, the majority of the Alberta Court of Appeal found that a clause purporting to limit an employee's common law notice by simply stating that termination pay would be calculated in "accordance with the provincial legislation for the province of employment" was not specific enough to contract out of the common law "reasonable notice". Even though the employment agreement stated that such amounts would be all that the employee was entitled to, the majority of the court found that this wording did not clearly restrict the applicable notice period to the statutory minimum set out in the Code. The court felt that the reference to the applicable employment standards legislation simply created a floor, but did not in any way create a ceiling that limited the employee's notice to the minimum requirements contained in the Code.
Justice O'Ferrall, concurring in the result, engaged for his part in a discussion about how a lay person reading the impugned termination provision might be forgiven for thinking that the parties did indeed intend to limit the notice or pay in lieu to the minimums prescribed by the Code. He noted that courts have historically not been interested in discerning the parties' intentions from the written words of the contract, but rather in applying certain interpretive tools that are designed to protect employees as a result of the perceived inequality of bargaining power between themselves and their employers. He identified at least two of the interpretive principles which were operative in this case:
- Termination provisions will only rebut the presumption of reasonable notice if they are absolutely clear.
- When faced with a clause in an employment contract that could reasonably be interpreted in more than one way, the court ought to prefer the interpretation which gives the greatest benefit to the employee.
He summarized these principles as: "what it takes to satisfy a court that presumptions in favour of the employee, as mandated by previously-decided jurisprudence, have been rebutted."
Best practices:
As Justice O'Ferrall astutely noted, courts will find any reason to find that language in an employment agreement is not specific enough to limit the employee's common law notice. As such, employers should give careful consideration to their agreements and seek legal advice. The following considerations, at the very least, bear close attention when drafting termination provisions:
- Any limitations must meet the minimums prescribed by the applicable employment standards legislation in order to be valid at all times (including in future years of employment). An employer cannot contract out of the statutory minimums prescribed by the applicable provincial employment standards legislation. If this occurs, the entire provision will be found void and an employee will become entitled to full common law notice. Employers should make clear that the employee will be provided the minimum entitlements set out in the applicable employment standards legislation. These entitlements include notice (or pay in lieu) and, in some jurisdictions, severance, benefits continuation, etc.
- Termination provisions should specifically state that the employee has the right to those entitlements (be it the statutory minimums or any other greater entitlements the employer is prepared to offer) and no other amount.
- Consider including language explicitly rebutting the application of the common law, such as the following: "For clarity, the employee is not entitled to any common law, or other notice or pay in lieu thereof."
- If the employee receives multiple streams of compensation (for example, profit sharing plans, performance based compensation, etc.), the plans or policies governing those streams of compensation should similarly limit an employee's entitlements and comply with the applicable employment standards legislation. The termination provision should take those into account.
